Mini Exam #1 A1-A2 Flashcards
Under which of the following circumstances would an adverse opinion be most
appropriate?
A. The financial statements include property, plant, and equipment amounts at fair market value based on management’s position that fair market value
better depicts true financial position and results of operations of the company.
B. The client has severely limited the scope of the audit, not permitting access to outside client legal counsel.
C. The auditor was unable to observe client inventory counts by virtue of the fact that the auditor was appointed after balance sheet date.
D. There has been a material impact on the financial presentations due to a justifiable change in reporting entity, which has been fully disclosed in the financial statements and related footnotes.
Explanation
Choice “A” is correct. An adverse opinion is required when serious GAAP problems exist. (GAAP requires that property, plant, and equipment be stated at cost less accumulated depreciation.)
Choices “B” and “C” are incorrect. Scope limitations, as opposed to GAAP problems, result in qualified opinions or disclaimer of opinion, not adverse opinions.
Choice “D” is incorrect. A justifiable change in accounting principle does not result in an
adverse opinion.
MCQ-09874
Which of the following procedures would an auditor be least likely to use in an effort to obtain evidence regarding subsequent events?
A. Obtaining lists of litigation for review with the client’s attorneys.
B. Investigating personnel changes which occurred after year-end.
C. Reading minutes of board meetings and reading interim financial statements.
D. Making inquiry of management about unusual adjustments after year-end.
Choice “B” is correct. Personnel changes generally would not have financial statement implications.
Choice “A” is incorrect. The auditor should inquire of the client’s legal counsel concerning litigation, claims, and assessments, because such issues might have
financial statement implications.
Choice “C” is incorrect. The auditor should read the minutes of board meetings and examine the latest available interim financial statements to determine whether there are any items that might have financial statement implications.
Choice “D” is incorrect. The auditor should inquire of management regarding any material unusual adjustments made after year-end, because such adjustments might require financial statement adjustment or disclosure.
MCQ-10254
Which of the following is not true about audit documentation?
A. Audit documentation should demonstrate that sufficient appropriate audit evidence has been obtained to support the conclusions reached and the report to be issued.
B. Audit documentation should include identification of the staff who performed the audit work.
C. Audit documentation should include a separate page for each material account balance or transaction class.
D. Audit documentation should include information related to the selection and application of accounting principles.
Choice “C” is correct. There is no requirement that documentation related to each material account balance or transaction class be included on a separate page. In fact, it is common for related accounts to be audited and documented together.
Choice “A” is incorrect. Audit documentation should demonstrate that appropriate audit evidence has been obtained to support the conclusions reached and the report to be issued.
Choice “B” is incorrect. Audit documentation should include identification of the staff who performed the audit work.
Choice “D” is incorrect. Audit documentation should include significant audit findings, such as matters that are related to the selection and application of accounting principles.
MCQ-10264
An uncertainty may result in:
An unmodified opinion / A qualified opinion / An adverse opinion / A disclaimer of opinion
A. No Yes Yes Yes
B. Yes No No No
C. No Yes No Yes
D. Yes Yes Yes Yes
Choice “D” is correct. An uncertainty may result in an unmodified opinion if management’s analysis is supported and properly recorded or disclosed. An uncertainty for which the auditor is unable to obtain sufficient audit evidence would result in either a
qualified opinion or a disclaimer of opinion. If the financial statements are materially misstated due to improper accounting for the uncertainty, a qualified or adverse opinion would result.
Choice “A” is incorrect. An uncertainty may result in an unmodified opinion if
management’s analysis is supported and properly recorded or disclosed.
Choice “B” is incorrect. An uncertainty for which the auditor is unable to obtain sufficient audit evidence would result in either a qualified opinion or a disclaimer of opinion. If the financial statements are materially misstated due to improper accounting
for the uncertainty, a qualified or adverse opinion would result.
Choice “C” is incorrect. An uncertainty may result in an unmodified opinion if
management’s analysis is supported and properly recorded or disclosed. If the auditor
determines that the financial statements are materially misstated due to improper
accounting for the uncertainty (and it is both material and pervasive), an adverse
opinion may be issued.
MCQ-10249
Which of the following are required as part of an auditor’s planning process?
Understanding the design of controls
Determining whether controls have been
implemented
Evaluating the operating effectiveness of controls
Documenting the understanding of internal control
A. No Yes Yes No
B. Yes No No Yes
C. No No Yes No
D. Yes Yes No Yes
Choice “D” is correct. As part of planning, the auditor is required to obtain an understanding of the design of controls and determine whether they have been
implemented, as well as to document this understanding. The auditor is not required to
evaluate the operating effectiveness of controls during the planning process.
Choices “B”, “C”, and “A” are incorrect, based on the above explanation.
Which of the following inquiries should be made of a predecessor auditor before accepting a new client engagement?
A. Specific inquiries of the predecessor regarding communication to management, the audit committee, and those charged with governance
about operational inefficiencies.
B. Specific inquiries of the predecessor regarding audit problems that arose from the condition of the accounting system and records.
C. Specific inquiries of the predecessor regarding audit areas that have required an inordinate amount of time.
D. The predecessor’s understanding as to the reasons for the change of auditors.
Choice “D” is correct. The successor auditor is required to make certain inquiries of the predecessor auditor before accepting an engagement, including the predecessor’s
understanding as to the reasons for the change of auditors.
Choice “A” is incorrect. The auditor is not required to communicate to management, the
audit committee, and those charged with governance about operational inefficiencies.
Choice “B” is incorrect. Specific inquiries of the predecessor auditor regarding matters
that the successor believes may affect the conduct of the audit, such as audit problems
that arose from the condition of the accounting system and records, should be made
after acceptance.
Choice “C” is incorrect. Specific inquiries of the predecessor regarding matters that the
successor believes may affect the conduct of the audit, such as audit areas that have
required an inordinate amount of time should be made after acceptance.
When assessing the competence of an entity’s internal auditor, an independent CPA
should obtain information about all of the following except:
A. The organizational status of the internal auditor.
B. Quality of the internal auditor’s audit documentation.
C. Professional certification of the internal auditor.
D. Education level and professional experience of the internal auditor.
Choice “A” is correct. The organizational status of the internal auditor is used to evaluate objectivity.
Choice “B” is incorrect. An internal auditor’s competence may be evaluated based upon
the quality of his or her audit documentation.
Choice “C” is incorrect. An internal auditor’s competence may be evaluated based
upon his or her professional certification.
Choice “D” is incorrect. An internal auditor’s competence may be evaluated based
upon his or her educational level and professional experience.
A special report on financial statements prepared on the cash basis of accounting should include:
A. A qualified or adverse opinion, due to the departure from GAAP.
B. A disclaimer of opinion, because an auditor should not report on financial statements that are not designed to be in conformity with GAAP.
C. An emphasis-of-matter paragraph including a brief explanation of the cash basis of accounting.
D. A statement that the audit was conducted in accordance with generally accepted auditing standards.
Choice “D” is correct. A special report on financial statements prepared on the cash basis of accounting should include, in the auditor’s responsibility paragraph, a statement that the audit was conducted in accordance with generally accepted
auditing standards.
Choice “A” is incorrect. A special report on financial statements prepared on the cash basis of accounting does not require a qualified or adverse opinion. An “unmodified” opinion may be presented stating that the financial statements are presented fairly in
conformity with the cash basis of accounting.
Choice “B” is incorrect. A special report on financial statements prepared on the cash basis of accounting includes positive assurance, not a disclaimer of opinion, regarding whether the financial statements are presented fairly in conformity with the cash basis
of accounting.
Choice “C” is incorrect. A special report on financial statements prepared on the cash basis of accounting does include an emphasis-of-matter paragraph, but it does not provide an explanation of the cash basis of accounting. Instead, it refers to the note that discusses the cash basis of accounting.
Cyrus, CPA is the continuing auditor of Topaz, Inc. During the current year’s audit, Cyrus becomes aware of evidence that affects the previous year’s statements as well as the opinion that was expressed. Topaz is planning to present comparative financial statements that will include last year’s financial statements. How should Cyrus handle
this situation?
A. Report on both sets of financial statements, using the original opinion on last
year’s financial statements only after reviewing the previous year’s audit
documentation to ensure that auditing standards were followed.
B. Report on both sets of financial statements, using the original opinion on last
year’s financial statements.
C. Report on both sets of financial statements, updating the previous opinion for any changes that have occurred.
D. Report only on the current year’s financial statements.
Choice “C” is correct. The auditor reports on the financial statements “taken as a whole”, which applies to all financial statements presented. Since the auditor’s report is generally dated as of the completion of fieldwork for the most recent audit, it is implied that previous reports would be updated.
Choice “A” is incorrect. Regardless of the fact that auditing standards may have been
followed in the previous year, the auditor still has a responsibility to update the previous
report for changes in circumstances.
Choice “B” is incorrect. Since the auditor’s report is generally dated as of the
completion of fieldwork for the most recent audit, it is implied that previous reports
would be updated. “Update” can mean either to reaffirm the previous opinion, or to
change it based on new circumstances.
Choice “D” is incorrect. The auditor reports on the financial statements “taken as a
whole”, which applies to all financial statements presented.
When a client makes extensive use of information technology, the auditor should consider the effect this may have on internal control. Which of the following is least likely to be affected?
A. The audit procedures used to evaluate controls.
B. The five components of internal control.
C. The audit objectives with respect to evaluating internal control.
D. The assessed level of control risk.
Choice “C” is correct. The client’s extensive use of information technology generally would not affect the auditor’s objectives, although it might affect how those objectives are achieved.
Choice “A” is incorrect. An entity’s use of information technology will affect the appropriate audit procedures to apply. For example, the extent and complexity of computer operations may require the use of computer-assisted audit techniques.
Choice “B” is incorrect. An entity’s use of information technology may affect any of the five components of internal control.
Choice “D” is incorrect. An entity’s use of information technology may create additional internal control risks, such as the risk of unauthorized access to data.
MCQ-09878
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph
added to the report for:
A justified change in accounting principle
An unjustified change in accounting principle
A justified change in accounting estimate
A. Yes Yes No
B. No No Yes
C. Yes No No
D. No Yes Yes
Choice “C” is correct. Only a justified change in accounting principle would result in an
unmodified opinion with an emphasis-of-matter paragraph. An unjustified change leads to a qualified or adverse opinion, and a change in estimate does not require an emphasis-of-matter paragraph.
Choice “A” is incorrect. An unjustified change in accounting principle would lead to a
qualified or adverse opinion.
Choice “B” is incorrect. A justified change in accounting estimate does not require the
use of an emphasis-of-matter paragraph. A justified change in accounting principle
would be the other scenario of the three presented in which an unmodified opinion with
an emphasis-of-matter paragraph would be appropriate.
Choice “D” is incorrect. A justified change in accounting principle would be the other
scenario of the three presented in which an unmodified opinion with an emphasis-of matter paragraph would be appropriate.
Whitney, CPA, is assessing the auditability of Nissen Manufacturing, a possible new client. Which of the following would be least likely to cause Whitney to reject Nissen as a new client?
A. Management of Nissen is unwilling to provide all financial records to Whitney, due to a desire to keep such information confidential.
B. Management of Nissen expresses a disregard for maintaining an adequate internal control environment.
C. Management of Nissen is unwilling to send accounts receivable confirmations, due to a desire not to trouble customers.
D. Management of Nissen is unable to provide financial records for the second half of the year due to a computer malfunction.
Choice “C” is correct. If a potential client is unwilling to send accounts receivable confirmations, the auditor may perform alternative procedures, such as reviewing subsequent cash receipts.
.
Choice “B” is incorrect. Management’s disregard for its responsibility to maintain an adequate internal control environment compromises its ability to provide reasonable assurance regarding reliable financial reporting and may lead the auditor to decide not to accept a new engagement because the risk of financial statement misstatement is
too high.
Choices “D” and “A” are incorrect. If a potential client is unable or unwilling to provide
the financial information needed by the auditor to complete the audit, the auditor may
not be willing to accept the engagement.
A limitation on the scope of an audit sufficient to preclude an unmodified opinion will
usually result when the client:
A. Asks the auditor to report on the balance sheet and not the other basic financial statements.
B. Omits the statement of cash flows.
C. Refuses to disclose in the notes to the financial statements a significant related party transaction.
D. Does not make the minutes of the Board of Directors meetings available to the auditor.
Choice “D” is correct. Failure to make the minutes available is a scope limitation sufficient to preclude an unmodified opinion.
Choice “A” is incorrect. Reporting on only one financial statement and not the others
simply involves a limited reporting objective. The auditor should obtain an understanding of the purpose for which the financial statement is prepared, the intended users, and the steps taken by management to determine that the applicable
financial reporting framework is acceptable in the circumstances. As long as these steps are taken by the auditor, auditing a single financial statement would not constitute a limitation on the scope of the audit.
Choices “B” and “C” are incorrect. Omission of the statement of cash flows and refusal
to disclose a significant related party transaction are examples of GAAP violations, but
they do not constitute a limitation on the scope of the audit.
Assuming no other material misstatements are found, an independent auditor
determines that supplementary information is not fairly stated relative to the basic
financial statements taken as a whole. In this instance where the independent auditor
was engaged to audit both the financial statements and the supplementary information, the independent auditor should:
A. Issue an unmodified opinion on the financial statements without reference to
the supplementary information outside the basic financial statements.
B. Issue a disclaimer of opinion on the financial statements.
C. Issue a qualified (except for) or adverse opinion on the financial statements.
D. Issue an unmodified opinion on the financial statements and modify the
auditor’s opinion on the supplementary information within a separate section
of the auditor’s report with the heading “Supplementary Information.”
Choice “D” is correct. Supplementary information is outside the basic financial statements, so problems with this information do not prevent the issuance of an unmodified opinion on the basic financial statements. The situation should result in a
modified opinion on the supplementary information as expressed in a separate section of the auditor’s report with the heading “Supplementary Information.”
Choice “A” is incorrect. Auditing standards require the auditor to expand his or her
report when required supplementary information is not fairly stated relative to the basic
financial statements taken as a whole.
Choices “C” and “B” are incorrect. Since supplementary information is outside the basic
financial statements, an unmodified opinion on the basic financial statements is still
appropriate.
Dante, CPA, is auditing the financial statements of Crest Computing. During the previous year, Kratzke & Kratzke, CPAs, audited Crest’s financial statements. Crest has decided to present comparative financial statements for the current year. Which statement is true about Kratzke & Kratzke’s report?
A. Kratzke & Kratzke may reissue their report on the previous statements only
after performing limited procedures to evaluate the continuing
appropriateness of the report.
B. Kratzke & Kratzke should not reissue their report, since they may be unaware
of recent circumstances that might have affected the previous year’s
financial statements.
C. Kratzke & Kratzke may reissue their report on the previous statements without
performing any additional procedures as long as no changes have been made
to those statements.
D. Kratzke & Kratzke should not reissue their report unless Dante agrees to cosign that report.
Choice “A” is correct. Kratzke & Kratzke should perform limited procedures, such as
reading the current statements, comparing the current and prior statements, and
obtaining representation letters from Crest’s management and from Dante.
Choice “B” is incorrect. A predecessor auditor may reissue a previous report after
performing certain limited procedures.
Choice “C” is incorrect. Certain limited procedures are required to be performed before
a predecessor auditor can reissue a previous report.
Choice “D” is incorrect. There is no requirement that the successor auditor co-sign the
report on the previous year’s financial statements, and in fact it would be inappropriate
to do so.
