Chapter 1 Set 1

Question 1

What is an auditor’s responsibility regarding financial statements?

Answer 1

To express an opinion on financial statements based on an audit

Question 2

U.S. generally accepted accounting principles” or GAAP is an accounting term that means what?

Answer 2

GAAP encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice AT A PARTICULAR TIME (note this is because it changes over time)

Question 3

What must audit evidence be?

Answer 3

Appropriate (or sufficient appropriate audit evidence)

Question 4

What does the term reasonable assurance mean?

Answer 4

High, but not absolute, level of assurance to allow an auditor to detect a material misstatement

Question 5

What provides the most authoritative guidance for the auditor of a nonissuer?

Answer 5

General guidance provided by a Statement on Auditing Standards (or SASs)

Question 6

What is an auditor’s responsibility with respect to Statements on Auditing Standards (or SASs)?

Answer 6

The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures

Question 7

An auditor of a nonissuer must conduct the audit in accordance with?

Answer 7

ASB standards

Question 8

An audit should be planned and performed with what attitude?

Answer 8

Professional skepticism

Question 9

When financial statements contain a departure from U.S. GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should express an opinion that is what?

Answer 9

Unmodified

Question 10

When a PCAOB auditing standard indicates that an auditor “could” perform a specific procedure, how should the auditor decide whether and how to perform the procedure?

Answer 10

By exercising professional judgment in the circumstances (note that anytime words such as could, may, or might occur an auditor has to consider these things nothing should for sure be done until after the auditor reviews it)

Question 11

The Public Company Accounting Oversight Board was established by who?

Answer 11

The Sarbanes-Oxley Act of 2002

Question 12

An auditor of a nonissuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately do what regarding audit evidence?

Answer 12

Consider the reliability of information to be used as audit evidence

Question 13

For an entity’s financial statements to be presented fairly in accordance with an applicable financial reporting framework, the framework selected should what?

Answer 13

Include an adequate description of the framework in the financial statements

Question 14

When disclaiming an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the what?

Answer 14

Auditor’s Responsibility paragraph (note that it should also be discussed in an additional paragraph before the opinion paragraph titled Basis for Disclaimer of Opinion)

Question 15

Under U.S. auditing standards, when an auditor believes there is substantial doubt about the ability of an entity to continue as a going concern, what should NOT be included?

Answer 15

Management’s conclusion regarding whether substantial doubt remains or is alleviated

Question 16

After considering an entity’s negative trends and financial difficulties, an auditor has substantial doubt about the entity’s ability to continue as a going concern. The auditor’s considerations relating to management’s plans for dealing with the adverse effects of these conditions most likely would include management’s plans to?

Answer 16

• increase ownership equity
• borrow money
• restructure debt
• sell assets
  anything to reduce or delay expenditures might all be considered mitigating factors

Question 17

The auditor’s report should include reference to the United States as the country of origin of?

Answer 17

• The accounting principles used to prepare the financial statements and
• The auditing standards the auditor followed in performing the audit

Question 18

What situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?

Answer 18

Conditions that cause the auditor to have substantial doubt about the entity’s ability to continue as a going concern are inadequately disclosed

Question 19

What events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?

Answer 19

Usual trade credit from suppliers is denied (indications of possible financial difficulties)

Question 20

If the auditor concludes that there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, the auditor should include an emphasis-of-matter paragraph following the opinion paragraph that includes what terms?

Answer 20

“Substantial doubt” and “going concern”