Reporting Flashcards
1
Q
- A CPA has performed an examination of the generalpur
pose fi nancial statements of Big City. The examination
scope included the additional requirements of the Single
Audit Act. When reporting on Big City’s internal account ing
and adminis trative controls used in administering a fed eral
fi nancial assis tance program, the CPA should
a. Communicate those weaknesses that are material in
rela tion to the general-purpose fi nancial state ments.
b. Express an opinion on the systems used to ad minister
major federal fi nancial assistance pro grams and
express negative assurance on the sys tems used to
administer nonmajor federal fi nancial assistance
programs.
c. Communicate those weaknesses that are material in
rela tion to the federal fi nancial assistance pro gram.
d. Express negative assurance on the systems used to
ad minister major federal fi nancial assistance programs
and express no opinion on the systems used
to admin ister nonmajor federal fi nancial assistance
programs.
A
- (c) The requirement is to identify the correct state ment
which would communicate weaknesses in internal control used
in administering a federal fi nancial assistance program when
a CPA has examined the general purpose fi nancial statements
of a municipality. The AICPA Ac counting and Audit Guide,
Audits of State and Local Gov ernmental Units, requires the
communication of weaknesses that are material in relation to
the federal fi nancial assistance program
2
Q
- Kent is auditing an entity’s compliance with
requirements governing a major federal fi nancial assistance
program in accord ance with the Single Audit Act. Kent detected
noncompliance with requirements that have a material
effect on that program. Kent’s report on compliance should
express a(n)
a. Unmodifi ed opinion with a separate emphasis-ofmatter
paragraph.
b. Qualifi ed opinion or an adverse opinion.
c. Adverse opinion or a disclaimer of opinion.
d. Limited assurance on the items tested.
A
- (b) The requirement is to identify the appropriate
compli ance report under the Single Audit Act when a CPA has
detected noncompliance with requirements that have a material
effect on that program. AU-C 806 states that under such
circum stances the auditor should express a qualifi ed or adverse
opinion.
3
Q
- When performing an audit of a city that is subject to
the requirements of the Uniform Single Audit Act of 1984, an
auditor should adhere to
a. Governmental Accounting Standards Board Gen eral
Standards.
b. Governmental Finance Offi cers Association
Gov ernmen tal Accounting, Auditing, and Financial
Reporting Principles
c. General Accounting Offi ce Government Auditing
Stand ards.
d. Securities and Exchange Commission Regulation
S-X.
A
- (c) The requirement is to identify the source of authorita
tive guidance for performing audits of a city that is
subject to the requirements of the Uniform Single Audit Act
of 1984. Answer (c) is correct because while the AICPA’s
generally ac cepted auditing standards must be followed to
the extent they are pertinent, the General Accounting Offi ce
Government Auditing Standards must also be adhered to. The
other replies all relate to standards not directly related to the
Uniform Single Audit Act.
4
Q
- Which of the following statements is a standard
ap plicable to fi nancial statement audits in accordance with
Government Auditing Standards (the “Yellow Book”)?
a. An auditor should report on the scope of the audi tor’s
testing of internal controls.
b. All instances of abuse, waste, and mismanagement
should be reported to the audit committee.
c. An auditor should report the views of responsible
of fi cials concerning the auditor’s fi ndings.
d. Internal control activities designed to detect or prevent
fraud should be reported to the inspector gen eral.
A
- (a) The requirement is to identify the correct statement
with respect to a fi nancial statement audit conducted in
accord ance with Government Auditing Standards (the “Yellow
Book”). Answer (a) is correct because the auditor issues
a report on com pliance with laws and internal control, and a
report on the fi nan cial information. Answer (b) is incorrect
because not all in stances of abuse, waste and mismanage ment are so reported. Answer (c) is incorrect because the views
of offi cials are not re ported. Answer (d) is incorrect because
internal control activi ties designed to detect or pre vent fraud
are not reported to the inspector general.
5
Q
- In reporting under Government Auditing Standards, an
auditor most likely would be required to report a falsifi ca tion
of accounting records directly to a federal inspector general
when the falsifi cation is
a. Discovered after the auditor’s report has been made
available to the federal inspector general and to the
public.
b. Reported by the auditor to the audit committee as a
sig nifi cant defi ciency in internal control.
c. Voluntarily disclosed to the auditor by low-level person
nel as a result of the auditor’s inquiries.
d. Communicated by the auditor to the auditee and the
au ditee fails to make a required report of the matter.
A
- (d) The requirement is to identify the circumstance
in which an auditor is required to report a falsifi cation of
accounting records directly to a federal inspector general.
Answer (d) is correct because under Government Auditing
Standards a falsifi cation of accounting records must ordinarily
be communicated by the auditor to the auditee and, if the
auditee fails to make ap propriate disclosure, by the auditor to a
federal inspector general. Answers (a), (b), and (c) all provide
inaccurate descriptions of auditor reporting respon sibility.
See Government Auditing Standards (the “Yellow Book”) for
information on reporting un der Government Au diting Standards.
6
Q
- Although the scope of audits of recipients of federal
fi nan cial assistance in accordance with federal audit regulations
varies, these audits generally have which of the fol lowing
elements in common?
a. The auditor is to determine whether the federal fi nancial
assistance has been administered in accor dance
with applicable laws and regulations.
b. The materiality levels are lower and are determined
by the government entities that provided the fed eral
fi nancial assistance to the recipient.
c. The auditor should obtain written management re p resentations
that the recipient’s internal auditors will report
their fi ndings objectively without fear of political
repercussion.
d. The auditor is required to express both positive and
neg ative assurance that illegal acts that could have a
material effect on the recipient’s fi nancial state ments
are disclosed to the inspector general.
A
- (a) The requirement is to identify a common aspect
of various types of audits of recipients of federal fi nancial
assistance in accordance with federal audit regulations. Answer
(a) is cor rect because audits of recipients of federal
fi nancial assistance include reports on (1) the fi nancial
statements, and (2) a sepa rate or combined report on internal
control and on compliance with laws and regulations.
An swer (b) is incorrect because mate riality levels are not
ordi narily lower or always determined by the governmental
en tity. Answer (c) is incorrect because the auditor need not
obtain such written management representations. An swer (d)
is incorrect because requirements for reporting il legal acts may
vary depending upon the type of audit being performed. AU-C
806 provides requirements related to audit ing entities that
have received governmental fi nancial assis tance. In addition,
guidance is provided by Government Auditing Standards
(GAS), also referred to as the “Yellow Book,” published by the
Comp troller General of the United States.
7
Q
- An auditor most likely would be responsible for com municating
signifi cant defi ciencies in the design of internal control
a. To the Securities and Exchange Commission when
the client is a publicly held entity.
b. To specifi c legislative and regulatory bodies when
re porting under Government Auditing Standards.
c. To a court-appointed creditors’ committee when the
cli ent is operating under Chapter 11 of the Fed eral
Bankruptcy Code.
d. To shareholders with signifi cant infl uence (more than
20% equity ownership) when signifi cant defi ciencies
are deemed to be material weaknesses.
A
- (b) The requirement is to identify to whom an auditor
most likely would be responsible for communicating
signifi cant defi ciencies in the design of internal control.
Answer (b) is cor rect because in audits under Government
Auditing Standards, signifi cant defi ciencies in the design of
internal control are com municated to legislative and regulatory
bodies (AU-C 806). Answer (a) is incorrect because the
Securities and Exchange Commission does not ordinarily
receive information on such defi ciencies. Answer (c) is
incorrect because while a court-ap pointed creditors’ committee
might in some circumstances re ceive information on
such defi ciencies, this practice is not as frequent as is done
under Government Auditing Standards. An swer (d) is incorrect
because shareholders do not normally re ceive reports on
signifi cant defi ciencies or material weaknesses (see AU-C 265).
8
Q
- Wolf is auditing an entity’s compliance with require ments
governing a major federal fi nancial assistance pro gram in accordance with Government Auditing Standards. Wolf detected
noncompliance with requirements that have a material effect on
the program. Wolf’s report on compliance should express
a. No assurance on the compliance tests.
b. Reasonable assurance on the compliance tests.
c. A qualifi ed or adverse opinion.
d. An adverse or disclaimer of opinion
A
- (c) The requirement is to determine the opinion which
an auditor should express in a report on compliance when s/he
has detected material instances of noncompliance within
the program. AU-C 806 defi nes these instances of
ma terial noncom pliance as failures to follow requirements,
or violations of regula tions or grants which cause the auditor
to conclude that the total of the misstatements resulting from
these failures or violations is material to the fi nancial statements.
Therefore, answer (c) is correct because the auditor
should issue a qualifi ed or an adverse opinion. Answer (a) is
incorrect because the auditor is required under Governmen tal
Auditing Standards to provide reasonable assurance on the entity’s compliance with the applicable laws and regula tions.
Answer (b) is incorrect because the auditor must dis close the
instances of noncompliance. Answer (d) is incor rect because
the auditor should not disclaim an opinion as a result of
noncompliance.
9
Q
- Which of the following is a specifi c documentation
require ment that an auditor should follow when auditing in
accordance with Government Auditing Standards?
a. The auditor should obtain written representations
from management acknowledging responsibility for
correcting instances of fraud, abuse, and waste.
b. Before the report is issued, evidence of supervisory
re view of the audit.
c. The auditor should document the procedures that
as sure discovery of all illegal acts and contingent
liabili ties resulting from noncompliance.
d. The auditor’s working papers should contain a ca veat
that all instances of material misstatements and fraud
may not be identifi ed.
A
- (b) The requirement is to determine a documentation
requirement that an auditor should follow when auditing in accordance
with (also referred to as the “Yellow Book”). An swer (b)
is correct because Government Auditing Stan dards require
documentation of supervisory review before the report is issued
10
Q
- In performing a fi nancial statement audit in accor dance
with Government Auditing Standards, an auditor is required
to report on the entity’s compliance with laws and regulations.
This report should
a. State that compliance with laws and regulations is the
re sponsibility of the entity’s management.
b. Describe the laws and regulations that the entity must
comply with.
c. Provide an opinion on overall compliance with laws
and regulations.
d. Indicate that the auditor does not possess legal skills
and cannot make legal judgments.
A
- (a) The requirement is to identify the statement that
should be included in an auditor’s report on an entity’s compli
ance with laws and regulations when performing an audit
in ac cordance with Government Auditing Standards. Answer
(a) is correct because such compliance reports require a
statement that management is responsible for compliance with
laws, regulations, contracts, and grants. See AU-C 806 for this
requirement and others.
11
Q
- In reporting under Government Auditing Standards, an
auditor most likely would be required to communicate management’s
misappropriation of assets directly to a federal
inspec tor general when the fraudulent activities are
a. Concealed by management by circumventing spe cifi c
in ternal controls designed to safeguard those assets.
b. Reported to the entity’s governing body and the governing
body fails to make a required report to the federal
inspector general.
c. Accompanied by fraudulent fi nancial reporting that
re sults in material misstatements of asset balances.
d. Perpetrated by several levels of management in a
scheme that is likely to continue in future years.
A
- (b) The requirement is to determine when an auditor
reporting under would most likely be required to communi cate
management’s misappropriation of assets directly to a federal
inspector general. Answer (b) is correct because Government
Auditing Standards requires that when a governing body fails
to make a required report on such acts the auditors should communicate
the matter to the external body specifi ed in the law or
regulation. Answer (a) is incorrect because such concealment
will not necessarily lead to com munication to a federal inspector
general. Answer (c) is incorrect because material misstatement
does not necessarily lead to such communication. Answer (d)
is incorrect because the expected duration of the scheme is not
what leads to reporting to a federal inspector general.
12
Q
- In auditing compliance with requirements governing
major federal fi nancial assistance programs under the Single
Audit Act, the auditor’s consideration of materiality differs
from materiality under generally accepted auditing stan d ards.
Under the Single Audit Act, materiality is a. Calculated in relation to the fi nancial statements taken
as a whole.
b. Determined separately for each major federal fi nancial
assistance program.
c. Decided in conjunction with the auditor’s risk as sessment.
d. Ignored, because all account balances, regardless of
size, are fully tested.
A
- (b) The requirement is to identify the auditor’s proper
measure of materiality for major federal fi nancial assistance
pro grams under the Single Audit Act. AU-C 806 requires that
it be determined separately for each major pro gram.
13
Q
- Mill, CPA, was engaged by a group of royalty reci pients
to apply agreed-upon procedures to fi nancial data supplied
by Modern Co. regarding Modern’s written asser tion about its
compliance with contractual requirements to pay royalties. Mill’s report on these agreed-upon procedures
should contain a(n)
a. Disclaimer of opinion about the fair presentation of
Modern’s fi nancial statements.
b. List of the procedures performed (or reference thereto)
and Mill’s fi ndings.
c. Opinion about the effectiveness of Modern’s inter nal
control activities concerning royalty payments.
d. Acknowledgment that the suffi ciency of the procedures
is solely Mill’s responsibility.
A
- (b) The requirement is to identify the information provided
in an agreed-upon procedures report on compliance with
contractual requirements to pay royalties. Answer (b) is correct
because agreed-upon procedures reports include a list of the
procedures performed (or reference thereto) and fi ndings.
An swer (a) is incorrect because no such disclaimer of opinion
is provided in an agreed-upon procedures report. Answer (c) is
incorrect because no opinion is included in an agreed-upon
pro cedures report. Answer (d) is incorrect be cause an agreedupon
procedures report includes a statement disclaiming an
opinion on the suffi ciency of procedures, not an acknowledgement
of the suffi ciency of the procedures. See AT 201 for
guidance on agreed-upon procedures en gagements.
14
Q
- A CPA’s report on agreed-upon procedures related to an
entity’s compliance with specifi ed requirements should contain
a. A statement of limitations on the use of the report.
b. An opinion about whether management’s assertion is
fairly stated.
c. Negative assurance that control risk has not been assessed.
d. An acknowledgment of responsibility for the suffi -
ciency of the procedures.
A
- (a) The requirement is to identify the statement that is
included in a CPA’s report on agreed-upon procedures on management’s
assertion about an entity’s compliance with specifi ed
requirements. Answer (a) is correct because such an agreedupon
procedures report includes a statement of limitations on
the use of the report because it is intended solely for the use
of specifi ed parties. See AT 601 for in formation that should be
included in such an agreed-upon procedures report. Answer (b)
is incorrect because no “opinion” is included. Answer (c) is incorrect
because a sum mary of fi ndings, not negative assurance
is provided. An swer (d) is incorrect because the CPA makes no
representation regarding the suffi ciency of procedures.
15
Q
- When reporting on an examination of a company’s
compli ance with requirements of specifi ed laws, the practitioner
has identifi ed an instance of material noncompliance.
Management has agreed to include this instance in its writ ten
assertion. The examination report should include
a. No modifi cation from the standard form.
b. An opinion paragraph that is unmodifi ed, and an
empha sis-of-matter paragraph.
c. A qualifi ed or adverse opinion.
d. A disclaimer of opinion.
A
- (c) The requirement is to identify the correct statement
concerning an examination report when management
has properly disclosed an instance of material noncom pli ance.
AT 601 states that the opinion should be qualifi ed or adverse.
Note that AT 601 requires the CPA’s report to relate directly to
the subject matter when the opinion is modifi ed.
16
Q
- In auditing a not-for-profi t entity that receives governmental
fi nancial assistance, the auditor has a responsibility to
a. Issue a separate report that describes the expected
bene fi ts and related costs of the auditor’s suggested
changes to the entity’s internal control.
b. Assess whether management has identifi ed laws and
reg ulations that have a direct and material ef fect on
the entity’s fi nancial statements.
c. Notify the governmental agency providing the
fi nan cial assistance that the audit is not designed to
provide any assurance of detecting misstatements and
fraud.
d. Render an opinion concerning the entity’s contin ued
eli gibility for the governmental fi nancial as sistance
A
- (b) The requirement is to determine an auditor’s
respon sibility when auditing a not-for-profi t entity that
re ceives governmental fi nancial assistance. Answer (b) is
correct because AU-C 806 requires that the auditor assess
whether management has identifi ed laws and regulations
that have a direct and material effect on the entity’s fi nancial
statements; AU-C 806 also pre sents procedures to be followed
in assessing such laws and regu lations. Answer (a) is incor rect
because such a separate report describing expected ben efi ts
and costs does not need to be issued. Answer (c) is incorrect
because the CPA will not notify the governmental agency that
the audit is not designed to provide assurance. Answer (d) is incorrect because the CPA does not express an opinion on
the entity’s continued eligibility for gov ernmen tal fi nancial
assistance. AU-C 806 presents requirements re lating to
compliance auditing for governmental entities and recipients
of governmental fi nancial assistance.
17
Q
- Hill, CPA, is auditing the fi nancial statements of Help ing
Hand, a not-for-profi t organization that receives fi nan cial assistance
from governmental agencies. To detect mis statements in
Helping Hand’s fi nancial statements re sulting from violations
of laws and regulations, Hill should focus on violations that a. Could result in criminal prosecution against the organi
zation.
b. Involve signifi cant defi ciencies to be communicated
to the organization’s trustees and the funding
agencies.
c. Have a direct and material effect on the amounts in
the organization’s fi nancial statements.
d. Demonstrate the existence of material weaknesses
A
- (c) The requirement is to determine the focus of an
auditor’s attention in detecting misstatements resulting from
violations of laws and regulations when auditing a not-forprofi
t organization that receives fi nancial assistance from
governmental agencies. Answer (c) is correct because the
focus of such proce dures should be on violations that have a
direct and material effect on the amounts in the organiza tion’s
fi nancial statements (AU-C 806). Answers (a), (b), and (d)
all represent a focus that is not as accurate as that provided in
answer (c).
18
Q
- A governmental audit may extend beyond an examination
leading to the expression of an opinion on the fairness of
fi nancial presentation to include
Program
results Compliance
Economy and
effi ciency
a. Yes Yes No
b. Yes Yes Yes
c. No Yes Yes
d. Yes No Yes
A
- (b) The requirement is to determine the proper
scope of a governmental audit. The General Accounting
Offi ce’s “Yellow Book” suggests that in addition to fi nancial
statements, such an audit may include consideration of
(1) program results, (2) compliance with laws and regula tions,
and (3) economy and effi ciency.
19
Q
- When auditing an entity’s fi nancial statements in
ac cor dance with Government Auditing Standards (the “Yel low
Book”), an auditor is required to report on
I. Noteworthy accomplishments of the program.
II. The scope of the auditor’s testing of internal controls.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
A
- (b) The requirement is to identify whether an auditor
performing an audit in accordance with Government
Auditing Standards (the “Yellow Book”) is required to report
on notewor thy accomplishments of the program, the scope of
the auditor’s testing of internal controls, or both. An swer (b)
is correct be cause the “Yellow Book” requires re porting only
upon the scope of the auditor’s testing of inter nal controls.
Answers (a), (c), and (d) all include an incor rect combination
of reporting replies.
20
Q
- When auditing an entity’s fi nancial statements in accord
ance with Government Auditing Standards (the “Yellow
Book”), an auditor is required to report on
I. Recommendations for actions to improve operations.
II. The scope of the auditor’s tests of compliance with
laws and regulations.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
A
- (b) The requirement is to identify whether an audi tor
performing an audit in accordance with Government Auditing
Standards (the “Yellow Book”) is required to report on recommendations
for actions to improve operations, the scope of
tests of compliance with laws and regulations, or both. Answer
(b) is correct because the “Yellow Book” re quires reporting
upon the scope of the auditor’s tests of compliance with
laws and regula tions. Answers (a), (c), and (d) all include an
incorrect combina tion of reporting replies
21
Q
- Which of the following statements is a standard
applica ble to fi nancial statement audits in accordance with
Government Auditing Standards (the “Yellow Book”)?
a. An auditor should report on the scope of the audi tor’s
testing of compliance with laws and regula tions.
b. An auditor should assess whether the entity has
re portabl e measures of economy and effi ciency that
are valid and reliable.
c. An auditor should report recommendations for
ac tions to correct problems and improve operations.
d. An auditor should determine the extent to which the
en tity’s programs achieve the desired results.
A
- (a) The requirement is to identify the correct statement
with respect to a fi nancial statement audit conducted in
accord ance with Government Auditing Standards (the “Yellow
Book”). Answer (a) is correct because the auditor issues
a report on com pliance with laws and internal control, and a
report on the fi nan cial information. Answer (b) is incorrect
because a fi nancial statement audit does not address econ omy
and effi ciency in the manner suggested. Answer (c) is incorrect
because recommen dations for actions to correct problems and
improve operations are not ordinarily in cluded. Answer (d) is
incorrect because a fi nancial state ment audit does not address
whether programs are achieving the desired results
22
Q
- In an integrated audit, what must the auditor
communicate to the audit committee?
Known material
weaknesses
All control
defi ciencies
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (b) The requirement is to specify what types of
defi ciencies must be communicated by the auditor to the
audit committee. Answer (b) is correct because the auditor
must communicate material weaknesses and other signifi cant
defi ciencies, but not all control defi ciencies. Answer (a) is
incorrect because control defi ciencies that are not signifi cant
need not be communicated to the audit committee (unless
the auditor has made an agreement to communicate them).
Answers (c) and (d) are incorrect because known material
weaknesses must be communicated to the audit committee and
control defi ciencies that are not signifi cant defi ciencies need
not be communicated.
23
Q
- In which manner are signifi cant defi ciencies
communicated by the auditors to the audit committee under
Public Company Accounting Oversight Board requirements?
a. The communication may either be orally or in written
form.
b. The communication must be oral, and not in written form.
c. The communication must be in written form.
d. No such communication is required as only material
weaknesses must be communicated
A
- (c) The requirement is to determine the manner in
which signifi cant defi ciencies are communicated by the
auditor to the audit committee under PCAOB requirements.
Answer (c) is correct because the PCAOB requires a written
communication. Answer (a) is incorrect because a written
communication is required. Answer (b) is incorrect because the
communication must be in a written form, not in an oral form.
Answer (d) is incorrect because both material weaknesses and
signifi cant defi ciencies must be communicated.
24
Q
- Which is correct concerning the external auditors’ use of
the work of others in an audit of internal control performed for
a public company?
a. It is not allowed.
b. The work of internal auditors may be used, but only
when those internal auditors report directly to the
audit committee.
c. Ordinarily the work of internal auditors and others is
used primarily in low-risk areas.
d. There is no limitation and is likely to reduce auditor
liability since the auditors will then share legal responsibility
with those who have performed the service.
A
- (c) The requirement is to identify the correct statement
concerning the external auditors’ use of the work of others
when performing an audit of internal control of a public
company. Answer (c) is correct because, after assuring
themselves as to the competence and objectivity of the internal
auditors and others, the external auditors may use their work—
particularly in low-risk areas and when that work is supervised
and/or reviewed. Answer (a) is incorrect because using the
work of internal auditors and others is allowed. Answer (b) is
incorrect because there is no such requirement of reporting to
the audit committee, although this is one indication of internal
auditor objective. Answer (d) is incorrect because there are
limitations, and because it is uncertain whether liability will be
shared.
25
Q
- In an integrated audit, which must the auditor
communicate in writing to management?
a. Only material weaknesses.
b. Material weaknesses and signifi cant defi ciencies.
c. Material weaknesses, signifi cant defi ciencies and
other control defi ciencies.
d. Material weaknesses, signifi cant defi ciencies, other
control defi ciencies, and all suspected and possible
employee law violations.
A
- (c) The requirement is to identify the information that
must be communicated in writing to management. Answer
(c) is correct because in an integrated audit all material
weaknesses, signifi cant defi ciencies, and other control
defi ciencies must be reported to management. Answers (a) and
(b) are incorrect because they are incomplete. Answer (d) is
incorrect because “all suspected and possible employee law
violations” need not be communicated
26
Q
- Which of the following is correct when applying a topdown
approach to identify controls to test in an integrated audit?
a. For certain assertions, strong entity-level controls
may allow the auditor to omit additional testing
beyond those controls.
b. Starting at the top—controls over specifi c assertions—
the auditor should link to major accounts and reporting
items.
c. The goal is to focus on details of accounting controls,
while avoiding consideration of overall entity-level
controls.
d. The goal is to focus on all controls related to
assertions, omitting consideration of controls related
to the fi nancial statements.
A
- (a) The requirement is to identify a correct statement
about applying a top-down approach to identify controls
to test in an integrated audit. Answer (a) is correct because
certain effective entity-level controls may allow the auditor to
omit additional testing beyond those controls. Answer (b) is
incorrect because starting with assertions does not represent
starting at the top (starting at the top includes consideration
of the fi nancial statements and entity-level controls fi rst).
Answer (c) is incorrect because consideration of entity-level
controls cannot be avoided. Answer (d) is incorrect because
not all controls related to assertions need to be focused upon,
and because one may not omit controls related to the fi nancial
statements.
27
Q
- Which of the following is not included in a standard
unqualifi ed opinion on internal control over fi nancial reporting
performed under PCAOB requirements?
a. Because of inherent limitations, internal control
over fi nancial reporting may not prevent or detect
misstatements.
b. In our opinion, [company name] maintained, in all
material respects, effective internal control over
fi nancial reporting.
c. Our audit included obtaining an understanding of
internal control over fi nancial reporting.
d. The [company name] management and audit
committee is responsible for maintaining effective
internal control over fi nancial reporting.
A
- (d) The requirement is to identify the statement not
included in a standard unqualifi ed opinion on internal control
performed under PCAOB requirements. Answer (d) is correct
because the report indicates that management is responsible
for maintaining effective internal control over fi nancial
reporting, not management and the audit committee. Answers
(a), (b) and (c) are all incorrect because they represent
statements included in the audit report
28
Q
- In reporting on an entity’s internal control over fi nancial
reporting, a practitioner should include a paragraph that
describes the
a. Documentary evidence regarding the control
environment factors.
b. Changes in internal control since the prior report.
c. Potential benefi ts from the practitioner’s suggested
improvements.
d. Inherent limitations of any internal control.
A
- (d) The requirement is to identify the statement that
should be included in a CPA’s report on a client’s internal
control over fi nancial reporting. Answer (d) is correct because
AT 501 requires that the report include a comment on the
inherent limitations of any internal control.
29
Q
- When an independent auditor reports on internal control
based on criteria established by governmental agencies, the
report should
a. Not include the agency’s name in the report.
b. Indicate matters covered by the study and whether
the auditor’s study included tests of controls with the
procedures covered by the study.
c. Not express a conclusion based on the agency’s criteria.
d. Assume responsibility for the comprehensiveness
of the criteria established by the agency and include
recommendations for corrective action.
A
- (b) The requirement is to describe the contents of
a report on the study of internal control that is based on
criteria established by governmental agencies. Answer (b) is
correct because the report should indicate matters covered
by the consideration and whether the auditor’s consideration
included tests of controls with the procedures covered by his/
her consideration. Additionally, the report should describe
the objectives and limitations of internal control and the
accountant’s evaluation thereof; state the accountant’s
conclusion, based on the agency’s criteria; and describe the purpose of the report and state that it should not be used
for any other purpose. Answer (a) is incorrect because the
agency’s name should be included. Answer (c) is incorrect
because a conclusion may be made relative to the agency’s
criteria. Answer (d) is incorrect because the accountant should
not assume responsibility for the comprehensiveness of the
criteria.
30
Q
- When an examination has been performed on the
effectiveness of entity’s internal control over fi nancial
reporting and a material weakness has been noted, the
practitioner’s report should express an opinion on
a. The assertion.
b. The subject matter to which the assertion relates.
c. Neither of the above.
d. Both of the above.
A
- (b) AT 501 states that when a deviation from the
control criteria being reported upon exists (here a material
weakness in internal control) the CPA should report directly
upon the subject matter and not upon the assertion.
31
Q
- Which of the following types of engagements is not permitted
under the professional standards for reporting on an entity’s
compliance?
a. Agreed-upon procedures on compliance with the
speci fi ed requirements of a law.
b. Agreed-upon procedures on the effectiveness of in ternal
control over compliance with a law.
c. Review on compliance with specifi ed requirements of
a law.
d. Examination on compliance with specifi ed requirements
of a law.
A
- (c) The requirement is to identify the type of asso ciation
not permitted under the compliance attestation stand ards.
AT 601 does not allow the CPA to perform a review over
compli ance.
32
Q
- For purposes of an audit of internal control performed
under Public Company Accounting Oversight Board standards,
the “as of date” is ordinarily
a. The fi rst day of the year.
b. The last day of the fi scal period.
c. The last day of the auditor’s fi eldwork.
d. The average date for the entire fi scal period.
A
- (b) The requirement is to identify the “as of date” for
purposes of an audit of internal control performed under PCAOB
standards. Answer (b) is correct because the “as of date” is the
last day of the fi scal period; it is this date on which the auditor
concludes as to the effectiveness of internal control. Answers
(a) and (c) are incorrect because neither the fi rst day of the year
nor the last day of the auditor’s fi eldwork is the appropriate date
on which to evaluate internal control. Answer (d) is incorrect
because the “as of date” is a particular date, not an average.
33
Q
- Consider an issuer (public) company whose purchases
are made through the Internet and by telephone. Which of the
following is correct?
a. These types of purchases represent control objectives
for the audit of internal control.
b. These purchases are the assertions related to the
purchase class of transactions.
c. These types of purchases represent two major classes
of transactions within the purchases process.
d. These two types of transactions represent routine
transactions that must always be investigated in
extreme detail.
A
- (c) The requirement is to identify the correct statement
concerning a company that makes purchases both through
the Internet and by telephone. Answer (c) is correct because
both types of purchases are a part of the purchases process
and represent major classes of transactions, as per PCAOB
requirements. Answer (a) is incorrect because the purchase
types themselves are not control objectives for internal control
(control objectives address issues such as the completeness
of the recording of sales). Answer (b) is incorrect because
purchases are not assertions. Answer (d) is incorrect because
purchase transactions may or may not be investigated in
extreme detail.
34
Q
- For an issuer (public) company audit of internal control,
walkthroughs provide the auditor with primary evidence to
Evaluate the
effectiveness of the
design of controls
Confi rm whether
controls have been
implemented
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (a) The requirement is to identify the circumstance(s) in
which walk-throughs provide the auditor with primary evidence.
A walk-through involves literally tracing a transaction from its
origination through the company’s information systems until it
is refl ected in the fi nancial reports. Answer (a) is correct because
a walk-through provides evidence to (1) confi rm the auditor’s
understanding of the fl ow of transactions and the design of
controls, (2) evaluate the effectiveness of the design of controls,
and (3) to confi rm whether controls have been implemented.
Answer (b) is incorrect because walk-throughs provide the
auditors with primary evidence to confi rm whether controls
have been implemented. Answer (c) is incorrect because walkthroughs
provide primary evidence to evaluate the effectiveness
of design in internal control. Answer (d) is incorrect both
because walk-throughs provide primary evidence to (1) evaluate
the effectiveness of the design of controls and (2) confi rm
whether the controls have been implemented.
35
Q
- Which is most likely to be a question asked of employee
personnel during a walk-through in an audit of the internal
control of an issuer (public) company?
a. Have you ever been asked to override the process?
b. Do you believe that you are underpaid?
c. What do you do when you fi nd a fraudulent transaction?
d. Who trained you for this job?
A
- (a) The requirement is to identify the most likely
question to be asked of employee personnel during a walkthrough.
Answer (a) is correct because a question on whether
an employee has ever been asked to override the process is
included in the example questions to be asked by the auditor.
Answer (b) is incorrect because auditors do not in general
ask whether the employee believes he or she is underpaid.
Answer (c) is incorrect because a direct question on fraudulent
transactions like this, while possible, ordinarily is not suggested.
Answer (d) is incorrect because the auditor will not usually ask
who trained the person. Note that all four questions might be
asked, but only one is among those recommended in Standard 5.
36
Q
169. How large must the actual loss identifi ed by the auditor be for a control defi ciency to possibly be considered a material weakness? Immaterial Material a. Yes Yes b. Yes No c. No Yes d. No No
A
- (a) The requirement is to identify how large the actual
loss identifi ed must be for a control defi ciency to possibly
be considered a material weakness. Answer (a) is correct
because a material weakness is determined by whether there
is more than a remote likelihood of a material loss occurring
due to the control defi ciency; the actual loss identifi ed need
not be material. Answer (b) is incorrect because it suggests
that a material amount identifi ed will not be considered a
material weakness. Answer (c) is incorrect because it states
that when the identifi ed amount is immaterial it is never a
material weakness. Answer (d) is incorrect because it suggests
that when an immaterial or material actual loss is discovered,
the situation would not be assessed as a possible material
weakness.
37
Q
- For purposes of an audit of internal control performed
under Public Company Accounting Oversight Board
requirements, an account is signifi cant if there is more than a
a. Reasonably possible likelihood that it could contain
immaterial or material misstatements.
b. Reasonably possible likelihood that it could contain
material misstatements.
c. Remote likelihood that it could contain material
misstatements.
d. Remote likelihood that it could contain more than
inconsequential misstatements
A
- (c) The requirement is to identify the circumstance
that makes an account signifi cant for purposes of a PCAOB
audit of internal control. Answer (c) is correct because
PCAOB requires only more than a remote likelihood of
material misstatement. Answer (a) is incorrect because the
standard requires only a remote likelihood and because it is
limited to material misstatements. Answer (b) is incorrect
because the standard requires more than a remote likelihood,
not more than a reasonably possible likelihood. Answer (d)
is incorrect because material misstatements are involved, not
misstatements that are more than inconsequential.
38
Q
- A control defi ciency that is more than a signifi cant
defi ciency is most likely to result in what form of audit
opinion relating to internal control?
a. Adverse.
b. Qualifi ed.
c. Unqualifi ed.
d. Unqualifi ed with explanatory language
A
- (a) The requirement is to identify the appropriate
report when a control defi ciency that is more than a signifi cant
defi ciency is identifi ed. Answer (a) is correct because a
control defi ciency that is more than a signifi cant defi ciency
is a material weakness, and because a material weakness
leads to an adverse opinion on internal control. Answer (b)
is incorrect because qualifi ed opinions are not issued when a
material weakness exists. Answer (c) is incorrect because an
unqualifi ed opinion is not issued when a material weakness
exists. Answer (d) is incorrect because explanatory language
added to an unqualifi ed report is not appropriate when a
material weakness exists.
39
Q
- Which of the following is most likely to be considered
a material weakness in internal control for purposes of an
internal control audit of an issuer (public) company?
a. An ineffective oversight of fi nancial reporting by the
audit committee.
b. Restatement of previously issued fi nancial statements
due to a change in accounting principles.
c. Inadequate segregation of recordkeeping from
accounting.
d. Weaknesses in control activities.
A
- (a) The requirement is to identify the defi ciency that
is most likely to be considered a material weakness in internal
control for purposes of an internal control audit of a public
company. Answer (a) is correct because ineffective oversight
of fi nancial reporting by the audit committee is among the
list of circumstances that the PCAOB suggests are strong
indicators of the existence of a material weakness. Restatement
of previously issued fi nancial statements as a result of a
change in accounting principles is ordinarily not considered
even a signifi cant defi ciency. Answer (c) is incorrect because
the reply “inadequate segregation of recordkeeping from
accounting” makes no real sense because accounting is
involved with recordkeeping. Answer (d) is incorrect because
control activity weaknesses often do not represent material
weaknesses.
40
Q
- Inability to evaluate internal control due to a
circumstance-caused scope limitation relating to a signifi cant
account in a Sarbanes-Oxley 404 internal control audit is most
likely to result in a(n)
a. Adverse opinion.
b. Qualifi ed opinion.
c. Unqualifi ed opinion with explanatory language.
d. All of the above are equally likely
A
- (b) The requirement is to identify the most appropriate
report when a circumstance-caused scope limitation results in
inability to evaluate internal control for a signifi cant account
involved in the audit. Answer (b) is correct because the
PCAOB requires that either a qualifi ed opinion or a disclaimer
is appropriate, and because the disclaimer is not listed as an option. Answer (a) is incorrect because an adverse opinion is
not appropriate. Answer (c) is incorrect because an unqualifi ed
opinion with explanatory language is not appropriate when the
auditor is unable to evaluate internal control for a signifi cant
account. Answer (d) is incorrect because answers (a) and (c)
are not appropriate.
41
Q
- Which of the following is most likely to indicate a
signifi cant defi ciency relating to a client’s antifraud programs?
a. A broad scope of internal audit activities.
b. A “whistle-blower” program that encourages
anonymous submissions.
c. Audit committee passivity when conducting oversight
functions.
d. Lack of performance of criminal background
investigations for likely customers.
A
- (c) The requirement is to identify the most likely
signifi cant defi ciency relating to a client’s antifraud programs.
Answer (c) is correct because an active audit committee, not
a passive audit committee is needed. Answer (a) is incorrect
because a broad scope of internal audit activities is ordinarily
a strength, not a defi ciency. Answer (b) is incorrect because
a whistle-blower program that encourages anonymous
submissions is required. Answer (d) is incorrect because it
is not ordinarily necessary to perform criminal background
investigations for likely customers.
42
Q
- An auditor identifi ed a material weakness in December. The
client was informed and corrected it shortly after the “as of date”
(December 31); the auditor agrees that the correction eliminates
the material weakness as of January 31. The appropriate report
under a PCAOB audit of internal control is
a. Adverse.
b. Unqualifi ed.
c. Unqualifi ed with explanatory language relating to the
material weakness.
d. Qualifi ed.
A
- (a) The requirement is to identify the appropriate
audit report when a material weakness is corrected
subsequent to year-end, but before the audit report is
issued. Answer (a) is correct because the PCAOB requires
an adverse audit report when a material weakness exists at
year-end, the “as of date.” Answer (b) is incorrect because an
unqualifi ed opinion is not appropriate. Answer (c) is incorrect
because an unqualifi ed opinion with explanatory language
is not adequate. Answer (d) is incorrect because a qualifi ed
opinion is not appropriate when a material weakness exists at
year-end.
43
Q
176. In an integrated audit, which of the following lead(s) to
an adverse opinion on internal control?
Material weaknesses
Signifi cant
defi ciencies
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (b) The requirement is to specify whether material
weaknesses and/or signifi cant defi ciencies lead to an adverse
opinion on internal control in an integrated audit. Answer (b)
is correct because only material weaknesses lead to an
adverse opinion. Answer (a) is incorrect because signifi cant
defi ciencies do not result in an adverse opinion. Answer (c)
is incorrect because material weaknesses do result in adverse
opinions but signifi cant defi ciencies do not. Answer (d) is
incorrect because material weaknesses do result in adverse
opinions.
44
Q
- Which of the following best describes a CPA’s
engagement to report on an entity’s internal control over
fi nancial reporting?
a. An engagement to form an opinion on the
effectiveness of its internal control.
b. An audit engagement to provide negative assurance
on the entity’s internal control.
c. A prospective engagement to project, for a period
of time not to exceed one year, and report on the
expected benefi ts of the entity’s internal control.
d. A consulting engagement to provide constructive
advice to the entity on its internal control.
A
- (a) The requirement is to identify the statement that
best describes a CPA’s engagement to report on an entity’s
internal control over fi nancial reporting. Answer (a) is correct
because the objective of such engagement is to form an
opinion on the effectiveness of internal control. Answer (b)
is incorrect because no such negative assurance is provided
based on an “audit” of the entity’s internal control. Answer (c)
is incorrect because such engagements do not project expected
benefi ts of the entity’s internal control. Answer (d) is incorrect
because such engagements are attestation engagements, not
consulting engagements.
45
Q
- An engagement to examine internal control will generally
a. Require procedures that duplicate those already
applied in assessing control risk during a fi nancial
statement audit.
b. Increase the reliability of the fi nancial statements that
have already been audited.
c. Be more extensive in scope than the assessment of
control risk made during a fi nancial statement audit.
d. Be more limited in scope than the assessment of
control risk made during a fi nancial statement audit.
A
- (c) The requirement is to determine the correct
statement regarding an engagement to examine internal control.
Answer (c) is correct because the procedures relating to internal
control will be more extensive when reporting on internal
control as compared to procedures performed for a fi nancial
statement audit. This difference occurs because during fi nancial
statement audits the auditor may decide not to perform tests of
controls and may simply assess control risk at the maximum
level. Conversely, in an engagement to report on internal
control an auditor must perform additional tests of controls.
Answer (a) is incorrect because such duplication of procedures
may not be necessary. Answer (b) is incorrect because a report
on internal control will not in general increase the reliability
of the fi nancial statements. Answer (d) is incorrect because, as
indicated, the scope of procedures relating to internal control
is more extensive, not more limited, than the assessment of
control risk made during a fi nancial statement audit.
46
Q
- Which of the following is correct concerning the level of
assistance auditors may provide in assisting management with
its assessment of internal control?
a. No assistance of any type may be provided.
b. No limitations on assistance exist.
c. Only very limited assistance may be provided.
d. As less risk is assumed by the auditors, a higher level
of assistance is appropriate
A
- (c) The requirement is to identify the correct statement
concerning the level of assistance that auditors may provide in
assisting management with its assessment of internal control.
Answer (c) is correct since only limited assistance may be
provided so as not to create a situation in which the auditors
are auditing their own work. Answer (a) is incorrect since some
assistance may be provided. Answer (b) is incorrect because there
are limitations on the level of assistance. Answer (d) is incorrect
because the tie between risk and assistance seems inappropriate
and in the wrong direction; also, this type of tradeoff between
risk and assistance is not included in PCAOB auditing standards.
47
Q
- Which of the following need not be included in
management’s report on internal control under Section 404a of
the Sarbanes-Oxley Act of 2002?
a. A statement that the company’s auditor has issued an
attestation report on management’s assertion.
b. Identifi cation of the framework for evaluating internal
control.
c. Management’s assessment of the effectiveness of
internal control.
d. Management’s statement of responsibility to establish
and maintain internal control that has no signifi cant
defi ciencies
A
- (d) The requirement is to identify which of the
following need not be included in management’s report on
internal control under Section 404a of the Sarbanes-Oxley Act
of 2002. Answer (d) is correct because, while the report must
indicate that it is management’s responsibility to establish and
maintain adequate internal control, it need not also indicate
that such control has no signifi cant defi ciencies. Answers (a),
(b), and (c) are all incorrect because they include information
that must be contained in management’s report.
48
Q
- Which of the following is an accurate statement about
internal control weaknesses?
a. Material weaknesses are also control defi ciencies.
b. Signifi cant defi ciencies are also material weaknesses.
c. Control defi ciencies are also material weaknesses.
d. All control defi ciencies must be communicated to the
audit committee.
A
- (a) Answer (a) is correct because all material
weaknesses are control defi ciencies. Answer (b) is incorrect
because a signifi cant defi ciency may or may not be a material
weakness. Answer (c) is incorrect because not all control
defi ciencies are material weaknesses. Answer (d) is incorrect
because only signifi cant defi ciencies and material weaknesses
must be communicated.
49
Q
- How do the scope, procedures, and purpose of an
examination of internal control compare to those for obtaining
an understanding of internal control and assessing control risk
as part of an audit?
Scope Procedures Purpose
a. Similar Different Similar
b. Different Similar Similar
c. Different Different Different
d. Different Similar Different
A
- (d) The requirement is to identify the relationship
between an examination of internal control and obtaining an
understanding of internal control and assessing control risk as
part of an audit. Answer (d) is correct because, while the scope
and purpose differ between the two types of engagements, the
procedures followed are similar.
50
Q
- A procedure that involves tracing a transaction from its
origination through the company’s information systems until
it is refl ected in the company’s fi nancial report is referred to
as a(n)
a. Analytical analysis.
b. Substantive procedure.
c. Test of a control
d. Walk-through.
A
- (d) The requirement is to identify the procedure that
involves tracing a transaction from origination through the
company’s information systems until it is refl ected in the
company’s fi nancial report. Answer (d) is correct because this is the approach followed in a walk-through. Answer (a)
is incorrect because analytical analysis is a general term that
simply suggests a general analysis. Answer (b) is incorrect
because a substantive procedure addresses the correctness of a
particular fi nancial statement amount or disclosure. Answer (c)
is incorrect because a test of a control addresses the operating
effectiveness of a control.
51
Q
- The existence of audit risk is recognized by the state ment
in the auditor’s standard report that the auditor
a. Obtains reasonable assurance about whether the fi nancial
statements are free of material misstate ment.
b. Assesses the accounting principles used and also
evalu ates the overall fi nancial statement presenta tion.
c. Realizes some matters, either individually or in the
ag gregate, are important while other-matters are not
im portant.
d. Is responsible for expressing an opinion on the fi nancial
statements, which are the responsibility of man agement
A
- (a) The requirement is to identify the statement in the
standard audit report that indicates the existence of audit risk.
Answer (a) is correct because the existence of audit risk is
recog nized by the statement in the auditor’s standard report
that the auditor obtained “reasonable assurance.” Answer (b)
is incorrect because while the standard report does indicate that the CPA assesses the accounting prin ci ples used and
the overall fi nancial statement presentation, this does not
indicate the existence of audit risk. Answer (c) is incorrect
because while the standard report does indicate that the
audit relates to whether the fi nancial statements are free of
material misstatement, it does not discuss materiality and the
audit risk associated with materiality. An swer (d) is incorrect
because while the fi nancial statements are the re sponsibility of management and the CPA’s responsibility is to express an
opinion, the indication that the CPA expresses an opinion does
not address audit risk and is less precise than the statement that
the auditor obtains reasonable assur ance.
52
Q
- When an accountant performs more than one level of
ser vice (for example, a compilation and a review, or a compilation
and an audit) concerning the fi nancial statements of a
nonissuer (nonpublic) entity, the accountant generally should
issue the report that is appropriate for
a. The lowest level of service rendered.
b. The highest level of service rendered.
c. A compilation engagement.
d. A review engagement.
A
- (b) The requirement is to determine an accountant’s
reporting responsibility when more than one level of service
con cerning the fi nancial statements of a nonissuer (nonpub lic)
entity has been performed. Answer (b) is correct be cause the
profes sional standards that the accountant report on the highest
level of service rendered. Answer (a) is incorrect because the
highest, and not the lowest, level is reported on. Answer (c)
is incorrect because regardless of the other type of service
performed, the compilation level is always the lowest level and
therefore should not be the basis of the re port. Answer (d) is
incorrect because in circumstances in which an audit has been
performed, an audit report, not a review report, is appropriate
53
Q
- March, CPA, is engaged by Monday Corp., a client, to
audit the fi nancial statements of Wall Corp., a company that
is not March’s client. Monday expects to present Wall’s
audited fi nan cial statements with March’s auditor’s report to
1st Federal Bank to obtain fi nancing in Monday’s attempt
to purchase Wall. In these circumstances, March’s auditor’s
report would usually be addressed to
a. Monday Corp., the client that engaged March.
b. Wall Corp., the entity audited by March.
c. 1st Federal Bank.
d. Both Monday Corp. and 1st Federal Bank.
A
- (a) The requirement is to determine the proper ad dressee
of a report in a circumstance in which one company has
hired a CPA to audit another company’s fi nancial state ments.
Answer (a) is correct because while audit reports are ordinarily
addressed to the company whose fi nancial state ments are being
audited, when a CPA audits the fi nancial statements of a company
that is not his or her client (as is the case here) the report
is addressed to the company that hired the CPA.
54
Q
- Which of the following statements is a basic element of the
auditor’s standard report on fi nancial statements?
a. The disclosures provide reasonable assurance that the
fi nancial statements are free of material mis statement.
b. The auditor evaluated the overall internal control and
provides limited assurance on it.
c. An audit includes assessing signifi cant estimates made
by management.
d. The fi nancial statements are consistent with those of
the prior period.
A
- (c) The requirement is to identify the statement that is
included in the auditor’s standard report. Answer (c) is correct
because the auditor’s standard report states that an audit
includes assessing signifi cant estimates made by man agement;
the other replies provide information not directly mentioned in
a standard report.
55
Q
- For a nonpublic company, which section (paragraph) of the
audit report includes a statement that the auditor believes that
the audit evidence obtained is suffi cient?
a. Introductory.
b. Opinion.
c. Auditor’s responsibility.
d. Management’s responsibility
A
- (c) The requirement is to identify which section of
the audit report the auditor speaks of the adequacy of audit
evi dence. Answer (a) is correct because in the auditor’s responsibility
sec tion the auditors states a belief that the audit
evidence obtained is suffi cient and appropriate to provide a
basis for the audit opinion.
56
Q
- For a nonpublic company audit report, a statement that the
auditor has audited the fi nancial statements followed by the
titles of the fi nancial statements is included in the
a. Management’s responsibility section of the audit re port.
b. The opening paragraph of the auditor’s standard re port.
c. The auditor’s responsibility section of the audit re port.
d. The opinion paragraph of the auditor’s standard report.
A
- (b) The requirement is to identify the correct state ment
concerning where a statement that the auditor has au dited
the fi nancial statements which are then listed is in cluded in
the audit report. Answer (b) is correct because the opening
(introduc tory) paragraph of the audi tor’s standard report
states that the auditor has audited the fi nancial statements
and then lists them. Answer (a) is incorrect be cause of the
explicit statement in the introductory paragraph. Answers (c)
and (d) are incorrect be cause the introductory paragraph, not
the auditor’s responsibility section or the opinion paragraph,
includes the statement and lists the fi nan cial statements
57
Q
7. How does an auditor make the following representa tions
when issuing the standard public company auditor’s report on
compar ative fi nancial statements?
Examination of
evidence on
a test basis
Consistent
application of
accounting principles
a. Explicitly Explicitly
b. Implicitly Implicitly
c. Implicitly Explicitly
d. Explicitly Implicitly
A
- (d) The requirement is to determine the representa tions
made explicitly and implicitly when issuing a public company
standard auditor’s report on comparative fi nancial statements.
Answer (d) is correct because that audit report ex plicitly
states that the examination of evidence is made on a test basis
and im plicitly assumes consistent application of accounting
principles. Answer (a) is incorrect because con sistency of
application of accounting principles is not indi cated explicitly.
Answer (b) is incorrect because examina tion of evidence on
a test basis is re ferred to explicitly. Answer (c) is incorrect because examination of evidence on a test basis is explicitly
referred to and because consistent application of accounting
principles is not explicitly referred to
58
Q
- Which of the following best describes the reference to the
expression “taken as a whole” in the PCAOB’s audit reporting
standards?
a. They apply equally to a complete set of fi nancial statements
and to each individual fi nancial state ment.
b. They apply only to a complete set of fi nancial
state ments.
c. They apply equally to each item in each fi nancial
state ment.
d. They apply equally to each material item in each fi -
nan cial statement.
A
- (a) The requirement is to determine the meaning of the
expression “taken as a whole” in the fourth generally accepted
auditing standard of reporting. The professional standards state
that “taken as a whole” applies equally to a complete set of fi -
nancial statements and to an individual fi nancial statement.
59
Q
- A fi nancial statement audit report issued for the audit of an
issuer (public) company concludes that the fi nancial statements
follow
a. Generally accepted accounting principles.
b. Public Company Accounting Oversight Board
stan d ards.
c. Generally accepted auditing standards.
d. International accounting standards.
A
- (a) The requirement is to determine the accounting
principles that an issuer (public) company audit report refers
to. Answer (a) is correct because the fi nancial statements
follow generally accepted accounting principles. Answer (b)
is incorrect because, while the audit is performed in accordance
with PCAOB standards, the fi nancial statements do not
follow those standards. Answer (c) is incorrect because the
fi nancial statements do not follow generally accepted auditing
standards. Answer (d) is in correct because the fi nancial
statements ordinarily follow gener ally accepted ac counting
principles, not International Accounting Standards.
60
Q
- Which of the following is not correct concerning information
included in an audit report of fi nancial statements
issued under the requirements of the Public Company
Ac counting Oversight Board?
a. The report should include the title “Report of Independ
ent Registered Public Accounting Firm.”
b. The report should refer to the standards of the
PCAOB.
c. The report should include a paragraph referring to
the auditor’s report on compliance with laws and
regula tions.
d. The report should contain the city and state or coun try
of the offi ce that issued the report
A
- (c) The requirement is to identify the incorrect statement
concerning information included in an audit report of
fi nancial statements issued under the requirements of the
PCAOB. Answer (c) is correct since the report should refer
to the auditor’s report on internal control, not on compliance
with laws and reg ulations. Answer (a) is incorrect because
the report should in clude the title “Report of Independent
Registered Public Ac counting Firm.” Answer (b) is incor rect
because the report should refer to the standards of the PCAOB.
Answer (d) is in correct because the report should contain the
city and state or country of the offi ce that issued the report
61
Q
- An auditor concludes that there is substantial doubt
about an entity’s ability to continue as a going concern for a
reasonable period of time. If the entity’s fi nancial state ments
adequately disclose its fi nancial diffi culties, the audi tor’s
report is required to include an emphasis-of-matter par agraph
that specifi cally uses the phrase(s)
“Reasonable period
of time, not to
exceed 1 year” “Going concern”
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (c) The requirement is to determine whether the term
“reasonable period of time, not to exceed one year” and/
or “go ing concern” is included in an emphasis-of-matter
paragraph relating to going concern status. Answer (c) is
correct because while the term “going concern” must be
included, the fi rst term is not included in such a report
62
Q
- Mead, CPA, had substantial doubt about Tech Co.’s
ability to continue as a going concern when reporting on
Tech’s audited fi nancial statements for the year ended June 30,
20X1. That doubt has been removed in 20X2. What is Mead’s
reporting re sponsibility if Tech is presenting its fi nancial
statements for the year ended June 30, 20X2, on a comparative
basis with those of 20X1?
a. The emphasis-of-matter paragraph included in the
20X1 au ditor’s report should not be repeated.
b. The emphasis-of-matter paragraph included in the
20X1 au ditor’s report should be repeated in its
en tirety.
c. A different emphasis-of-matter paragraph describ ing
Mead’s reasons for the removal of doubt should be included.
d. A different emphasis-of-matter paragraph describ ing
Tech’s plans for fi nancial recovery should be
in cluded.
A
- (a) The requirement is to determine an auditor’s
report ing responsibility when reporting on comparative
fi nancial statements in which the fi rst year presented originally
received a going concern modifi cation on a matter that has now
been re solved, thus removing the auditor’s substan tial doubt.
Answer (a) is correct because if substantial doubt has been
removed in the current period, the emphasis-of-matter paragraph
included in the auditor’s report on the fi nancial statements of the
prior period should not be repeated. An swers (b), (c), and (d) are
all incorrect because the paragraph should not be repeated given
the changed circumstances.
63
Q
- When an auditor concludes there is substantial doubt
about a continuing audit client’s ability to continue as a going
concern for a reasonable period of time, the auditor’s
responsibility is to
a. Issue a qualifi ed or adverse opinion, depending upon
ma teriality, due to the possible effects on the fi nancial
statements.
b. Consider the adequacy of disclosure about the
cli ent’s possible inability to continue as a going
con cern.
c. Report to the client’s audit committee that
manage ment’s accounting estimates may need to
be ad justed.
d. Reissue the prior year’s auditor’s report and add an
em phasis-of-matter paragraph that specifi cally re fers
to “substantial doubt” and “going concern.”
A
- (b) The requirement is to determine the auditor’s responsibility
when s/he concludes that there is substantial doubt
about an entity’s ability to continue as a going concern for a
reasonable period of time. Answer (b) is correct be cause when
the auditor concludes there is substantial doubt, s/he should
consider the possible effects on the fi nancial statements, and
the adequacy of the related disclosures. Answer (a) is incorrect
be cause either an unmodifi ed opin ion with an emphasis-ofmatter
paragraph or a disclaimer is generally appropriate,
not a qualifi ed or adverse opinion. Answer (c) is incorrect because the substan tial doubt of go ing concern status does not
require adjusting accounting estimates. An swer (d) is incorrect
because the prior year’s audit report need not be reissued with
an emphasis-of-matter paragraph.
64
Q
- Green, CPA, concludes that there is substantial doubt
about JKL Co.’s ability to continue as a going concern. If
JKL’s fi nan cial statements adequately disclose its fi nancial
diffi culties, Green’s auditor’s report should Include an
emphasis-ofmatter
paragraph
following
the opinion
paragraph
Specifi cally
use the
words “going
concern”
Specifi cally
use the
words
“substantial
doubt”
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes Yes
A
- (a) The requirement is to determine an auditor’s reporting
responsibility when there is substantial doubt about a
client’s ability to continue as a going concern. An swer (a) is
correct because the audit report must include an emphasis-ofmatter
paragraph following the opinion para graph, and must
use the terms “going concern” and “sub stantial doubt.”
65
Q
- In which of the following circumstances would an audi tor
most likely add an emphasis-of-matter paragraph to the audit
report while not affecting the auditor’s unmodifi ed opinion?
a. The auditor is asked to report on the balance sheet, but
not on the other basic fi nancial statements.
b. There is substantial doubt about the entity’s ability to
continue as a going concern.
c. Management’s estimates of the effects of future events
are unreasonable.
d. Certain transactions cannot be tested because of management’s
records retention policy.
A
- (b) The requirement is to identify the situation in
which an emphasis-of-matter paragraph may be added to an
unmodifi ed report. Answer (b) is correct because substantial
doubt about the entity’s ability to continue as a going concern
leads to either an unmodifi ed report with an emphasisof-
matter paragraph or a disclaimer of opinion. Answer (a) is
incor rect because an auditor may issue an opinion on a balance
sheet without reporting on the other basic fi nancial state ments.
Answer (c) is incorrect because unreasonable esti mates lead to
either a qualifi ed or an adverse opinion. An swer (d) is incorrect
because inadequate manage ment record retention policies are
a scope limitation that may re sult in a qualifi ed opinion or a
disclaimer.
66
Q
- After considering an entity’s negative trends and fi nan cial
diffi culties, 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
manage ment’s plans to
a. Increase current dividend distributions.
b. Reduce existing lines of credit.
c. Increase ownership equity.
d. Purchase assets formerly leased.
A
- (c) The requirement is to identify the management
plan an auditor would most likely positively consider when a
question concerning an entity’s ability to continue as a going
concern ex ists. Answer (c) is correct because increasing the
ownership equity will bring in funds to possibly overcome the
negative trends and fi nancial diffi culties. Answers (a), (b), and
(d) are all incorrect because increasing dividend distributions,
reducing lines of credit, and purchasing assets will all use
funds, they will not provide funds. See AU-C 570 for guidance
on an auditor’s consideration of an entity’s ability to continue
as a going concern
67
Q
- Which of the following conditions or events most likely
would cause an auditor to have substantial doubt about an entity’s
ability to continue as a going concern?
a. Signifi cant related-party transactions are pervasive.
b. Usual trade credit from suppliers is denied.
c. Arrearages in preferred stock dividends are paid.
d. Restrictions on the disposal of principal assets are present.
A
- (b) The requirement is to identify the condition or event
most likely to cause an auditor to have substantial doubt about
an entity’s ability to continue as a going con cern. Answer (b)
is correct because denial of usual trade from suppliers is ordinarily
an indicator that the company is in weak fi nancial condition.
Answer (a) is incorrect because while such related-party
transactions may be considered risky, there is less likely to be
a question concerning going concern status than suggested
by answer (a). Answer (c) is incorrect because the payment
of such stock dividends does not indicate fi nancial weakness.
Answer (d) is incorrect because restrictions on the disposal
of principal assets is a condition often present in various loan
agreements.
68
Q
- Cooper, CPA, believes there is substantial doubt about
the ability of Zero Corp. to continue as a going concern for
a reason able period of time. In evaluating Zero’s plans for
dealing with the adverse effects of future conditions and
events, Cooper most likely would consider, as a mitigating
factor, Zero’s plans to
a. Discuss with lenders the terms of all debt and loan
agreements.
b. Strengthen controls over cash disbursements.
c. Purchase production facilities currently being leased
from a related party.
d. Postpone expenditures for research and develop ment
projects.
A
- (d) The requirement is to identify the most likely
miti gating factor a CPA would consider when a client’s
ability to continue as a going concern is in question. Answer
(d) is correct because the ability to postpone expenditures
for research and development projects may mitigate
the circumstance. An swer (a) is incorrect because there is no
guaran tee that Zero’s discussions with its lenders will lead to
a restructuring of the debt and loan agreements. Only existing
or committee agreements to restructure the debt would be
considered a mitigating factor. Answer (b) is incorrect because
69
Q
- Which of the following conditions or events most likely
would cause an auditor to have substantial doubt about an entity’s
ability to continue as a going concern?
a. Cash fl ows from operating activities are negative.
b. Research and development projects are postponed.
c. Signifi cant related-party transactions are pervasive.
d. Stock dividends replace annual cash dividends.
A
- (a) The requirement is to identify the condition or
event that is most likely to cause an auditor to have substantial
doubt about an entity’s ability to continue as a going
concern. Answer (a) is correct because the professional
standards (as well as logic) includes negative cash fl ows as
one of its examples of such condi tions and events. An swer (b)
is incorrect because while the postponement of research and
development projects may sometimes be due to extreme
fi nancial diffi culties, often it is not. Answers (c) and (d) are
incorrect because neither sig nifi cant related-party transactions
nor stock dividends need not indicate substan tial doubt about
an entity’s ability to continue as a going concern. See AU-C
570 for information on an auditor’s con sideration of an entity’s
ability to continue as a going con cern.
70
Q
- Which of the following auditing procedures most likely
would assist an auditor in identifying conditions and events
that may indicate substantial doubt about an entity’s ability to
con tinue as a going concern?
a. Inspecting title documents to verify whether any assets
are pledged as collateral.
b. Confi rming with third parties the details of ar rangements
to maintain fi nancial support.
c. Reconciling the cash balance per books with the cu toff
bank statement and the bank confi rmation.
d. Comparing the entity’s depreciation and asset cap italization
policies to other entities in the industry
A
- (b) The requirement is to identify the condition or event
that might indicate to an auditor substantial doubt about an
entity’s ability to continue as a going concern. Answer (b)
is correct because confi rmation with related and third
parties of the details of arrangements to provide or maintain
fi nancial support is a procedure that would assist an auditor
in identifying a ques tion concerning going con cern status.
See AU-C 570 for this and other such conditions and events
indicating doubt about an en tity’s ability to con tinue as a
going concern. Answer (a) is incor rect because the pledging
of assets as collateral is a normal busi ness transaction and
it need not necessarily indicate a question of going concern
status. Answer (c) is incorrect because rec onciling the cash
balances with the cutoff bank statement is an acceptable audit
procedure, but will not normally identify a going concern
question. Answer (d) is incorrect because comparing an
entity’s depreciation and asset capitalization policies will not
normally indicate a question of going con cern status.
71
Q
- Which of the following audit procedures would most
likely assist an auditor in identifying conditions and events that
may indicate there could be substantial doubt about an entity’s
ability to continue as a going concern?
a. Review compliance with the terms of debt
agree ments.
b. Confi rmation of accounts receivable from principal
cus tomers.
c. Reconciliation of interest expense with debt
out stand ing.
d. Confi rmation of bank balances.
A
- (a) The requirement is to identify the audit proce dure
most likely to assist an auditor in identifying conditions and
events that may indicate there could be substantial doubt about
an entity’s ability to continue as a going concern. Answer (a) is
correct because a review of compliance with terms of debt and
loan agreements may reveal conditions of noncompliance due
to poor fi nancial condition. See the outline of AU-C 570 for a
list of procedures that may identify such conditions and events.
Answers (b), (c), and (d) are all incorrect because, while they
might in some circumstances reveal a question concerning the
company’s ability to con tinue as a going concern, they are not
considered to be as effective as answer (a).
72
Q
- Davis, CPA, believes there is substantial doubt about
the ability of Hill Co. to continue as a going concern for
a reasonable period of time. In evaluating Hill’s plans for
dealing with the adverse effects of future conditions and
events, Davis most likely would consider, as a mitigating
factor, Hill’s plans to
a. Accelerate research and development projects re lated
to future products.
b. Accumulate treasury stock at prices favorable to Hill’s
historic price range.
c. Purchase equipment and production facilities cur rently
being leased.
d. Negotiate reductions in required dividends being paid
on preferred stock.
A
- (d) The requirement is to identify the factor which a
CPA would most likely consider as mitigating substantial
doubt about the ability of an entity to continue as a going
concern. Answer (d) is correct because management’s abil ity
to negotiate reductions of required dividends will de crease
required cash outfl ows, and thereby increase the like lihood that
the entity will be able to continue as a going con cern. AU-C
570 provides ex amples of information that might mitigate such
concern. An swers (a), (b), and (c) are all in correct because they
involve spending cash, rather than re ducing outfl ows of cash.
73
Q
- The adverse effects of events causing an auditor to be lieve
there is substantial doubt about an entity’s ability to continue
as a going concern would most likely be mitigated by evidence
relat ing to the
a. Ability to expand operations into new product lines in
the future.
b. Feasibility of plans to purchase leased equipment at
less than market value.
c. Marketability of assets that management plans
to sell.
d. Committed arrangements to convert preferred stock to
long-term debt.
A
- (c) The requirement is to identify the circumstance
most likely to mitigate an auditor’s substantial doubt about
an entity’s ability to continue as a going concern. An swer (c)
is correct because the marketable assets that man agement
intends to sell may potentially provide the neces sary fi nancial
resources to mitigate the substantial doubt about the entity’s
ability to con tinue as a going concern. Answer (a) is incorrect
because the ability to expand opera tions into new product lines
is a suspect circumstance, given the substantial doubt about
the entity’s abil ity to continue as a going concern. Answer (b)
is incorrect be cause it also requires cash resources which may
not be available. An swer (d) is incorrect because converting
preferred stock to long-term debt will not generally alleviate a
question con cerning an entity’s ability to continue as a going
concern.
74
Q
- For which of the following events would an auditor issue
a report that omits any reference to consistency?
a. A change in the method of accounting for invento ries.
b. A change from an accounting principle that is not
gen erally accepted to one that is generally ac cepted.
c. A change in the useful life used to calculate the pro vision
for depreciation expense.
d. Management’s lack of reasonable justifi cation for a
change in accounting principle.
A
- (c) The requirement is to identify the circumstances
in which an auditor would issue a report that omits any
ref erence to consistency. Answer (c) is correct because a
change in the useful life of assets is a change in estimate,
and a change in estimate does not result in a consistency
modifi cation. Answers (a) and (b) are in correct because they
both represent a change in accounting principle, and a change
in accounting principle requires a con sistency modi fi cation.
Answer (d) is incorrect because manage ment’s lack of
reasonable justifi cation for a change in accounting principle
is a departure from generally ac cepted accounting prin ciples,
and the description of the de parture will discuss the inconsistency.
75
Q
25. An auditor would express an unmodifi ed opinion and add
an emphasis-of-matter paragraph for
An unjustifi ed
accounting
change
A material
weakness
in the internal control
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (d) The requirement is to determine whether an unjustifi
ed accounting change, a material weakness in internal
con trol, or both, would cause an auditor to express an unmodifi
ed opinion with an emphasis-of-matter paragraph.
Answer (d) is correct because an unjustifi ed accounting change
will result in either a qualifi ed or an adverse opinion and a material
weakness will ordinarily result in no report modifi ca tion
(see AU-C 265 for information on the treatment of ma terial
weaknesses); accord ingly, an unmodifi ed opin ion with an
emphasis-of-matter para graph added to the au ditor’s report is
not appropriate in either case.
76
Q
- Under which of the following circumstances would a disclaimer
of opinion not be appropriate?
a. The auditor is unable to determine the amounts as so ciated
with an employee fraud scheme.
b. Management does not provide reasonable justifi ca tion
for a change in accounting principles.
c. The client refuses to permit the auditor to confi rm
cer tain accounts receivable or apply alternative procedures
to verify their balances.
d. The chief executive offi cer is unwilling to sign the
man agement representation letter.
A
- (b) The requirement is to identify the circumstance in
which a disclaimer of opinion is not appropriate. An swer (b)
is correct because when management does not pro vide
reasonable justifi cation of a change in accounting prin ciples
either a qualifi ed or an adverse opinion is appropriate, not a
disclaimer. An swers (a), (c), and (d) are all incorrect because
they represent scope limitations that lead to either a qualifi ed
opinion or a dis claimer of opinion.
77
Q
- Digit Co. uses the FIFO method of costing for its
in terna tional subsidiary’s inventory and LIFO for its domestic
inventory. Under these circumstances, the auditor’s report on
Digit’s fi nan cial statements should express an
a. Unmodifi ed opinion.
b. Opinion qualifi ed because of a lack of consistency.
c. Opinion qualifi ed because of a departure from GAAP.
d. Adverse opinion.
A
- (a) The requirement is to determine the effect on an
audit report of a client’s decision to use differing inventory
cost ing methods for various portions of its inventory.
An swer (a) is correct because a standard unmodifi ed opinion
may ordinarily be issued (see AU-C 708 for a discussion of
the consistency stan dard). Answer (b) is incorrect because
there is no lack of con sistency between accounting periods.
An swer (c) is incorrect because there is no departure from
GAAP. Answer (d) is incor rect because adverse opinions are
only issued when a departure from GAAP exists that makes
the fi nancial statements mislead ing.
78
Q
- In the fi rst audit of a new client, an auditor was able to
ex tend auditing procedures to gather suffi cient evidence about
consistency. Under these circumstances, the auditor should
a. Not report on the client’s income statement.
b. Not refer to consistency in the auditor’s report.
c. State that the consistency standard does not apply.
d. State that the accounting principles have been ap plied
consistently.
A
- (b) The requirement is to identify an auditor’s report ing
responsibility when performing a fi rst audit of a new client and
when the auditor was able to extend auditing procedures to
gather suffi cient evidence about consistency. Answer (b) is correct
because, when the auditor has obtained assurance as to the
consistency of application of accounting principles between
the current and preceding year, no men tion of consistency is
in cluded in the audit report. An swer (a) is incorrect because
the auditor may report on the client’s income statement.
Answer (c) is incorrect because the consistency standard does
apply. An swer (d) is incorrect because the auditor does not
refer to con sistency when ac counting principles have been
applied consist ently.
79
Q
- When management does not provide reasonable justifi -
cation that a change in accounting principle is preferable and
it presents comparative fi nancial statements, the auditor should
express a qualifi ed opinion
a. Only in the year of the accounting principle change.
b. Each year that the fi nancial statements initially re fl ecting
the change are presented.
c. Each year until management changes back to the accounting
principle formerly used.
d. Only if the change is to an accounting principle that is
not generally accepted
A
- (b) The requirement is to determine auditor reporting
responsibility when management does not provide reasonable
justifi cation for a change in accounting principle
and presents comparative fi nancial statements. Answer (b) is
correct because the auditor should continue to express his/her
exception with the fi nancial statements for the year of change
as long as they are presented and reported on. Answer (a) is
incorrect because the auditor must express his/her exception
for as long as the fi nancial statements for the year of change
are presented and reported on. An swer (c) is incorrect because
the auditor need not qualify the report until management
changes back to the accounting princi ple formerly used.
Answer (d) is incorrect because the qualifi ca tion is necessary
despite the fact that the principle is generally accepted.
80
Q
- When an entity changes its method of accounting for income
taxes, which has a material effect on comparability, the
auditor should refer to the change in an emphasis-of-matter
para graph added to the auditor’s report. This para graph should
iden tify the nature of the change and
a. Explain why the change is justifi ed under generally
ac cepted accounting principles.
b. Describe the cumulative effect of the change on the
au dited fi nancial statements.
c. State the auditor’s explicit concurrence with or op posi
tion to the change.
d. Refer to the fi nancial statement note that discusses the
change in detail.
A
- (d) The requirement is to determine the information
that must be presented when a client has changed accounting
principles. Answer (d) is correct because in addition to identifying
the nature of the change, the auditor must refer to the
fi nancial statement note that discusses the change in de tail.
An swer (a) is incorrect because while the auditor must believe
that the change is justifi ed, it is not necessary to ex plain it
in the re port. Answer (b) is incorrect because the cumulative
effect of the change need not be described in the audit report.
Answer (c) is incorrect because the auditor need not make
explicit concurrence with the change.
81
Q
- An entity changed from the straight-line method to the
declining balance method of depreciation for all newly acquired
assets. This change has no material effect on the current
year’s fi nancial statements, but is reasonably certain to have
a substan tial effect in later years. If the change is disclosed in
the notes to the fi nancial statements, the auditor should issue a
report with a(n)
a. “Except for” qualifi ed opinion.
b. Emphasis-of-matter paragraph.
c. Unmodifi ed opinion.
d. Consistency modifi cation
A
- (c) The requirement is to determine the proper
re port ing option for a change in accounting principles with an
immate rial current year effect, but which is expected to have
a substantial effect in subsequent years. Answer (c) is cor rect
because the auditor need not recognize the change in the audit
report and may issue a standard unmodifi ed opinion
82
Q
- An uncertainty facing the fi rm relating to the possible
future results of litigation fi led against client is most likely to
result in which of the following types of audit report?
a. Adverse with a basis for adverse opinion para graph.
b. Qualifi ed due to a scope limitation.
c. Qualifi ed with a basis for qualifi cation paragraph.
d. Unqualifi ed with emphasis-of-matter paragraph.
A
- (d) The requirement is to identify the proper audit
re port relating to an uncertainty arising due to litigation.
Answer (d) is correct because an uncertainty may result in
either a an unqualifi ed opinion with an emphasis-of-matter
paragraph or a disclaimer. Answer (a) is incorrect because an
adverse opinion is not appropriate. Answers (c) and (d) are
incorrect because a qualifi ed opinion is not appropriate.
83
Q
- Wilson, CPA, completed gathering suffi cient appropriate
audit evidence for the audit of Abco’s December 31, 20X8
fi nan cial statements on March 6, 20X9. A subsequent event
requiring adjustment to the 20X8 fi nancial statements occurred
on April 10, 20X9 and came to Wilson’s attention on April 24,
20X9. If the adjustment is made without dis closure of the
event, Wil son’s report ordi narily should be dated
a. March 6, 20X9.
b. April 10, 20X9.
c. April 24, 20X9.
d. Using dual dating.
A
- (a) The requirement is to determine the appropriate
date for an audit report when a subsequent event requiring
ad justment of fi nancial statements, without disclosure of
the event, comes to the auditor’s attention. The professional
standards state that the date suffi cient appropriate audit
evi dence has been collected should be used in such
circumstances.
84
Q
- An auditor issued an audit report that was dual dated
for a subsequent event occurring after the completion of fi eldwork but before issuance of the auditor’s report. The
audi tor’s responsi bility for events occurring subsequent to the
completion of fi eld work was
a. Extended to subsequent events occurring through the
date of issuance of the report.
b. Extended to include all events occurring since the
com pletion of fi eldwork.
c. Limited to the specifi c event referenced.
d. Limited to include only events occurring up to the
date of the last subsequent event referenced.
A
- (c) The requirement is to determine an auditor’s responsibility
for subsequent events when an audit report has been
dual dated for a subsequent event. Answer (c) is cor rect
because, when dual dating is used, auditor responsibility for
events subsequent to the completion of fi eldwork is lim ited
to the specifi c event referred to in the notes to the fi nancial
statement. Answers (a), (b), and (d) are all incor rect
because they establish more responsibility than required by
the professional standards. Note, however, that if the auditor
chooses to date the report as of the date of the subse quent
event, his/her responsibility for other subsequent events
extends to the date of the audit report.
85
Q
- An auditor includes a separate paragraph in an other wise
unmodifi ed report to emphasize that the entity being reported
on had signifi cant transactions with related parties. The
inclusion of this separate paragraph
a. Is considered an “except for” qualifi cation of the
opin ion.
b. Violates generally accepted auditing standards if this
in formation is already disclosed in footnotes to the fi -
nancial statements.
c. Necessitates a revision of the opinion paragraph to include
the phrase “with the foregoing expla-na tion.”
d. Is appropriate and would not negate the unmodi fi ed
opinion.
A
- (d) The requirement is to identify the proper state ment
about an audit report that includes a separate paragraph in an
otherwise unmodifi ed report that emphasizes that the entity
being reported on had signifi cant transactions with related
par ties. Answer (d) is correct because such emphasis of a
matter does not negate the unmodifi ed opinion. An swer (a)
is incorrect be cause the report is considered un modifi ed.
Answer (b) is in correct because such emphasis of a matter
does not violate gen erally accepted auditing stand ards if this
information is disclosed in notes to the fi nancial statements.
Answer (c) is incorrect be cause the report should not include
the phrase “with the forego ing explana tion.”
86
Q
- Which of the following phrases should be included in
the opinion paragraph when an auditor expresses a qualifi ed
opin ion?
When read in
conjunction with Note X
With the foregoing
explanation
a. Yes No
b. No Yes
c. Yes Yes
d. No No
A
- (d) The requirement is to determine whether the terms
“when read in conjunction with Note X,” and “with the
foregoing explanation” should be included in the opinion
paragraph of a qualifi ed opinion. The professional standards
state that an au dit report with a qualifi ed opinion should not
include either phrase in the opinion paragraph.
87
Q
- An auditor may not issue a qualifi ed opinion when
a. An accounting principle at variance with GAAP is
used.
b. The auditor lacks independence with respect to the audited
entity.
c. A scope limitation prevents the auditor from com pleting
an important audit procedure.
d. The auditor’s report refers to the work of a special ist.
A
- (b) The requirement is to identify the situation in which
an auditor may not issue a qualifi ed opinion. An swer (b) is
cor rect because the auditor who lacks indepen dence must
disclaim an opinion, not qualify an opinion. Answer (a) is
incorrect be cause a departure from GAAP will result in either
a qualifi ed opinion or an adverse opinion. Answer (c) is
incorrect because scope limitations result in either a qualifi ed
opinion or a dis claimer of opinion. An swer (d) is incorrect
because a specialist may be referred to when an auditor is
issuing a qualifi ed opinion, an adverse opinion, or a disclaimer
of opinion
88
Q
- When an auditor expresses an adverse opinion, the opinion
paragraph should include
a. The principal effects of the departure from gener ally
ac cepted accounting principles.
b. A direct reference to a separate paragraph disclos ing
the basis for the opinion.
c. The substantive reasons for the fi nancial state ments
be ing misleading.
d. A description of the uncertainty or scope limitation
that prevents an unmodifi ed opinion.
A
- (b) The requirement is to identify the information that
should be included in the opinion paragraph of an audit
report with an adverse opinion. Answer (b) is correct
be cause the opinion paragraph should include a direct reference
to a separate paragraph disclosing the basis for the
opin ion. Answer (a) is incorrect because the principal ef fects,
if available, should be described in a separate emphasis-ofmatter
paragraph, and not in the opinion para graph. Answer (c)
is incorrect because while a separate paragraph provides a
description of the substantive rea sons for the ad verse opinion,
the opinion paragraph does not. Answer (d) is incorrect
because neither an uncertainty nor a scope limi tation leads to
an adverse opinion.
89
Q
- An auditor concludes that a client’s illegal act, which
has a material effect on the fi nancial statements, has not
been properly accounted for or disclosed. Depending on the
materiality of the effect on the fi nancial statements, the au ditor
should express either a(n)
a. Adverse opinion or a disclaimer of opinion.
b. Qualifi ed opinion or an adverse opinion.
c. Disclaimer of opinion or an unmodifi ed opinion with a
separate emphasis-of-matter paragraph.
d. Unmodifi ed opinion with a separate emphasis-ofmatter
paragraph or a qualifi ed opinion.
A
- (b) The requirement is to identify the appropriate types
of audit reports when an illegal act with a material effect on
the fi nancial statements has not been properly ac counted for or dis closed. Answer (b) is correct because omission of required
dis closures, a departure from generally accepted accounting
princi ples, leads to either a qualifi ed or an adverse opinion.
Answer (a) is incorrect because a dis claimer of opinion is not
appropriate when the auditor knows of such misstatements.
Answer (c) is incorrect be cause neither a disclaimer of opinion
nor an unmodi fi ed opinion with a separate emphasis-of-matter
paragraph is appropri ate. Answer (d) is incorrect because
an unmodifi ed opinion with a separate emphasis-of-matter
paragraph is not appropriate.
90
Q
- Which of the following phrases would an auditor most
likely include in the auditor’s report when expressing a
qualifi ed opin ion because of inadequate disclosure?
a. Subject to the departure from US generally ac cepted
ac counting principles, as described above.
b. With the foregoing explanation of these omitted disclo
sures.
c. Except for the omission of the information dis cussed
in the preceding paragraph.
d. Does not present fairly in all material respects.
A
- (c) The requirement is to identify the phrase that an
auditor would include in an audit report with a qualifi ed
opinion because of inadequate disclosure. Answer (c) is
correct because the phrase “except for the omission of the
information discussed in the opinion paragraph” is the proper
phrase. Answers (a), (b), and (d) are all incorrect because they
are phrases not allowed in reports with quali fi ed opinions.
91
Q
- In which of the following circumstances would an audi tor
be most likely to express an adverse opinion?
a. The chief executive offi cer refuses the auditor ac cess
to minutes of board of directors’ meetings.
b. Tests of controls show that the entity’s internal con trol
is so poor that it cannot be relied upon.
c. The fi nancial statements are not in conformity with a
FASB requirement regarding the capitalization of leases.
d. Information comes to the auditor’s attention that raises
substantial doubt about the entity’s ability to continue
as a going concern.
A
- (c) The requirement is to identify the circumstance
that would most likely result in an auditor expressing an
adverse opinion. Answer (c) is correct because departures
from GAAP, such as inappropriately reporting leases, result
in either a quali fi ed or an adverse opinion. Answer (a) is
incorrect because client refusal to provide access to minutes
is a client imposed scope limitation that will normally result
in a disclaimer of opinion. Answer (b) is incorrect because
weak internal control will not in general result in an adverse
opinion; if controls are so weak that an audit cannot effec tively
be completed, a disclaimer of opinion or withdrawal may be
appropriate. Answer (d) is incorrect be cause sub stantial doubt
about going concern status results in either an unmodifi ed
opinion with an emphasis-of-matter para graph or a dis claimer
of opinion.
92
Q
- When an auditor qualifi es an opinion because of inadequate
disclosure, the auditor should describe the nature of the
omission in a basis for qualifi cation paragraph and mod ify the
Introductory
paragraph
Auditor
responsibility
paragraphs
Opinion
paragraph
a. Yes No No
b. Yes Yes No
c. No Yes Yes
d. No No Yes
A
- (d) The requirement is to identify the paragraphs of
an audit report that are modifi ed when an auditor qualifi es
an opin ion because of inadequate disclosure. In addition to
requiring the inclusion of a separate basis for qualifi cation
matter paragraph, AU-C 705 indicates that only the opinion
paragraph should be modifi ed.
93
Q
- If a publicly held company issues fi nancial statements
that purport to present its fi nancial position and results of
operations but omits the statement of cash fl ows, which
of the following types of opinion is most likely to be
appropri ate?
a. Disclaimer of opinion.
b. Qualifi ed opinion.
c. Review report with negative assurance.
d. Unmodifi ed opinion with a separate emphasis-ofmatter
paragraph.
A
- (b) The requirement is to determine the appropriate
report modifi cation that results when the management of a
pub licly held company issues fi nancial statements that purport
to present its fi nancial position and results of opera tions
but omits the statement of cash fl ows. Answer (b) is correct
because failure to include a statement of cash fl ows in such a
circumstance is considered a departure from GAAP and the
appropriate choice here is a qualifi ed opinion.
94
Q
- In which of the following situations would an auditor
ordinar ily choose between expressing an “except for” quali fi ed
opinion or an adverse opinion?
a. The auditor did not observe the entity’s physical inven
tory and is unable to become satisfi ed as to its
balance by other auditing procedures.
b. The fi nancial statements fail to disclose in forma tion
that is required by generally accepted ac counting principles.
c. The auditor is asked to report only on the entity’s balance
sheet and not on the other basic fi nancial statements.
d. Events disclosed in the fi nancial statements cause the
au ditor to have substantial doubt about the en tity’s
ability to continue as a going concern.
A
- (b) The requirement is to identify the circumstance in
which an auditor will choose between expressing an “ex cept
for” qualifi ed opinion and an adverse opinion. An swer (b) is
correct because omissions of required informa tion, a departure
from generally accepted accounting princi ples, leads to either
a quali fi ed or an adverse opinion. An swer (a) is incorrect
because a scope limitation such as the failure to observe a
client’s physical inventory leads to either a qualifi ed opinion
or a disclaimer of opinion. An swer (c) is incorrect because an
auditor may issue an unmodifi ed opin ion on one statement.
Answer (d) is incorrect because sub stantial doubt about an entity’s ability to con tinue as a going concern leads to either an
unmodifi ed report with ex plana tory language or a disclaimer
of opinion.
95
Q
- In which of the following situations would an auditor
ordinar ily choose between expressing a qualifi ed opinion or an
adverse opinion?
a. The auditor did not observe the entity’s physical inventory
and is unable to become satisfi ed about its
bal ance by other auditing procedures.
b. Conditions that cause the auditor to have substan tial
doubt about the entity’s ability to continue as a going
concern are inadequately disclosed.
c. There has been a change in accounting principles
that has a material effect on the comparability of the
entity’s fi nancial statements.
d. The auditor is unable to apply necessary procedures
con cerning an investor’s share of an inves tee’s
earnings recognized on the equity method.
A
- (b) The requirement is to identify the situation in
which an auditor will ordinarily choose between expressing a
qualifi ed opinion or an adverse opinion. Answer (b) is correct
because departures from generally accepted ac counting
principles result in either a qualifi ed opinion or an adverse
opinion—such lack of disclosure is a departure from generally
accepted accounting principles. Answer (a) is incorrect
because the inability to ob serve the physical in ventory and
inability to become satisfi ed about its balance represents a
scope limitation that will result in either a quali fi ed opinion
or a disclaimer of opinion. Answer (c) is incor rect because
a change in accounting principles leads to an unmodifi ed
opinion with an emphasis-of-matter paragraph added to the
report. Answer (d) is incorrect because inabil ity to apply
necessary procedures represents a scope limita tion that will
result in either a qualifi ed opinion or a dis claimer of opinion.
96
Q
- In the fi rst audit of a client, an auditor was not able to
gather suffi cient evidence about the consistent application
of accounting principles between the current and the prior
year, as well as the amounts of assets or liabilities at
the beginning of the current year. This was due to the
client’s record re tention policies. If the amounts in question
could materially affect current operating results, the
auditor would
a. Be unable to express an opinion on the current year’s
re sults of operations and cash fl ows.
b. Express a qualifi ed opinion on the fi nancial state ments
because of a client-imposed scope limita tion.
c. Withdraw from the engagement and refuse to be associ
ated with the fi nancial statements.
d. Specifi cally state that the fi nancial statements are not
comparable to the prior year due to an uncer tainty.
A
- (a) The requirement is to identify the type of opin ion
that should be issued on the fi nancial statements when an
auditor has been unable to obtain suffi cient evidence re lating
to the con sistent application of accounting principles be tween
the current and prior year. Answer (a) is correct be cause the
scope limita tion will affect the year’s beginning balances and
thereby affect the current year’s results of op erations and cash
fl ows. Answer (b) is incorrect because the year-end balance
sheet will be unaf fected by the scope limi tation (any retained
earnings misstate ment of the preceding year will be offset in
the current year). Answer (c) is incor rect because the auditor
need not withdraw in such circum stances. Answer (d) is
incorrect because this situa tion repre sents a scope limitation,
and not an uncertainty.
97
Q
- In which of the following circumstances would an audi tor
not express an unmodifi ed opinion?
a. There has been a material change between periods in
ac counting principles.
b. Quarterly fi nancial data required by the SEC has been
omitted.
c. The auditor wishes to emphasize an unusually important
subsequent event.
d. The auditor is unable to obtain audited fi nancial statements
of a consolidated investee.
A
- (d) The requirement is to identify the circumstance
in which an auditor would not express an unmodifi ed opinion.
Answer (d) is correct because an inability to obtain the
audited fi nancial statements of a consolidated investee represents
a scope limitation, and a signifi cant scope limita tion
results in either a qualifi ed opinion or a disclaimer of opin ion.
Answer (a) is incor rect because a material change be tween
periods in accounting principles will result in an emphasis-ofmatter
paragraph being added to a report with an unmodifi ed
opinion. Answer (b) is incorrect because the omis sion of the
SEC required quarterly fi nancial data, which is considered
“unaudited,” results in a report with an un modifi ed opinion
with an emphasis-of-matter para graph. Answer (c) is incorrect
because an auditor’s emphasis of an unusually important
subsequent event results in a report with an unmodifi ed
opinion with an emphasis-of-matter para graph.
98
Q
- Due to a scope limitation, an auditor disclaimed an opinion
on the fi nancial statements taken as a whole, but the
auditor’s report included a statement that the current asset
portion of the entity’s balance sheet was fairly stated. The
inclusion of this statement is
a. Not appropriate because it may tend to overshadow
the auditor’s disclaimer of opinion.
b. Not appropriate because the auditor is prohibited from
reporting on only one basic fi nancial state ment.
c. Appropriate provided the auditor’s scope para graph
ad equately describes the scope limitation.
d. Appropriate provided the statement is in a separate
par agraph preceding the disclaimer of opinion par agraph.
A
- (a) The requirement is to determine the propriety of
including a statement that the current asset portion of an
entity’s balance sheet was fairly stated in an audit report
that disclaims an opinion on the overall fi nancial statements.
Answer (a) is correct because expressions of opinion as to
certain identifi ed items in fi nancial statements (referred
to as “piecemeal opinions”) should not be expressed when the
auditor has disclaimed an opinion or has expressed an ad verse
opinion. Such opinions tend to over shadow or contra dict the disclaimer or adverse opinion. An swer (b) is incor rect because
an auditor may report on one basic fi nancial statement.
Answers (c) and (d) are incorrect because pro viding such
assurance is not appropriate.
99
Q
- Park, CPA, was engaged to audit the fi nancial state ments
of Tech Co., a new client, for the year ended Decem ber 31, - Park obtained suffi cient audit evidence for all of Tech’s
fi nancial statement items except Tech’s opening inventory.
Due to inade quate fi nancial records, Park could not verify
Tech’s January 1, 2009 inventory balances. Park’s opinion on
Tech’s 2009 fi nan cial statements most likely will be
Balance sheet Income statement
a. Disclaimer Disclaimer
b. Unmodifi ed Disclaimer
c. Disclaimer Adverse
d. Unmodifi ed Adverse
A
- (b) The requirement is to identify the type of opin ion
that should be issued on the balance sheet and the in come
state ment when an auditor did not observe a client’s taking of
the beginning physical inventory and was unable to become
satisfi ed about its accuracy by using other auditing procedures.
An swer (b) is correct because the scope limita tion will not
affect the year-end balance sheet account bal ances. However,
because evidence with respect to the beginning inventory is
lacking, veri fi cation of cost of goods sold, an income statement
element, is impossible. Although year-end retained earnings
will not be affected, both the current and prior years’ retained
earnings statements will be affected (by an offsetting amount)
by the cost of goods sold misstatement. If no other problems
arise, the audi tor will be able to issue an unmodifi ed opinion
on the balance sheet and a disclaimer on the income statement
(and on the re tained earnings statement). Answer (a) is
incorrect because an unmodifi ed opinion may be issued on the
balance sheet. An swer (c) is incorrect because an unmodifi ed
opinion may be issued on the balance sheet with a disclaimer
on the in come statement. Answer (d) is incorrect because a
dis claimer should be issued on the income statement.
100
Q
- An auditor who qualifi es an opinion because of an in suffi -
ciency of audit evidence should describe the limita tions in a
basis for modifi cation paragraph. The auditor should also refer
to the limitation in the
Auditor’s
responsibility
section
Opinion
paragraph
Notes to the
fi nancial
statements
a. Yes No Yes
b. No Yes No
c. Yes Yes No
d. Yes Yes Yes
A
- (c) The requirement is to determine whether the audi tor
responsibility section, opinion paragraph, and/or notes to the
fi nancial statements should refer to an audit scope limitation.
Answer (c) is correct because the sug gested report presented
for a scope limitation includes modi fi cation of both the scope
and opinion paragraphs. In addi tion, it is not appro priate for
the scope of the audit to be explained in a note to the fi nancial
state ments.
101
Q
- Harris, CPA, has been asked to audit and report on the
bal ance sheet of Fox Co. but not on the statements of in come,
re tained earnings, or cash fl ows. Harris will have access to all
in formation underlying the basic fi nancial statements. Under
these circumstances, Harris may
a. Not accept the engagement because it would con stitute
a violation of the profession’s ethical stan d ards.
b. Not accept the engagement because it would be tan tamount
to rendering a piecemeal opinion.
c. Accept the engagement because such engagements
merely involve limited reporting objectives.
d. Accept the engagement but should disclaim an opinion
because of an inability to apply the proce dures
consid ered necessary
A
- (c) The requirement is to identify a CPA’s responsibility
when asked to report on only one fi nancial statement.
An swer (c) is correct because the auditor may accept the
engage ment because the situation involves limited reporting
objectives, not a limitation on the scope of audit procedures.
Answers (a), (b), and (d) are incorrect because the auditor is
able to accept such an engagement and because the auditor is
able to apply the procedures considered necessary.
102
Q
- When disclaiming an opinion due to a client-imposed
scope limitation on a nonpublic company’s fi nancial statements,
an auditor should indicate in a separate paragraph why
the audit did not comply with generally ac cepted au diting
standards. The auditor should also omit which of the two
sections (paragraphs) below?
Auditor
responsibility Opinion
a. No Yes
b. Yes Yes
c. Yes No
d. No No
A
- (d) The requirement is to determine whether either the
auditor’s responsibility section, the opinion paragraph, or both
should be deleted when an auditor is disclaiming an opinion
due to a client-imposed scope limitation. An swer (d) is correct
be cause neither the auditor responsibility section nor the
opinion paragraph is deleted, although they are both modifi ed
Answer (a) is incorrect because it sug gests that the opinion
paragraph is omitted. Answer (b) is incor rect because it states
that both the auditor responsibility par agraph and the opinion
paragraph are omitted. An swer (c) is incorrect be cause it states
that the opin ion para graph is omitted.
103
Q
- An auditor decides to issue a qualifi ed opinion on an
entity’s fi nancial statements because a major inadequacy in
its comput erized accounting records prevents the auditor
from applying necessary procedures. The opinion paragraph
of the auditor’s report should state that the qualifi cation
pertains to
a. A client-imposed scope limitation.
b. A departure from generally accepted auditing stan dards.
c. The possible effects on the fi nancial statements.
d. Inadequate disclosure of necessary information.
A
- (c) The requirement is to identify the information included
in the opinion paragraph of an auditor’s report that is
qualifi ed due to a major inadequacy in the computerized
ac counting records. Answer (c) is correct because the opin ion
paragraph indicates that the exception is due to the pos sible ef fects on the fi nancial statements. Answer (a) is in correct
because the opinion paragraph will not include a reference
to client-im posed scope limitations. Answer (b) is incorrect
because no indication of a departure from generally accepted
auditing stand ards is provided in the opinion para graph and
this situation is not a departure from GAAS. An swer (d) is
incorrect because there is no indication that there is inadequate
disclosure of necessary information.
104
Q
- A scope limitation suffi cient to preclude an unmodifi ed
opinion always will result when management
a. Prevents the auditor from reviewing the working papers
of the predecessor auditor.
b. Engages the auditor after the year-end physical inventory
is completed.
c. Requests that certain material accounts receivable not
be confi rmed.
d. Refuses to acknowledge its responsibility for the fair
presentation of the fi nancial statements in con formity
with GAAP.
A
- (d) The requirement is to identify the circumstance
in which a scope limitation is suffi cient to preclude an
un modifi ed opinion. Answer (d) is correct because AU-C 580
states that management’s refusal to furnish such a written
repre sentation constitutes a limitation on the scope of an audit
suffi cient to pre clude an unmodifi ed opinion. An swers (a), (b),
and (c) are all incorrect because while they represent scope
limitations, they may sometimes not result in a report that is
other than unmodi fi ed.
105
Q
- An auditor concludes that extreme doubt exists about the
integrity of management and the representations obtained from
management relating to the fairness of the fi nancial statements
and the completeness of the record of transac tions. If the
auditor retains the client, which audit report is most likely to
be appropriate?
a. Unmodifi ed with emphasis-of-matter paragraph.
b. Standard unmodifi ed.
c. Disclaimer.
d. Adverse
A
- (c) The requirement is to determine the proper audit
report when an auditor has doubt as to the integrity of manage
ment and the representations obtained from management
and has not decided to resign. Answer (c) is correct be cause
the professional standards consider this as a scope limitation
and accordingly its signifi cant nature makes a disclaimer most
likely. An swer (a) is incorrect because an unmodifi ed opinion
is not appropriate due to the lack of suffi cient appropriate audit
evi dence due to the doubt con cerning management’s integrity.
An swer (b) is incorrect because the lack of confi dence
in manage ment’s integrity makes an unmodifi ed opinion
inappropriate. Answer (d) is incorrect be cause the auditor is
not aware of sig nifi cant mis statements that would lead to an
adverse opinion.
106
Q
- In which of the following situations would an auditor
ordinar ily issue an unmodifi ed audit opinion without an
emphasis-of-matter paragraph?
a. The auditor wishes to emphasize that the entity had
sig nifi cant related-party transactions.
b. The auditor decides to make reference to the report
of an auditor who audited a component of group
fi nancial statements.
c. The entity issues fi nancial statements that present
fi nan cial position and results of operations, but omits
the statement of cash fl ows.
d. The auditor has substantial doubt about the entity’s
abil ity to continue as a going concern, but the cir cumstances
are fully disclosed in the fi nancial statements.
A
- (b) The requirement is to determine the situation in
which an auditor would ordinarily issue an unmodifi ed au dit
opinion without an emphasis-of-matter paragraph. An swer (b)
is correct because when an auditor makes reference to the
re port of another auditor no additional paragraph is added to
the report. Answer (a) is incorrect because empha sizing
that the entity had signifi cant related-party transac tions is
normally accomplished through the addition of an emphasisof-
matter paragraph. An swer (c) is incorrect be cause the
omission of a statement of cash fl ows when an entity issues
fi nancial statements that present fi nancial posi tion and result
of operations results in a qualifi ed audit opinion with basis
for qualifi ed opinion paragraph. An swer (d) is incorrect
because substantial doubt about the entity’s ability to continue
as a going concern normally re sults in either an unmodifi ed
opin ion with an emphasis-of-matter paragraph or a disclaimer
of opin ion.
107
Q
- A group engagement partner decides not to refer to the
audit of another CPA who audited a component of the overall
group fi nancial statements. After making inquiries about
the other CPA’s professional reputation and independence, the
prin cipal au ditor most likely would
a. Add an emphasis-of-matter paragraph to the audi tor’s
re port indicating that the subsidiary’s fi nan cial statements
are not material to the consolidated fi nancial
statements.
b. Document in the engagement letter that the prin ci pal
auditor assumes no responsibility for the other CPA’s
work and opinion.
c. Obtain written permission from the other CPA to omit
the reference in the principal auditor’s report.
d. Perform additional audit procedures
A
- (d) The requirement is to determine a group engage ment
partner’s responsibility, in addition to making inquiries of
the other auditor’s reputation and independence, after having
decided not to refer to the audit of the component (other)
audi tor. An swer (d) is correct because when a deci sion is
made not to make reference to the component audi tor—that
is, to take responsi bility for that auditor’s work—the group
auditor should perform additional procedures de pendent upon
the signifi cance of the component. Answer (a) is incorrect
because no emphasis-of-matter paragraph is added to the audit
report. Answer (b) is incorrect because the group engagement partner is assuming responsi bility for the component auditor’s
work when a decision is made not to refer to the component
auditor’s report. An swer (c) is in correct because written
permission is not required when the group engagement
partner is taking responsibility for the work of the other
auditor.
108
Q
- The auditor’s responsibility section of a nonpublic company’s
auditor’s report con tains the following sentences:
We did not audit the fi nancial statements of EZ Inc.,
a wholly owned subsidiary, which statements refl ect
total assets and revenues constituting 27% and 29%,
respectively, of the related consolidated totals. Those
statements were audited by other auditors whose
report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for EZ
Inc., is based solely on the report of the other auditors.
These sentences
a. Indicate a division of responsibility.
b. Assume responsibility for the other auditor.
c. Require a departure from an unmodifi ed opinion.
d. Are an improper form of reporting.
A
- (a) The requirement is to determine the meaning of
sentences added to the auditor responsibility section of an
audi tor’s report that states that another auditor audited a
portion of the entity. Answer (a) is correct because the professional
stand ards provide that such a statement indicates
a division of respon sibility. An swer (b) is incorrect because
when the other auditor is re ferred to the CPA, the CPA is
not assuming responsibility for the other auditor. Answer (c)
is incorrect because an unmodifi ed opinion may be issued.
Answer (d) is incorrect because the sen tences are proper
109
Q
- An auditor may issue the standard audit report when the
a. Auditor refers to the fi ndings of a specialist.
b. Financial statements are derived and summarized from
complete audited fi nancial statements that are fi led
with a regulatory agency.
c. Financial statements are prepared on the cash re ceipts
and disbursements basis of accounting.
d. Group engagement partner assumes responsibility for
the work of a component auditor.
A
- (d) The requirement is to identify the situation in
which an auditor may issue the standard audit report.
An swer (d) is correct because a standard report may be
issued in circumstances in which the principal auditor
assumes responsibility for the work of another auditor.
Answer (a) is incorrect because the standard report does
not include refer ence to a specialist. Thus, reference to a
specialist within a report by defi nition causes modifi cation
of the standard re port. Answer (b) is incorrect because the
auditor is required to issue a modifi ed report on condensed
fi nancial statements. Answer (c) is incorrect because audit
reports on fi nancial statements prepared using a fi nancial
reporting frame work other than GAAP require departures
from the standard form.
110
Q
- In the auditor’s report, the group engagement partner decides
not to make reference to a component auditor who audited
a client’s subsidiary. The group engagement partner could
justify this decision if, among other requirements, he or she
a. Issues an unmodifi ed opinion on the consolidated
fi nan cial statements.
b. Learns that the component auditor issued an unmodifi
ed opi nion on the subsidiary’s fi nancial statements.
c. Is unable to review the audit plan (programs) and
work ing pa pers of the component auditor.
d. Is satisfi ed as to the independence and professional
repu tation of the other CPA.
A
- (d) The requirement is to determine a group engage ment
partner’s reporting responsibility when a decision has been
made to not make reference to a component auditor who has
audited a client’s subsidiary. Answer (d) is correct because,
re gard less of whether the component auditor is referred to, the
group engagement partner must be satisfi ed as to the independence
and profes sional reputation of the other CPA. Answer (a)
is incorrect because the group en gagement partner need not
issue an unmodifi ed opinion on the consolidated fi nancial
statements. An swer (b) is incor rect because it is not necessary
that the com ponent auditor issue an unmodifi ed opinion on
the subsidiary’s fi nan cial statements. Answer (c) is incorrect
because the group en gagement partner should consider a
variety of procedures depending upon the signifi cance of the
subsidiary when a deci sion is made to not make reference to
the component auditor
111
Q
- When fi nancial statements of a company that follows
GASB standards would be misleading due to unusual circumstances
depart from those standards, the auditor should
explain the unu sual circumstances in a separate paragraph and
express an opin ion that is
a. Unmodifi ed.
b. Qualifi ed.
c. Adverse.
d. Qualifi ed or adverse, depending on materiality
A
- (a) The requirement is to determine the type of opin ion
to be issued when fi nancial statements of an entity that follows
GASB standards include a justifi ed departure from GAAP.
An swer (a) is correct because the auditor should issue an
unmodi fi ed opinion and should include a separate emphasisof-
matter paragraph explaining the de parture from GAAP.
Answers (b), (c), and (d) are incorrect because when the
auditor believes that the departure is justi fi ed, neither a
qualifi ed nor adverse opinion is appropriate.
112
Q
- A client follows US GAAP for its domestic operations
and foreign GAAP for a foreign subsidiary. The foreign
subsidiary is audited by a component auditor, while the
group auditor audits the remainder of the corporation
and issues an audit report on consolidated operations.
Which auditor(s) is (are) responsible for evaluating the
appropriateness of the adjustment of the foreign GAAP
statements to US GAAP?
Group auditor Component auditor
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (b) The requirement is to determine which auditor(s) is
(are) responsible for evaluating the appropriateness of the
ad justment of foreign fi nancial statements consolidated with US GAAP fi nancial statements in a group audit situation.
Answer (b) is cor rect because the group auditor is responsible.
Answer (a) is in correct because the component auditor is not
respons ible. Answer (c) is incorrect because the group auditor
is respon sible and the component auditor is not. Answer (d) is
incorrect because the group auditor is responsible.
113
Q
- In May 20X9, an auditor reissues the auditor’s report
on the 20X7 fi nancial statements at a continuing client’s request.
The 20X7 fi nancial statements are not restated and the
auditor does not revise the wording of the report. The auditor
should
a. Dual date the reissued report.
b. Use the release date of the reissued report.
c. Use the original report date on the reissued report.
d. Use the current period auditor’s report date on the
reis sued report.
A
- (c) The requirement is to determine the proper date of
a reissued audit report on fi nancial statements that have not
been restated. Answer (c) is correct because use of the original
date on the reissued audit report removes any impli cation that
rec ords, transactions or events after the date of the audit report
have been examined or reviewed.
114
Q
- When reporting on comparative fi nancial statements, an
auditor ordinarily should change the previously issued opin ion
on the prior year’s fi nancial statements if the
a. Prior year’s fi nancial statements are restated to conform
with generally accepted accounting prin ciples.
b. Auditor is a predecessor auditor who has been requested
by a former client to reissue the previously
is sued report.
c. Prior year’s opinion was unmodifi ed and the opin ion
on the current year’s fi nancial statements is modifi ed
due to a lack of consistency.
d. Prior year’s fi nancial statements are restated fol low ing
a pooling of interests in the current year.
A
- (a) The requirement is to identify the circumstance
in which an auditor reporting on comparative fi nancial
statements would ordinarily change the previously issued
opinion on the prior year’s fi nancial statements. Answer (a)
is correct because when an auditor has previously expressed
a qualifi ed or an ad verse opinion on fi nancial statements of
a prior period and those fi nancial statements have been restated,
the auditor’s updated report is changed. Answer (b)
is incorrect because, ordinarily, the reissued report by a prede
cessor auditor will be the same as that originally issued.
Answer (c) is incorrect because the prior year’s opinion will
remain unmodifi ed if the current year’s audit report is modifi
ed due to a lack of consistency. Answer (d) is incorrect
because restatement of prior year’s fi nancial statements following
a pooling of interest will not lead to a change in the
previously issued opinion.
115
Q
- Jewel, CPA, audited Infi nite Co.’s prior year fi nancial
state ments. These statements are presented with those of the current year for comparative purposes without Jewel’s auditor’s
report, which expressed a qualifi ed opinion. In drafting
the current year’s auditor’s report, Crain, CPA, the successor
auditor, should
I. Not name Jewel as the predecessor auditor.
II. Indicate the type of report issued by Jewel.
III. Indicate the substantive reasons for Jewel’s
qualifi ca tion.
a. I only.
b. I and II only.
c. II and III only.
d. I, II, and III.
A
- (d) The requirement is to determine the information
to be included in an audit report on comparative fi nancial
state ments when a predecessor auditor’s report is not being
reissued. Answer (d) is correct because an other-matter paragraph
should be added to the successor’s report and it
should indicate (1) that the fi nancial statements of the prior
period were audited by an other auditor (whose name is not
presented), (2) the date of the predecessor’s report, (3) the
type of report issued by the prede cessor, and (4) if the report
was other than a stan dard report, the substantive reasons
therefor.
116
Q
- Before reissuing the prior year’s auditor’s report on the
fi nan cial statements of a former client, the predecessor au ditor
should obtain a letter of representations from the
Former client’s
management
Successor auditor
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (a) The requirement is to determine whether the predecessor
auditor should obtain a representation letter from management,
the successor auditor, or both, before reissuing the
prior year’s audit record. Answer (a) is correct because the
pre decessor auditor should obtain a representa tion letter from
both management and the succes sor auditor.
117
Q
- When single-year fi nancial statements are presented,
an auditor ordinarily would express a standard audit report
if the
a. Auditor is unable to obtain audited fi nancial statements
supporting the entity’s investment in a for eign
affi liate.
b. Entity declines to present a statement of cash fl ows
with its balance sheet and related statements of income
and retained earnings.
c. Auditor wishes to emphasize an accounting matter affecting
the comparability of the fi nancial state ments
with those of the prior year.
d. Prior year’s fi nancial statements were audited by another
CPA whose report, which expressed an unmodifi
ed opinion, is not presented.
A
- (d) The requirement is to identify the circumstance
in which a standard unmodifi ed report may be issued when
single-year fi nancial statements are presented. Answer (d) is
correct because when the prior year’s fi nancial statements are
not being presented, the CPA need not refer to them or include
the prede cessor auditor’s report. An swer (a) is in correct
because inability to audit an investment in a foreign affi liate
is a scope limitation that is likely to result in either a qualifi ed
opinion or a disclaimer. An swer (b) is incorrect because a
qualifi ed opinion is appropri ate when an entity declines to
present a statement of cash fl ows with its balance sheet and
related statements of in come and retained earn ings. Answer (c) is incorrect because the emphasis of an accounting
matter by an auditor results in inclusion of an empha sis-ofmatter
paragraph to the unmodifi ed audit report.
118
Q
- A client is presenting comparative (two-year) fi nancial
state ments. Which of the following is correct concerning reporting
responsibilities of a continuing auditor?
a. The auditor should issue one audit report that is on
both presented years.
b. The auditor should issue two audit reports, one on
each year.
c. The auditor should issue one audit report, but only on
the most recent year.
d. The auditor may issue either one audit report on both
presented years, or two audit reports, one on each
year.
A
- (a) The requirement is to identify the correct form of
an audit report on comparative fi nancial statements when
a contin uing auditor has audited the two years of fi nancial
statements being presented. Answer (a) is correct because one
audit report should be issued that includes the years involved.
Answer (b) is incorrect because one report, not two reports,
should be issued. Answer (c) is incorrect be cause both years
should be reported upon. Answer (d) is incorrect because
auditors do not have the option of issuing two audit reports in
this circumstance.
119
Q
- The predecessor auditor, who is satisfi ed after properly
communicating with the successor auditor, has reissued a
report because the audit client desires comparative fi nancial
statements. The predecessor auditor’s report for a nonpublic
company should make
a. Reference to the report of the successor auditor only
in another matter paragraph
b. Reference to the work of the successor auditor in an
other matter paragraph and in the opinion paragraph.
c. Reference to both the work and the report of the succes
sor auditor only in the opinion paragraph.
d. No reference to the report or the work of the succes sor
auditor.
A
- (d) The requirement is to determine the manner in which
a predecessor auditor who has reissued a report for comparative
fi nancial statements should refer to the succes sor auditor.
The predecessor auditor should not refer in the reissued
report to the report or work of the successor auditor.
120
Q
- Compiled fi nancial statements for the prior year pre sented
in comparative form with audited fi nancial statements for the
current year should be clearly marked to indicate their status and
I. The report on the prior period should be reissued to
accom pany the current period report.
II. The report on the current period should include as a
sepa rate paragraph a description of the responsibility
assumed for the prior period’s fi nancial statements.
a. I only.
b. II only.
c. Both I and II.
d. Either I or II.
A
- (d) The requirement is to determine the proper re port ing
procedure for comparative fi nancial statements for which the
prior year is compiled, and the current year is audited. When
compiled fi nancial state ments are presented in comparative
form with audited fi nan cial statements, the report on the prior
period may be reis sued to accompany the current period
report. Alternatively, the report on the current period may
include a separate para graph describing respon sibility assumed
for the prior period fi nancial statements.
121
Q
- An auditor concludes that there is a material inconsistency
in the other information in an annual report to shareholders
con taining audited fi nancial statements. If the au ditor
concludes that the fi nancial statements do not require revision,
but the client refuses to revise or eliminate the ma terial
inconsistency, the audi tor may
a. Revise the auditor’s report to include a separate
empha sis-of-matter paragraph describing the mate rial
incon sistency.
b. Issue an “except for” qualifi ed opinion after discussing
the matter with the client’s board of direc tors.
c. Consider the matter closed since the other infor ma tion
is not in the audited fi nancial statements.
d. Disclaim an opinion on the fi nancial statements af ter
ex plaining the material inconsistency in a sepa rate basis
for disclaimer paragraph.
A
- (a) The requirement is to identify the auditor’s re porting
responsibility for a material inconsistency between the
au dited fi nancial statements and the other information in an
annual report to shareholders containing audited fi nancial
statements. Answer (a) is correct because AU-C 720 states
that if a material inconsistency exists and the client refuses
to revise the other information, the auditor should include an
emphasis-of-matter paragraph that explains the incon sistency.
The auditor may also withhold the use of the audit report or
the auditor may withdraw from the engagement. Answer (b)
is incorrect because the fi nan cial statements are not misstated.
Answer (c) is incorrect be cause the auditor must review the
other information to ensure that it is con sistent with the
|fi nancial statements. Answer (d) is incorrect because the
fi nancial statements are not misstated and there fore a disclaimer
of opinion is inappropriate.
122
Q
- When audited fi nancial statements are presented in a client’s
document containing other information, the auditor should
a. Perform inquiry and analytical procedures to ascer tain
whether the other information is reasonable.
b. Add an emphasis-of-matter paragraph to the audi tor’s
re port without changing the opinion on the fi nancial
statements.
c. Perform the appropriate substantive auditing procedures
to corroborate the other information.
d. Read the other information to determine that it is consistent
with the audited fi nancial statements.
A
- (d) The requirement is to determine an auditor’s responsibility
when audited fi nancial statements are pre sented in a
document containing other information. An swer (d) is correct
because the auditor is required to read the other information
to determine that it is consistent with the audited fi nancial
state ments. Answers (a) and (c) are incor rect because no such
in quiry, analytical procedures, or other substantive auditing
proce dures are required. Answer (b) is incorrect because,
unless the information seems incorrect or inconsistent with the
audited fi nancial statements, no emphasis-of-matter paragraph
needs to be added to the auditor’s report.
123
Q
- An auditor may express an opinion on an entity’s accounts
receivable balance even if the auditor has disclaimed
an opinion on the fi nancial statements taken as a whole provided
the
a. Report on the accounts receivable discloses the rea son
for the disclaimer of opinion on the fi nan cial statements.
b. Distribution of the report on the accounts receivable is
restricted to internal use only.
c. Auditor also reports on the current asset portion of the
entity’s balance sheet.
d. Report on the accounts receivable is presented separately
from the disclaimer of opinion on the fi nancial
statements.
A
- (d) The requirement is to identify the manner in which
an auditor may express an opinion on an entity’s ac counts
receiv able when that auditor has disclaimed an opin ion on the fi nancial statements taken as a whole. An swer (d) is correct
because such a report is considered a “specifi ed elements,
accounts, or items report,” and should include the opinion
on the accounts receivable separately from the dis claimer of
opinion on the fi nancial statement. Answer (a) is incorrect
because reason for the dis claimer of opinion need not be
provided. Answer (b) is incorrect be cause distribu tion of such
a report is not restricted to internal use only. Answer (c) is
incorrect because the auditor need not report on the current
asset portion of the entity’s balance sheet to issue such a
report.
124
Q
- In an audit of a nonissuer company, which statement is
correct concerning required supplementary information by a
designated accounting standards setter?
a. The auditor has no responsibility for required sup plementary
information as long as it is outside the basic
fi nancial statements.
b. The auditor’s only responsibility for required sup plementary
information is to determine that such information
has not been omitted.
c. The auditor should apply certain limited proce dures
to the required supplementary information, and report
defi ciencies in, or omissions of, such in formation.
d. The auditor should apply tests of details of transactions
and balances to the required supplementary
infor mation, and report any material misstatements in
such information.
A
- (c) The requirement is to identify an auditor’s re sponsibility
for required supplementary information that is placed
out side the basic fi nancial statements. Answer (c) is correct
because AU-C 730 requires that the auditor apply lim ited
procedures to the information and report defi ciencies in, or
the omission of, the information. Answer (a) is incorrect
because the auditor does have some responsibility for the
supplementary information. Answer (b) is incorrect because
the auditor must apply limited procedures to information
presented and report defi ciencies in the information in addition
to determining whether it has been omitted. Answer (d) is
incorrect because tests of details of trans actions and bal ances
need not be performed.
125
Q
- If management declines to present supplementary information
required by the Governmental Accounting Standards
Board (GASB), the auditor should issue a(n)
a. Adverse opinion.
b. Qualifi ed opinion with an other-matter para graph.
c. Unmodifi ed opinion.
d. Unmodifi ed opinion with an additional other-matter
paragraph.
A
- (d) The requirement is to determine the proper audit
report when management declines to present supplementary
information required by the Governmental Accounting Standards
Board. Answer (d) is correct because omission of
required supplementary information, which when presented
is not consid ered audited, leads to an unmodifi ed opinion
with an other -matter paragraph. Answers (a) and (b) are
incorrect because neither an adverse opinion nor a quali fi ed
opinion is appropriate since the supplementary infor mation is
not audited. Answer (c) is incorrect because it is incom plete
since an unmodifi ed opinion with an additional other-matter
paragraph is required.
126
Q
- If an auditor is asked to provide an opinion relating to
infor mation accompanying the fi nancial statements in a document,
the opinion will ordinarily be upon whether the information
is fairly stated in
a. Accordance with US generally accepted auditing standards.
b. Conformity with US generally accepted accounting
prin ciples.
c. All material respects in relation to the basic fi nan cial
statements taken as a whole.
d. Accordance with attestation standards expressing a
con clusion about management’s assertions
A
- (c) The requirement is to identify the correct state ment
that may be included in an auditor’s report when an auditor
pro vides an opinion on information accompanying the basic
fi nan cial statements. Answer (c) is correct because the report
indi cates whether the accompanying information is fairly
stated in all material respects in relation to the basic fi nancial
statements taken as a whole. Answer (a) is incor rect because
the infor mation is not presented in accordance with generally
accepted auditing standards. Answer (b) is incorrect because
the infor mation is in addition to that re quired by generally
accepted ac counting principles. An swer (d) is incorrect
because it is not in accordance with attestation standards.
127
Q
- Which of the following statements is correct concerning
an auditor’s responsibility for controlling the distribution by
the client of a restricted-use report?
a. An auditor must make clear to the client that it is illegal
to distribute such a report beyond to speci fi ed
parties.
b. When an auditor is aware that a client has distri b uted a
restricted-use report to inappropriate third parties, the
auditor should immediately inform the client to cease
and desist.
c. An auditor controls distribution through insisting that
the client not duplicate the restricted-use report for
any purposes.
d. An auditor is not responsible for controlling the distribution
of such reports.
A
- (d) The requirement is to determine an auditor’s responsibility
for controlling the distribution by the client of a
restricted-use report. Answer (d) is correct because the
professional standards state that an auditor is not responsible
for con trolling the distribution of such reports. Answer (a) is
incorrect be cause while an auditor should consider in forming
a client that restricted-use reports are not intended for such
distribu tion, there is no such requirement and such distribution
may or may not be legal. Answer (b) is incor rect because the
auditor need not inform the client to cease and desist. Answer (c) is incorrect because an auditor need not insist that the client
not duplicate the restricted-use re port.
128
Q
- Which of the following types of reports is most likely
to include an alert as to its use being restricted to certain
specifi ed parties?
a. Audit report.
b. Review report.
c. Compilation report.
d. Agreed-upon procedures report.
A
- (d) The requirement is to identify the type of report
that is most likely to include an alert to readers that its use
is restricted to certain specifi ed users. Answer (d) is correct
because all agreed-upon procedures reports are so restricted.
Although au dit, review, or compilations reports may be so
restricted, there is no requirement that they be.
129
Q
- Which of the following is least likely to be a restricted
use report?
a. A report on internal control signifi cant defi ciencies
noted in an audit.
b. A required communication with the audit commit tee.
c. A report on fi nancial statements prepared follow ing a
fi nancial reporting framework other than generally accepted
accounting principles.
d. A report on compliance with aspects of contractual
agreements
A
- (c) The requirement is to identify the report that is
least likely to be a restricted-use report. Answer (c) is correct
because reports on most fi nancial reporting frameworks
other than GAAP are not restricted. An swers (a) and (b)
are incorrect because reports on signifi cant defi ciencies and
reports to audit committees are restricted under the professional
standards. An swer (d) is incorrect because a report on
compliance is restricted.
130
Q
- An auditor expressed a qualifi ed opinion on the prior
year’s fi nancial statements because of a lack of adequate
disclosure. These fi nancial statements are properly restated
in the current year and presented in comparative form with
the current year’s fi nancial statements. The auditor’s up dated
report on the prior year’s fi nancial statements should
a. Be accompanied by the auditor’s original report on the
prior year’s fi nancial statements.
b. Continue to express a qualifi ed opinion on the prior
year’s fi nancial statements.
c. Make no reference to the type of opinion expressed on
the prior year’s fi nancial statements.
d. Express an unmodifi ed opinion on the restated fi nancial
statements of the prior year.
A
- (d) The requirement is to determine auditor report ing
responsibility when prior period fi nancial statements which received
a qualifi ed opinion due to a lack of adequate disclosure
have been restated to eliminate the lack of disclo sure. Answer
(d) is correct because an auditor should ex press an
unmod ifi ed opinion on the restated fi nancial state ments of the
prior year (with an emphasis-of-matter paragraph describing
the circum stance). Answer (a) is in correct because the
auditor’s original report is not reissued. Answer (b) is incorrect
because the quali fi ed opinion is eliminated. Answer (c) is
incorrect because refer ence to the type of opinion expressed is
included in the reissued report’s emphasis-of-matter paragraph.
131
Q
- Before reporting on the fi nancial statements of a US entity
that have been prepared in conformity with another country’s
accounting principles, an auditor practicing in the US should
a. Understand the accounting principles generally accepted
in the other country.
b. Be certifi ed by the appropriate auditing or accoun tancy
board of the other country.
c. Notify management that the auditor is required to disclaim
an opinion on the fi nancial statements.
d. Receive a waiver from the auditor’s state board of accountancy
to perform the engagement
A
- (a) The requirement is to identify audit reporting
re quirements when reporting on fi nancial statements of a
US entity prepared in accordance with another country’s
ac counting prin ciples. Answer (a) is correct because
AU-C 910 states that the auditor should understand the
accounting principles generally accepted in the other country.
An swer (b) is incorrect because the auditor does not have to
obtain certifi cation outside of the United States. Answer (c)
is incorrect because the auditor does not have to disclaim
an opinion. Answer (d) is incorrect because the auditor does
not have to receive a waiver from the auditor’s state board of
accountancy.
132
Q
- The fi nancial statements of KCP America, a US entity, are
prepared for inclusion in the consolidated fi nancial statements
of its non-US parent. These fi nancial statements are prepared
in conformity with the accounting principles generally
accepted in the parent’s country and are for use only in that
country. How may KCP America’s auditor re port on these
fi nancial statements?
I. A US-style report (unmodifi ed).
II. A US-style report modifi ed to report on the
accounting principles of the parent’s country.
III. The report form of the parent’s country.
I II III
a. Yes No No
b. No Yes No
c. Yes No Yes
d. No Yes Yes
A
- (d) The requirement is to determine the appropriate
types of reports that may be issued when the fi nancial statements
of a US subsidiary are prepared following the prin ciples
of a non-US parent company’s country for inclusion in that
parent com pany’s non-US consolidated fi nancial statements.
AU-C 910 allows either a modifi ed US style report or the
report form of the parent’s country. A US style un modifi ed
report is not appropri ate.
133
Q
- An auditor of a nonpublic company should disclose the
substantive reasons for ex pressing an adverse opinion in a
basis for modifi cation paragraph
a. Preceding the auditor’s responsibility section
b. Preceding the opinion section.
c. Following the opinion section.
d. Within the notes to the fi nancial statements
A
- (b) The requirement is to determine the proper placement
of a basis for modifi cation paragraph disclosing the substantive
reasons for expressing an adverse opinion. AU-C 705 requires
that such paragraphs precede the opinion section (paragraph).
134
Q
- When an auditor reports on fi nancial statements pre pared
on an entity’s income tax basis, the auditor’s report should
a. Disclaim an opinion on whether the statements were
ex amined in accordance with generally ac cepted
au diting standards.
b. Not express an opinion on whether the statements are
presented in conformity with the fi nancial re porting
framework used.
c. Include an explanation of how the results of operations
differ from the cash receipts and disburse ments
basis of accounting.
d. State that the basis of presentation is a fi nancial
re port ing framework other than GAAP.
A
- (d) The requirement is to determine the information
that should be included in an audit report on fi nancial statements
prepared on the income tax basis of accounting. AU-C
800 pre sents the form of the report to be issued. Answer (d)
is correct because AU-C 800 requires that the report indicate that the in come tax basis of accounting is a fi nancial report ing
framework other than GAAP
135
Q
- Helpful Co., a nonprofi t entity, prepared its fi nancial
state ments on an accounting basis prescribed by a regulatory
agency solely for fi ling with that agency. Green audited the
fi nancial statements in accordance with generally accepted
auditing stan dards and concluded that the fi nancial state ments
were fairly presented on the prescribed basis. Green should
issue a report with a(n)
a. Qualifi ed opinion.
b. Adverse opinion
c. Disclaimer of opinion.
d. Unmodifi ed opinion.
A
- (d) The requirement is to identify the appropriate
type of audit report to be issued for a nonprofi t entity’s fi -
nancial statements prepared following an accounting basis
prescribed by a regulatory agency solely for fi ling with that
agency. Answer (d) is correct because an unmodifi ed opinion
is appropriate given that the fi nancial statements are fairly
presented; the report will include a paragraph indicat ing
that a basis other than GAAP is being followed. An swer (a)
is incorrect because an unmodifi ed report may be issued if
there are no departures from the pre scribed basis. The report
would not be qualifi ed because the fi nancial statements were
prepared using an accounting basis pre scribed by a regulatory
agency. Answer (b) is incorrect be cause an adverse opinion is
not appropriate when the infor mation is properly presented.
Answer (c) is incorrect be cause a disclaimer of opinion need
not be issued.
136
Q
- An auditor’s report on fi nancial statements pre pared in
conformity with the cash basis of accounting should include a
separate emphasis-of-matter paragraph that
a. Justifi es the reasons for departing from generally
ac cepted accounting principles.
b. States whether the fi nancial statements are fairly
pre sented in conformity with GAAP.
c. Refers to the note to the fi nancial statements that
de scribes the basis of accounting.
d. Explains how the results of operations differ from
fi nan cial statements prepared in conformity with
gener ally accepted accounting principles.
A
- (c) The requirement is to identify the disclosure
in cluded in a separat e emphasis-of-matter paragraph of an
auditor’s report on fi nancial statements prepared in
con formity with the cash basis of accounting. Answer (c) is
correct because the em phasis-of-matter paragraph refers to
the note to the fi nancial statements that describes the basis
of accounting. AU-C 800 presents complete details on such
re ports. Answer (a) is incor rect because the report need not
justify the reasons for following a basis other than generally
ac cepted accounting principles. An swer (b) is incorrect
be cause the emphasis-of-matter paragraph contains no statement
on fair presentation, and because the opinion paragraph
states whether the presentation is in con formity with the basis
de scribed in the appropriate fi nancial statement note.
An swer (d) is incorrect because no explanation of how the
re sults of operations differ from fi nancial statements pre pared
in conformity with generally accepted accounting prin ciples is
necessary.
137
Q
- An auditor’s report would refer to a basis of accounting
other than GAAP in which of the following situations?
a. Interim fi nancial information of a publicly held company
that is subject to a limited review.
b. Compliance with aspects of regulatory require ments
re lated to audited fi nancial statements.
c. Application of accounting principles to specifi ed
trans actions.
d. Limited use prospective fi nancial statements such as a
fi nancial projection
A
- (b) The requirement is to identify a situation in which
an auditor’s report would refer to a basis of account ing other
than GAAP AU-C 800 defi nes reports on compli ance with
aspects of regulatory requirements related to au dited fi nancial
statements as special-purpose fi nancial reporting frameworks
and requires such identifi cation
138
Q
- Delta Life Insurance Co. prepares its fi nancial state ments
on an accounting basis insurance companies use pur suant
to the rules of a state insurance commission. If Wall, CPA,
Delta’s audi tor, discovers that the statements are not suitably
titled, Wall should
a. Disclose any reservations in an emphasis-of-matter
para graph and qualify the opinion.
b. Apply to the state insurance commission for an
ad vi sory opinion.
c. Issue a special statutory basis report that clearly
dis claims any opinion.
d. Explain in the notes to the fi nancial statements the
ter minology used.
A
- (a) The requirement is to determine the type of re port
to issue when a client who uses a special-purpose fi nan cial
re porting framework has not appropriately titled its fi nancial
state ments. Answer (a) is correct because any such exceptions
or reservation should be described in an emphasis-of-matter
para graph and possibly a qualifi ed (or adverse) opinion should
be is sued. Answer (b) is incorrect because no such application
to the state insurance commission is necessary. Answer (c) is
incorrect because a disclaimer of opinion is not appropriate
when known misstatements exist. Answer (d) is incorrect
because, as indi cated, more than describing the terminology is
necessary.
139
Q
- Financial information is presented in a printed form that
prescribes the wording of the independent auditor’s report.
The form is not acceptable to the auditor because the form
calls for statements that are inconsistent with the au ditor’s
responsibility. Under these circumstances, the audi tor most
likely would
a. Withdraw from the engagement.
b. Reword the form or attach a separate report.
c. Express a qualifi ed opinion with an explanation.
d. Limit distribution of the report to the party who
de signed the form.
A
- (b) The requirement is to identify an auditor’s reporting
responsibility when a printed form prescribes the wording
of the independent auditor’s report that will accom pany it,
but that wording is not acceptable to the auditor. AU-C 800 suggests that the auditor reword the report (or attach a separate
report) in this situation.
140
Q
- Field is an employee of Gold Enterprises. Hardy, CPA, is
asked to express an opinion on Field’s profi t participation in
Gold’s net income. Hardy may accept this engagement only if
a. Hardy also audits Gold’s complete fi nancial state ments.
b. Gold’s fi nancial statements are prepared in confor m ity
with GAAP.
c. Hardy’s report is available for distribution to Gold’s
other employees.
d. Field owns controlling interest in Gold.
A
- (a) The requirement is to identify a requirement for
a CPA to express an opinion on a profi t participation plan
relating to an entity’s net income. Answer (a) is correct
because if a specifi ed element is, or is based upon, an entity’s
net income or stockholders’ equity, the CPA should
have audited the complete fi nancial statements in order to
express an opinion on the ele ment. Answer (b) is incorrect
because the fi nancial statements need not be prepared in
conformity with GAAP, as other bases of accounting may
be followed. Answer (c) is incorrect because the report need
not be made available for distribution to other em ployees.
Answer (d) is incorrect because the individual in the profi t
participation plan need not own a controlling interest in the
company.
141
Q
91. A CPA is permitted to accept a separate engagement (not
in conjunction with an audit of fi nancial statements) to audit
an entity’s
Schedule of
accounts
receivable
Schedule of
royalties
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (a) The requirement is to determine whether a CPA is
permitted to accept an engagement to audit either a schedule
of accounts receivable, a schedule of royalties, or both.
Answer (a) is correct because auditors may audit “specifi ed
elements, ac counts or items of a fi nancial statement,”
in cluding either a schedule of accounts receivable or a schedule
of royalties. An swer (b) is incorrect because an auditor
may audit a schedule of royalties. Answer (c) is incorrect
because an auditor may audit a schedule of accounts receivable.
Answer (d) is incorrect because an auditor may audit
both a schedule of accounts receivable and a schedule of
royalties.
142
Q
- In an accountant’s review of interim fi nancial information,
the accountant typically performs each of the following, except
a. Reading the available minutes of the latest stockholders’
meeting.
b. Applying fi nancial ratios to the interim fi nancial information.
c. Inquiring of the accounting department’s management.
d. Confi rming major receivable accounts.
A
- (d) The requirement is to identify the procedure not
ordinarily included in an accountant’s review of interim
fi nancial information. Answer (d) is correct because reviews
consist largely of inquiries of management and analytical
procedures and not corroborating external evidence such as
confi rmations. An swer (a) is incorrect because the reading
of minutes is ordinarily a part of a review. Answer (b) is
incorrect because “applying fi nancial ratios” is a form of
analytical procedures that may be included in a review. Answer
(c) is incorrect because inquiries of accounting department
management personnel are appropriate in a review.
143
Q
- When an independent CPA has reviewed the interim
fi nan cial statements of a public client, which procedure is least
likely to have been performed?
a. Obtaining written representations from manage ment
for all interim fi nancial information pre sented.
b. Observing the interim count of inventory.
c. Reading the fi nancial statements for obvious ma te rial
misstatements.
d. Performing analytical procedures related to sales.
A
- (b) The requirement is to identify the least likely procedure
included in an interim review of the fi nancial statements
of a public client. Answer (b) is correct because an interim
review ordinarily does not include such substan tive tests of
balances. Answer (a) is incorrect because a CPA should obtain
such writ ten representations. Answer (c) is incorrect because
the CPA will read the fi nancial state ments for obvious material
misstate ments. Answer (d) is in correct because the primary
procedures included in such a review are analytical procedures
and inquiries.
144
Q
- The objective of a review of interim fi nancial informa tion
of a public entity (issuer) is to provide an accountant with a
basis for reporting whether
a. Material modifi cations should be made to conform
with generally accepted accounting principles.
b. A reasonable basis exists for expressing an updated
opinion regarding the fi nancial statements that were
previously audited.
c. Summary fi nancial statements or pro forma fi nan cial
in formation should be included in a registra tion statement.
d. The fi nancial statements are presented fairly in ac cordance
with generally accepted accounting prin ciples.
A
- (a) The requirement is to identify the objective of a
review of interim fi nancial information. Answer (a) is correct
because the objective of a review of interim fi nancial
information is to provide a basis for re porting on whether
material modifi ca tion should be made for such information
to conform with gen erally accepted ac counting principles.
Answer (b) is incorrect because no updated opinion is being
issued. Answer (c) is incor rect because summary fi nancial
statements or pro forma fi nancial infor mation are not being considered in this question. An swer (d) is incorrect because the
statements may or may not be presented in conformity with
generally accepted ac counting principles
145
Q
- An independent accountant’s report is based on a re view
of interim fi nancial information. If this report is pre sented in a
reg istration statement, a prospectus should in clude a statement
clar ifying that the
a. Accountant’s review report is not a part of the reg istration
statement within the meaning of the Se cu rities
Act of 1933.
b. Accountant assumes no responsibility to update the
re port for events and circumstances occurring after the
date of the report.
c. Accountant’s review was performed in accordance
with standards established by the Securities and
Exchange Commission.
d. Accountant obtained corroborating evidence to de termine
whether material modifi cations are needed for
such information to conform with GAAP.
A
- (a) The requirement is to identify the correct state ment
with respect to an independent accountant’s review report
on interim fi nancial information presented in a regis tration
state ment. Answer (a) is correct because an accoun tant’s
review re port is not a part of the registration statement within
the meaning of Section 11 of the Securities Act of 1933.
Answer (b) is incor rect because under certain condi tions
an accountant is required to update the report. An swers (c)
and (d) are incorrect because the prospectus in cludes neither
a statement that the review was performed in accordance with
SEC standards, nor a statement that the accountant obtained
corroborating evidence.
146
Q
- A modifi cation of the CPA’s report on a review of the
in terim fi nancial statements of a publicly held company would
be necessitated by which of the following?
a. An uncertainty.
b. Lack of consistency.
c. Reference to another accountant.
d. Inadequate disclosure.
A
- (d) The requirement is to determine the circum stances
which will lead to a modifi cation of an interim re port. Departures
from generally accepted accounting princi ples, which
in clude adequate disclosure, require modifi ca tion of the
account ant’s report. Normally neither an uncertainty
[answer (a)] nor a lack of consistency [an swer (b)] would
cause a report modifi ca tion. Reference to another accoun tant
[answer (c)] is not con sidered a modifi cation.
147
Q
- Which of the following procedures ordinarily should be
applied when an independent accountant conducts a review of
interim fi nancial information of a publicly held entity?
a. Verify changes in key account balances.
b. Read the minutes of the board of directors’ meet ings.
c. Inspect the open purchase order fi le.
d. Perform cut-off tests for cash receipts and dis bursements.
A
- (b) The requirement is to identify the procedure that
would ordinarily be applied when an accountant conducts
a re view of the interim fi nancial information of a publicly
held entity. Answer (b) is correct because the accountant will
ordinarily read the minutes of meetings of stockholders, the
board of directors, and committees of the board of directors
to identify actions that may affect the interim fi nancial
in formation. An swers (a), (c), and (d) are all incorrect
be cause they represent verifi cation pro cedures typically
be yond the scope of a re view of interim fi nan cial information
148
Q
- Which of the following is least likely to be a procedure
in cluded in an accountant’s review of interim fi nancial
in formation of a public entity?
a. Compare disaggregated revenue data by month to that
of the previous interim period.
b. Read available minutes of meetings of stockhold ers.
c. Observe counting of physical inventory.
d. Inquire of management concerning signifi cant jour nal
entries and other adjustments.
A
- (c) The requirement is to identify the least likely
proce dure to be included in an accountant’s review of
inte rim fi nancial information of an issuer (public) entity.
An swer (c) is correct because a review consists principally of
performing analytical procedures and making inquiries, not
procedures such as obser vation, inspection, and confi rmation.
Answers (a), (b), and (d) are all incorrect because
they include review procedures included in the professional
standards
149
Q
- An accountant’s review report on interim fi nancial in formation
of a public entity is most likely to include a
a. Statement that the interim fi nancial information was
ex amined in accordance with standards of the Public
Company Accounting Oversight Board.
b. Statement that the interim fi nancial information is the
re sponsibility of the entity’s shareholders.
c. Description of the procedures for a review.
d. Statement that a review of interim fi nancial in for mation
is less in scope than a compilation con ducted in
accordance with AICPA standards
A
- (c) The requirement is to identify the most likely information
included in a review report. Answer (c) is cor rect
be cause the professional standards require that the re port
include a de scription of procedures performed. Answer (a) is
incorrect because the information was reviewed, not examined,
in accord ance with standards of the PCAOB. Answer (b) is
incorrect because the interim fi nancial infor mation is the
responsibility of the entity’s management, not the shareholders.
Answer (d) is incorrect because a review is less in scope
than an audit, not than a compilation.
150
Q
- An auditor may report on summary fi nancial state ments
that are derived from complete fi nancial statements if the
a. Summary fi nancial statements are distributed to
stock holders along with the complete fi nancial
statements.
b. Auditor described the additional procedures performed
on the summary fi nancial statements.
c. Auditor indicates whether the information in the
sum mary fi nancial statements is fairly stated in all
material respects in relation to the complete fi nan cial
state ments from which it has been derived.
d. Summary fi nancial statements are presented in compara
tive form with the prior year’s summary fi nancial
statements.
A
- (c) The requirement is to determine the circumstance
under which an auditor may report on summary
fi nancial state ments that are derived from complete audited
fi nancial state ments. Answer (c) is correct because a report
may be issued when the information in the summary fi nan cial
statements is fairly stated in all material respects in rela tion to the fi nancial statements. Answer (a) is incorrect because the
summary fi nan cial statements need not be dis trib uted with the
complete fi nan cial statements. Answer (b) is incorrect because
the report need not indicate the na ture of any additional
procedures. Answer (d) is incorrect because prior year
summary fi nancial information is not necessary. See AU-C 810
for information on summary fi nan cial state ments.
151
Q
- An auditor is engaged to report on selected fi nancial data
that are included in a document con taining audited fi nancial
statements. Under these circum stances, the report on the selected
data should
a. Be limited to data derived from the audited fi nan cial
statements.
b. Be distributed only to senior management and the
board of directors.
c. State that the presentation is a fi nancial reporting
frame work other than GAAP.
d. Indicate that the data are not fairly stated in all ma terial
respects.
A
- (a) The requirement is to determine the appropriate
response relating to selected fi nancial data that are included in
a document containing audited fi nancial statements.
An swer (a) is correct because the selected data should be
lim ited to data de rived from the audited fi nancial statements.
Answer (b) is incor rect because distribution of the report
need not be limited to senior management and the board of
directors. Answer (c) is incorrect because the se lected data
need not follow a fi nancial reporting framework other than
GAAP. Answer (d) is incorrect because the report will ordinarily
state that the selected data are fairly stated in all mate rial
respects in relation to the consolidated fi nancial state ments.
152
Q
- A registration statement fi led with the SEC contains the
reports of two independent auditors on their audits of fi nancial
statements for different periods. The predecessor auditor who
audited the prior period fi nancial statements generally should
obtain a letter of representation from the
a. Successor independent auditor.
b. Client’s audit committee.
c. Principal underwriter.
d. Securities and Exchange Commission.
A
- (a) The requirement is to determine a predecessor auditor’s
responsibility when the fi nancial statements he or she
au dited are being included in an SEC registration state ment
fi ling. Answer (a) is correct because AU-C 920 requires that the
prede cessor (1) read pertinent portions of the document, and
(2) ob tain a letter of representation from the suc cessor auditor.
153
Q
- Which of the following statements is correct concerning
letters for underwriters, commonly referred to as comfort
letters?
a. Letters for underwriters are required by the Securi ties
Act of 1933 for the initial public sale of regis tered
secu rities.
b. Letters for underwriters typically give negative as surance
on unaudited interim fi nancial information.
c. Letters for underwriters usually are included in the
regis tration statement accompanying a prospectus.
d. Letters for underwriters ordinarily update auditors’
opinions on the prior year’s fi nancial statements
A
- (b) The requirement is to identify the statement that
is correct concerning letters for underwriters. Answer (b)
is correct because letters for underwriters typically provide
negative assur ance on unaudited interim fi nancial information.
Answer (a) is incorrect because letters for underwriters
are not required by the Securities Act of 1933. Answer (c)
is incorrect because letters for underwriters are not included
in registrations statements. An swer (d) is incorrect because
auditors’ opinions on the prior year’s fi nancial statement are
not updated.
154
Q
- Comfort letters ordinarily are signed by the client’s
a. Independent auditor.
b. Underwriter of securities.
c. Audit committee.
d. Senior management.
A
- (a) The requirement is to determine who ordinarily
signs a comfort letter. Answer (a) is correct because a com fort
letter (also known as letter to an underwriter) is sent by the
inde pendent auditor to the underwriter.
155
Q
- Comfort letters ordinarily are addressed to
a. Creditor fi nancial institutions.
b. The client’s audit committee.
c. The Securities and Exchange Commission.
d. Underwriters of securities
A
- (d) The requirement is to identify to whom comfort
letters are ordinarily addressed. Answer (d) is correct be cause
comfort letters, also referred to as letters for under writers, are
ordinarily addressed to underwriters
156
Q
- When an accountant issues to an underwriter a comfort
letter containing comments on data that have not been au dited,
the underwriter most likely will receive
a. Negative assurance on capsule information.
b. Positive assurance on supplementary disclosures.
c. A limited opinion on pro forma fi nancial state ments.
d. A disclaimer on prospective fi nancial statements
A
- (a) The requirement is to determine the type of opin ion
or assurance provided by an accountant who issues a comfort
letter containing comments on data that have not been audited.
Answer (a) is correct because when proce dures short of an
audit are applied to information such as capsule information,
a comfort letter will generally provide negative assurance.
Answer (b) is incorrect because CPAs do not provide positive
assurance on supplementary disclo sures. Answer (c) is incorrect
because no “limited opinion” is issued on pro forma or other
information. Answer (d) is incorrect because no disclaimer will
be included on the prospective fi nancial statements.
157
Q
- When an independent audit report is incorporated by
refer ence in a SEC registration statement, a prospectus that includes
a statement about the independent accountant’s involvement
should refer to the independent accountant as
a. Auditor of the fi nancial reports.
b. Management’s designate before the SEC.
c. Certifi ed preparer of the report.
d. Expert in auditing and accounting.
A
- (d) The requirement is to determine the appropriate
reference to an independent accountant in a prospectus
(re lating to an SEC registration statement) that includes a statement about his/her involvement with an independent audit
report. AU-C 920 indicates that the independent ac countant is
an expert in auditing and accounting.
158
Q
- Which of the following matters is covered in a typical
com fort letter?
a. Negative assurance concerning whether the entity’s
in ternal control procedures operated as designed
during the period being audited.
b. An opinion regarding whether the entity complied
with laws and regulations under Government Auditing
Standards and the Single Audit Act of 1984.
c. Positive assurance concerning whether unaudited condensed
fi nancial information complied with generally
accepted accounting principles.
d. An opinion as to whether the audited fi nancial statements
comply in form with the accounting re quirements
of the SEC.
A
- (d) The requirement is to identify the information
in cluded in a typical comfort letter. Answer (d) is correct
because in a comfort letter auditors provide an opinion as
to whether the audited fi nancial statements comply in form
with the accounting requirements of the SEC. Answer (a)
is incorrect because nega tive assurance concerning whether
the entity’s internal control procedures operated as designed
during the period is not pro vided. Answer (b) is incorrect
because a comfort letter does not include an opinion on
whether the entity complied with Gov ernment Auditing
Standards and the Single Audit Act. An swer (c) is incorrect
because negative, not positive, assurance is provided on
unaudited summary fi nancial information.
159
Q
- When unaudited fi nancial statements are presented in
comparative form with audited fi nancial statements in a document
fi led with the Securities and Exchange Commis sion, such
statements should be
Marked as
“unaudited”
Withheld
until audited
Referred to in
the auditor’s
report
a. Yes No No
b. Yes No Yes
c. No Yes Yes
d. No Yes No
A
- (a) The requirement is to determine the proper treatment
of unaudited fi nancial statements presented in comparative
form with audited fi nancial statements in a document
fi led with the Securities and Exchange Commission.
An swer (a) is correct because those statements should be
marked “unaudited,” not withheld until they are audited, and
not referred to in the audi tor’s report.
160
Q
- In connection with a proposal to obtain a new audit
client, a CPA in public practice is asked to prepare a report
on the appli cation of accounting principles to a specific
transaction. The CPA’s report should include a statement that
a. The engagement was performed in accordance with
Statements on Standards for Accounting and Review
Services.
b. Responsibility for the proper accounting treatment
rests with the preparers of the fi nancial statements.
c. The evaluation of the application of accounting
prin ci ples is hypothetical and may not be used for
opinion-shopping.
d. The guidance is provided for management’s use only
and may not be communicated to the prior or continuing
auditor.
A
- (b) The requirement is to identify the requirement
relat ing to a CPA’s report when reporting on the application
of ac counting principles to a specific transaction. An swer (b)
is cor rect because AU-C 915 requires that the report include
a statement that responsibility for the proper ac counting
treatment rests with the preparers of the fi nancial statements.
Answer (a) is incorrect because the report states that the
engagement was per formed in accordance with ap plicable
AICPA standards, not Statements on Standards for Accounting
and Review Services. Answer (c) is incorrect as no such
statement about opinion-shopping is included. An swer (d) is
incorrect because the infor mation may be com municated to a
prior or continuing auditor.
161
Q
- In connection with a proposal to obtain a new client,
an accountant in public practice is asked to prepare a written
report on the application of accounting principles to a
spe cifi c transac tion. The accountant’s report should include a
statement that
a. Any difference in the facts, circumstances, or as sumptions
presented may change the report.
b. The engagement was performed in accordance with
Statements on Standards for Consulting Ser vices.
c. The guidance provided is for management use only
and may not be communicated to the prior or con tinuing
auditors.
d. Nothing came to the accountant’s attention that
caused the accountant to believe that the account ing
principles violated GAAP
A
- (a) The requirement is to determine an auditor’s
report ing responsibility when asked by a prospective client
to render an opinion on the application of accounting principles
to a specifi c transaction. Answer (a) is correct
be cause AU-C 915 indicates that the report must include a
state ment that any difference in the facts, circumstances,
or as sumptions presented may change the report, as well as
vari ous other disclosures. Answer (b) is incor rect because the
report indicates that the engagement was per formed in
ac cordance with AICPA standards, not Statements on Standards
for Consulting Services. Answer (c) is incorrect
be cause the report need not indicate that the guidance is for
man agement use only and may not be communicated to the
prior or continuing auditors. Answer (d) is incorrect because
the report does not include negative assurance (“nothing
came to our atten tion”). See AU-C 915 for performance and
reporting require ments relating to reports on the application of
accounting princi ples.
162
Q
- Blue, CPA, has been asked to render an opinion on the
application of accounting principles to a specifi c transaction
by an entity that is audited by another CPA. Blue, who
previously has provided no services to the entity, may ac cept
this engagement, but should
a. Consult with the continuing CPA to obtain in formation
relevant to the transaction.
b. Report the engagement’s fi ndings to the entity’s au dit
committee, the continuing CPA, and man agement.
c. Disclaim any opinion that the hypothetical application
of accounting principles conforms with gener ally
ac cepted accounting principles.
d. Notify the entity that the report is for the restricted
use of management and outside parties who are aware
of all relevant facts.
A
- (a) The requirement is to determine an auditor’s
respon sibility when asked to render an opinion on the applica
tion of accounting principles to a specifi c transaction by
an entity that is audited by another CPA. Answer (a) is correct
because the accountant ordinarily must consult with the continuing CPA to attempt to obtain information relevant to
the trans action; an exception to this rule exists under certain
circumstances in which the accountant provides recurring
services for the entity. Answer (b) is incorrect because the
engagement’s fi ndings need not be re ported to all of the groups
listed—the entity’s audit committee, the continuing CPA, and
manage ment. Answer (c) is incorrect because the accountant
need not disclaim an opinion. An swer (d) is incorrect because
the report’s distribution need not be restricted to management
and outside parties who are aware of all relevant facts.
163
Q
- Which of the following statements is not included in
an accountant’s report on the application of accounting principles?
a. The engagement was performed following stan d ards
es tablished by the American Institute of Cer ti fi ed
Pub lic Accountants.
b. The report is based on a hypothetical transaction not involving
facts or circumstances of this particular en tity.
c. The report is intended solely for the information and
use of specifi ed parties.
d. Responsibility for the proper accounting treatment
rests with the preparers of the fi nancial statements.
A
- (b) Answer (b) is correct because AU-C 915 indicates
that an accountant should not undertake such an engagement
when the report would be based on such a hypothetical
transac tion. Answers (a), (c), and (d) are all incorrect be cause
they include information included in an accountant’s report on
the application of accounting principles.
164
Q
- Which of the following services would be most likely
to be structured as an attest engagement in which assurance is
provided?
a. Advocating a client’s position in tax matter.
b. A consulting engagement to develop a new data base
sys tem for the revenue cycle.
c. An engagement to issue a report addressing an entity’s
compliance with requirements of specifi ed laws.
d. The compilation of a client’s forecast information.
A
- (c) The requirement is to select the service that is most
likely to be structured as an attest engagement. An swer (c) is
correct because CPAs may provide assurance as to compliance
with requirements of specifi ed laws through a variety of
services, including agreed-upon procedures en gagements and
various compliance audits. Answers (a) and (b) are incorrect
because advocating a client’s tax posi tion is not typically
structured as an attest service. Answer (d) is incorrect because
compilation reports do not provide assurance
165
Q
- An unmodifi ed attestation report ordinarily may refer to
a. Only the assertion.
b. Only the subject matter to which the assertion re lates.
c. Either the assertion or the subject matter to which the
as sertion relates.
d. Neither the assertion nor the subject matter to which
the assertion relates.
A
- (c) Answer (c) is correct because AT 101 indicates
that an unmodifi ed may ordinarily refer to that assertion or to
the subject matter to which the assertion relates. Answer (a) is
in correct because it suggests reporting only on the assertion.
An swer (b) is incorrect because it suggests re porting only on
the subject matter. Answer (d) is incorrect because it suggests
that reporting on neither the assertion nor the subject matter is
ap propriate. Note, however, that AT 101 also states that when
a deviation from the criteria being reported upon exits (e.g., a
ma terial weakness in internal control” the CPA should report
di rectly upon the subject matter and not upon the assertion.
166
Q
116. A practitioner is issuing a standard unmodifi ed examination
report under the attestation standards. The CPA’s conclusion
may be on
Subject matter
Management’s
written assertion
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (a) The requirement is to identify the correct statement.
When a standard unmodifi ed examination report is
being issued, that report may be upon the subject matter or the
written asser tion. Answers (b), (c), and (d) are all incor rect
because they suggest that the report may not be upon either the
subject matter, the written assertion, or both.
167
Q
- Conditions exist that result in a material deviation
from the criteria against which the subject matter was evaluated
during an examination. The CPA’s conclusion may
be on
Subject matter Written assertion
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (b) The requirement is to determine whether a
CPA’s conclusion may be upon the subject matter, the written
assertion, or both when conditions exist that result in a
material deviation from the criteria against which the subject
matter was evaluated during an examination. Answer (b) is
correct because in such circumstances the conclusion should
be directly upon the subject matter. Answer (a) is incorrect
because it suggests that the con clusion may be upon the
written assertion. Answer (c) is incor rect because it states that
the conclusion may not be upon the subject matter and may be
upon the written assertion. Answer (d) is incorrect because it
states that the conclusion may not be upon the subject matter.
168
Q
- When performing an attestation engagement, which of
the following is least likely to be present?
a. Practitioner’s written assertion.
b. Responsible party.
c. Subject matter.
d. Suitable criteria.
A
- (a) The requirement is to determine the element that is
least likely to be present when a practitioner performs an attest
engagement. Answer (a) is correct because while an assertion
is generally present, it is from the responsible party, not from
the practitioner. Answer (b) is incorrect because ordinarily there is a responsible party. Answers (c) and (d) are incorrect
because both subject matter, and suitable crite ria are required.
169
Q
- Suitable criteria in an attestation engagement may be
avail able
Publicly In CPA’s report
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (a) The requirement is to determine whether suitable
criteria in an attestation engagement may be available publicly,
and/or in the CPA’s report. Answer (a) is correct be cause
suit able criteria may be available publicly in the CPA’s report,
in cluded with the subject matter or in the as sertion, well
under stood by users (e.g., the distance between A and B is
twenty feet) or available only to specifi ed parties. Answers (b),
(c), and (d) are all incorrect because they sug gest that suitable
criteria may not be available publicly, in the CPA’s report, or
both.
170
Q
- Which of the following is least likely to be included
in an agreed-upon procedures attestation engagement
report?
a. The specifi ed party takes responsibility for the suffi -
ciency of procedures.
b. Use of the report is restricted.
c. Limited assurance on the information presented.
d. A summary of procedures performed.
A
- (c) The requirement is to identify the information
that is least likely to be included in an agreed-upon
proce dures attes tation report. Answer (c) is correct because
an agreed-upon procedures report provides a summary of procedures
performed and fi ndings, not limited assurance.
An swer (a) is incorrect be cause the specifi ed party does not
take responsibility for the suffi ciency of procedures. An swer
(b) is incorrect because the re port’s use is restricted.
Answer (d) is incorrect because a summary of procedures
performed is included
171
Q
121. A summary of fi ndings rather than assurance is most likely to be included in a. Agreed-upon procedures report. b. Compilation report. c. Examination report. d. Review report.
A
- (a) The requirement is to identify the type of report
that is most likely to include a summary of fi ndings rather
than assur ance. Answer (a) is correct because agreed-upon
procedures reports include a summary of fi ndings. An swer (b)
is incorrect because a compilation report does not provide
a summary of fi ndings. Answer (c) is incorrect be cause an
examination report includes positive assurance and not a
summary of fi ndings. An swer (d) is incorrect because a review
report includes limited (negative) assurance, not a summary of
fi ndings.
172
Q
- Which of the following is not correct concerning “specifi
ed parties” of an agreed-upon procedures report un der either
the auditing or attestation standards?
a. They must agree on the procedures to be per formed.
b. They must take responsibility for the adequacy of the
procedures performed.
c. They must sign an engagement letter.
d. After completion of the engagement, another party
may be added as a specifi ed user.
A
- (c) The requirement is to identify the statement that is
not correct concerning “specifi ed parties” of an agreed-upon
procedures report under either the auditing or attesta tion standards.
Answer (c) is correct because while a practi tioner should
establish a clear understanding regarding the terms of the engagement,
preferably in an engagement letter, no such engagement
letter is required. Answers (a) and (b) are incorrect because
the specifi ed parties must agree on the procedures to be
performed and take responsibility for their adequacy. Answer
(d) is incorrect because an additional party may be added as a
specifi ed party after completion of the engagement
173
Q
- When an accountant examines projected fi nancial statements,
the accountant’s report should include a separate paragraph
that
a. Describes the limitations on the usefulness of the
presen tation.
b. Provides an explanation of the differences between an
examination and an audit.
c. States that the accountant is responsible for events
and circumstances up to one year after the report’s
date.
d. Disclaims an opinion on whether the assumptions
pro vide a reasonable basis for the projection.
A
- (a) The requirement is to determine the information
to be included in a separate paragraph included in an
ac countant’s report on the examination of projected fi nancial
statements. Answer (a) is correct because AT 301 requires
that such a report include a separate paragraph that describes
the limitations on the usefulness of the presentation. See
AT 301 for information that should be included in an examination
report of prospective fi nancial statements. An swer (b)
is incorrect because the report includes no such statement
attempting to distinguish between an examination and an
audit. Answer (c) is incorrect because the report includes no
such disclosure and because the accountant is not responsible
for events and circumstances up to one year after the report’s
date. Answer (d) is incorrect because the report suggests that
the assumptions do provide a reasonable basis.
174
Q
- An accountant may accept an engagement to apply
agreed-upon procedures to prospective fi nancial statements
provided that
a. Use of the report is restricted to the specifi ed par ties.
b. The prospective fi nancial statements are also ex amined.
c. Responsibility for the adequacy of the procedures
per formed is taken by the accountant.
d. Negative assurance is expressed on the prospective fi -
nancial statements taken as a whole.
A
- (a) The requirement is to identify the circumstance
in which an accountant may accept an engagement to apply
agreed-upon procedures to prospective fi nancial statements.
Answer (a) is correct because AT 301 states that an accountant
may accept an engagement to apply agreed-upon procedures
to prospective fi nancial statements provided that (1) the
specifi ed parties involved have participated in establish ing the
nature and scope of the engagement and take respon sibility
for the adequacy of the procedures to be performed, (2) use of
the report is to be re stricted to specifi ed parties involved, and
(3) the prospective fi nancial statements in clude a summary
of signifi cant assump tions. Answer (b) is incorrect because
the prospective fi nancial statements need not be examined.
Answer (c) is incorrect be cause responsi bility for the adequacy
of the procedures is taken by the spe cifi ed parties. Answer (d)
is incorrect because a sum mary of fi ndings may be provided
based on the agreed-upon proce dures.
175
Q
- An accountant’s compilation report on a fi nancial forecast
should include a statement that
a. The forecast should be read only in conjunction with
the audited historical fi nancial statements.
b. The accountant expresses only limited assurance on
the forecasted statements and their assumptions.
c. There will usually be differences between the forecasted
and actual results.
d. The hypothetical assumptions used in the forecast are
reasonable in the circumstances.
A
- (c) The requirement is to identify the statement which
should be included in an accountant’s compilation report on
fi nancial forecasts. Answer (c) is correct because when the
ac countant is preparing a standard compilation report on
prospec tive fi nancial statements, AT 301 requires that the
accountant include a statement indicating that the prospective
results may not be achieved
176
Q
- Accepting an engagement to examine an entity’s fi -
nancial projection most likely would be appropriate if the
projection were to be distributed to
a. All employees who work for the entity.
b. Potential stockholders who request a prospectus or a
registration statement.
c. A bank with which the entity is negotiating for a loan.
d. All stockholders of record as of the report date.
A
- (c) The requirement is to identify the appropriate
distri bution of an entity’s fi nancial projection. A fi nancial
projection is sometimes prepared to present one or more
hypothetical courses of action for evaluation in response to a
question such as “What would happen if…?” It is based on a
responsible party’s assump tions refl ecting conditions it ex pects
would exist and the course of action it expects would be taken,
given one or more hypothet ical assumptions. Pro jections are
“limited use” fi nancial state ments meant for the responsible
party (generally management) and third parties with whom the
responsible party is negotiating directly. Answer (c) is correct
because a bank might be expected to receive such a projection.
Answers (a), (b), and (d) are all incorrect because projections
are meant for “limited use” and not to be broadly distributed
to groups such as all em ployees or po tential or current
stockholders. AT 301 pro vides overall guid ance on the area of
fi nancial forecasts and projections.
177
Q
- A CPA in public practice is required to comply with the
provisions of the Statements on Standards for Attestation Engagements
(SSAE) when
Testifying as an
expert witness in
accounting and
auditing matters
given stipulated facts
Compiling a client’s
fi nancial projection
that presents a
hypothetical course
of action
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (c) The requirement is to determine whether either
testifying as an expert witness, compiling a fi nancial projection,
or both are engagements governed by the provisions of
the Statement on Standards for Attestation Statements. Answer
(c) is correct because the attestation standards expli citly
exclude expert witness work, but include the compila tion of
a fi nancial projection; note that in most areas compi lations
are not included in attestation standard cover age, but in the
area of prospective fi nancial statement (fore casts as well as
projections) coverage is included. Answer (a) is incorrect
because it states that expert witness work is in cluded. Answer
(b) is incorrect both because it states that expert witness work
is included and that compiling a projec tion is not included.
Answer (d) is incorrect because it states that compilations of
projections are not included.
178
Q
- An accountant’s compilation report on a fi nancial forecast
should include a statement that the
a. Compilation does not include evaluation of the support
of the assumptions underlying the forecast.
b. Hypothetical assumptions used in the forecast are reasonable.
c. Range of assumptions selected is one in which one
end of the range is less likely to occur than the
other.
d. Prospective statements are limited to presenting, in
the form of a forecast, information that is the accountant’s
representation.
A
- (a) The requirement is to identify the statement that
should be included in a compilation report on a fi nancial forecast. Answer (a) is correct because the report should
state that the compilation does not include evaluation of
the support of the assumptions underlying the forecast.
An swer (b) is incorrect because no such statement is included
in a compilation report, and because hypothetical assumptions
pertain to fi nancial projec tions, not fi nancial forecasts.
Answer (c) is incorrect because the report makes no state ment
concerning the range of assumptions. Answer (d) is incorrect
because the statement is not included in the report, and
because the prospective statements are manage ment’s, not the
accountant’s, representation.
179
Q
- Which of the following is a prospective fi nancial statement
for general use upon which an accountant may appropriately
report?
a. Financial projection.
b. Partial presentation.
c. Pro forma fi nancial statement.
d. Financial forecast.
A
- (d) The requirement is to identify the type of general
use prospective fi nancial statement on which the accountant
may appropriately report. Answer (d) is correct because
fi nancial forecasts are considered prospective fi nancial
statements, and they are appropriate for general use.
An swer (a) is incorrect because fi nancial projections are only
appropriate for the party responsible for preparing them or
for third parties with whom the responsible party is negotiating
directly. Answers (b) and (c) are incorrect because
partial presentations and pro forma fi nancial statements are not
considered prospective fi nancial statements.
180
Q
- Which of the following is not included in a compila tion
report on prospective fi nancial statements?
a. A statement that the practitioner assumes no responsi
bility to update the report for events and circumstances
occurring after the date of the report.
b. A caveat that the prospective results may not be
achieved.
c. A statement that a compilation is limited in scope
and does not enable the practitioner to express an
opinion or any other form of assurance on the information.
d. Distribution of the report is restricted to speci fi ed parties.
A
- (d) The requirement is to identify the statement that is
not included in a compilation report on prospective fi nan cial
statements. Answer (d) is correct because distribution of such a
report is not necessarily restricted to specifi ed par ties. Answers
(a), (b), and (c) are all incorrect because such statements are
included in a compilation report.
181
Q
- When an accountant examines a fi nancial forecast that
fails to disclose several signifi cant assumptions used to pre pare
the forecast, the accountant should describe the as sumptions in
the accountant’s report and issue a(n)
a. “Except for” qualifi ed opinion.
b. “Subject to” qualifi ed opinion.
c. Unmodifi ed opinion with a separate emphasis-of-matter
paragraph.
d. Adverse opinion.
A
- (d) The requirement is to determine the appropriate
type of audit report to be issued when an accountant ex amines
a fi nancial forecast that fails to disclose several sig nifi cant
assump tions used to prepare the forecast. AT 301 states that an
adverse opinion is appropriate when signifi cant assumptions
are not dis closed.
182
Q
- An examination of a fi nancial forecast is a professional
service that involves
a. Compiling or assembling a fi nancial forecast that is
based on management’s assumptions.
b. Limiting the distribution of the accountant’s report to
management and the board of directors.
c. Assuming responsibility to update management on
key events for one year after the report’s date.
d. Evaluating the preparation of a fi nancial forecast and
the support underlying management’s assumptions.
A
132 . (d) The requirement is to identify what is included in
the examination of a fi nancial forecast. Answer (d) is correct
because an examination of a forecast includes an evaluation
of its preparation and the support underlying management’s
assumptions. As discussed in AT 301, an examination also
includes evaluating the representation of the prospective
fi nancial statements for conformity with AICPA presentation
guidelines and the issuance of an examination report. Answer
(a) is incorrect because the service need not include the
compiling or assembling of the fi nancial forecast. Answer (b)
is incorrect because distribution of fi nancial forecasts need not
be limited. Answer (c) is incorrect because the CPA assumes
no responsibility to update management on key events. See AT
301 for information on prospective fi nancial information.
183
Q
- Given one or more hypothetical assumptions, a responsible
party may prepare, to the best of its knowledge and
belief, an entity’s expected fi nancial position, results of
operations, and changes in fi nancial position. Such prospec tive
fi nancial state ments are known as
a. Pro forma fi nancial statements.
b. Financial projections.
c. Partial presentations.
d. Financial forecasts.
A
- (b) The requirement is to identify the type of prospective
fi nancial statement that includes one or more hypothetical
(“what if?”) assumptions. Answer (b) is correct
because fi nancial projections include one or more hy pothetical
assumptions. An swer (a) is incorrect because pro forma
fi nancial presentations are designed to demonstrate the ef fect of
a future or hypothetical transaction by showing how
it might have affected the historical fi nancial statements if it
had been consummated during the pe riod covered by those statements. Answer (c) is incorrect because partial presen tations
are presentations that do not meet the mini mum presentation
guidelines of AT 301. Answer (d) is incorrect because fi nancial
forecasts present, to the best of the responsible party’s
knowledge and belief, an entity’s ex pected fi nancial position,
results of operations, and changes in fi nan cial information.
184
Q
- An accountant’s report on a review of pro forma fi nancial
information should include a
a. Statement that the entity’s internal control was not relied
on in the review.
b. Disclaimer of opinion on the fi nancial statements
from which the pro forma fi nancial information is
derived.
c. Caveat that it is uncertain whether the transaction or
event refl ected in the pro forma fi nancial infor mation
will ever occur.
d. Reference to the fi nancial statements from which the
his torical fi nancial information is derived.
A
- (d) The requirement is to determine the statement that
should be included in an accountant’s report on a review of
pro forma fi nancial information. Answer (d) is correct because
the report must include a reference to the fi nancial statements
from which the historical fi nancial information is derived and a
state ment as to whether such fi nancial state ments were audited
or reviewed.
185
Q
- Which of the following is not an objective of a CPA’s
exami nation of a client’s management discussion and analy sis
(MD&A) prepared pursuant to Securities and Exchange Commission
rules and regulations?
a. The historical amounts have been accurately de rived,
in all material respects, from the entity’s fi nancial
statements.
b. The presentation is in conformity with rules and
reg ula tions adopted by the Securities and Ex change
Commission.
c. The underlying information, determinations, estimates
and assumptions of the entity provide a reasonable
ba sis for the disclosures contained herein.
d. The presentation includes the required elements of
MD&A.
A
- (b) The requirement is to determine the reply that is
not an objective of a CPA’s examination of a client’s MD&A.
Answer (b) is correct because an examination of a client’s
MD&A does not directly address overall conformity with such
rules and regulations. Answers (a), (c), and (d) are the three
objectives of an MD&A examination agree ment.
186
Q
- Which of the following is an assertion embodied in
manage ment’s discussion and analysis (MD&A)?
a. Valuation.
b. Reliability
c. Consistency with the fi nancial statements.
d. Rights and obligations.
A
- (c) The requirement is to identify an assertion embod
ied in MD&A. Answer (c) is correct because the attestation
standards on MD&A indicate that consistency with the
fi nancial statements is an assertion—in addition, occur rence,
complete ness, and presentation and disclosure are embodied
assertions. Answers (a), (b), and (d) are all incor rect because
valuation, reliability, and rights and obligations are not
considered to be assertions embodied in the MD&A.
187
Q
- Which of the following statements is correct relating to
an auditor’s review engagements on an entity’s manage ment
discus sion and analysis (MD&A)?
a. A review consists principally of applying analyti cal
pro cedures and search and verifi cation proce dures.
b. The review report of a public entity should be restricted
to the use of specifi ed parties.
c. No consideration of internal control is necessary.
d. The report issued will ordinarily include a sum mary
of fi ndings, but no negative assurance.
A
- (b) Answer (b) is correct because the MD&A re view of
an issuer (public) entity should be restricted to the use of specifi
ed parties. Answer (a) is incorrect because a review consists
principally of applying analytical proce dures, rather than also
including search and verifi cation pro cedures. Answer (c) is incorrect
because a consideration of relevant portion of internal
control is necessary to identify types of potential misstatements
and to select the inquiries and analytical procedures. Answer
(d) is incorrect because a review report ordinarily provides
negative assurance, not a summary of fi ndings.
188
Q
- Trust Service engagements are performed under the
provi sions of
a. Statements on Assurance Standards.
b. Statements on Standards for Attestation Engagements.
c. Statements on Standards for Trust Engagements
d. Statements on Auditing Standards
A
- (b) The requirement is to identify the standards un der
which Trust Services engagements are performed. An swer (b)
is correct because the Statements on Standards for Attestation
engagements address such engagements. More information on
Trust Services engagements (WebTrust and SysTrust) is available
on the AICPA’s website—www.aicpa.org. Answers (a) and
(c) are incorrect because such standards do not exist. Answer
(d) is incorrect because Statements on Auditing Standards do
not address Trust Ser vices engagements.
189
Q
- The WebTrust seal of assurance relates most directly to
a. Financial statements maintained on the Internet.
b. Health care facilities.
c. Risk assurance procedures.
d. Websites.
A
- (d) The requirement is to identify what the Web Trust
seal of assurance relates most directly to. Answer (d) is correct
because the WebTrust seal is designed to provide assurance
on website security, availability, processing in tegrity, online
privacy and confi dentiality. Answers (a), (b), and (c) are all
incorrect since WebTrust isn’t specially aimed at fi nancial
statements, health care facilities, or risk assur ance procedures
190
Q
- A CPA’s examination report relating to a WebTrust engagement
is most likely to include
a. An opinion on whether the site is “hackproof.”
b. An opinion on whether the site meets the Web Trust
cri teria.
c. Negative assurance on whether the site is electronically
secure.
d. No opinion or other assurance, but a summary of fi ndings
relating to the website.
A
- (b) The requirement is to determine the type of opin ion
or assurance most likely to be included in a CPA’s rep ort relating
to WebTrust engagements. Answer (b) is cor rect because the WebTrust examination report provides an opinion on whether
the site meets the Trust Services criteria for one or more of the
Trust Services Principles. Answer (a) is incorrect because no
opinion on being “hackproof” is issued. Answer (c) is incorrect
because negative assurance is not provided. Answer (d) is incorrect
because an agreed-upon procedures engagement, not an
examination engage ment results in a summary of fi ndings.
191
Q
- An engagement in which a CPA considers security,
availability, processing integrity, online privacy, and/or con fi dentiality
over any type of defi ned electronic system is most likely
to considered which of the following types of engagements?
a. Internal control over fi nancial reporting.
b. SysTrust.
c. Website Associate.
d. WebTrust.
A
- (b) The requirement is to identify the type of engagement
that considers security, availability, processing integrity,
online privacy and/or confi dentiality over any type of defi ned
electronic system. Answer (b) is correct because SysTrust engagements
consider any type of defi ned electronic system. Answer
(a) is incorrect because an engage ment to consider internal
control over fi nancial reporting does not directly address these
attributes. Answer (c) is incorrect because there is no such
en gagement as a website Associate. Answer (d) is incorrect
because WebTrust deals more directly with company websites.
192
Q
- A client’s refusal to provide a written assertion in a Trust
Services engagement is most likely to result in which of the
fol lowing types of opinions?
a. Adverse.
b. Disclaimer.
c. Qualifi ed.
d. Unmodifi ed with explanatory language
A
- (b) The requirement is to identify the most likely report
when a client refuses to provide a written assertion in a Trust
Services engagement. Answer (b) is correct because this represents
a scope limitation, and client imposed scope limitations
are most likely to result in a disclaimer of opin ion. Answer (a)
is incorrect because an adverse opinion is appropriate when
a CPA believes that the information is so misstated as to be
misleading. Answer (c) is incorrect because client imposed
scope limitations generally result in disclaimers, not qualifi ed
opinions. Answer (d) is incorrect because an unmodifi ed
opinion is most likely not appropri ate in such a circumstance.
193
Q
- Dunn, CPA, is auditing the fi nancial statements of Taft
Co. Taft uses Quick Service Center (QSC) to process its payroll. Price, CPA, is expressing an opinion on a description
of the controls implemented at QSC regarding the processing
of its customers’ payroll transactions. Dunn expects to
consider the effects of Price’s report on the Taft engagement.
Price’s report should contain a(n)
a. Description of the scope and nature of Price’s
procedures.
b. Statement that Dunn may assess control risk based on
Price’s report.
c. Assertion that Price assumes no responsibility to
determine whether QSC’s controls are suitably designed.
d. Opinion on the operating effectiveness of QSC’s
internal controls.
A
- (a) The requirement is to identify the information
provided in a service auditor’s report which includes an
opinion on a description of controls implemented. Answer (a)
is correct since such a report includes a description of the
scope and nature of the CPA’s procedures. Answers (b), (c),
and (d) are all incorrect because they suggest information not
included in such a report. See AU-C 402 for information on the
audit of service organizations.
194
Q
- Payroll Data Co. (PDC) processes payroll transactions
for a retailer. Cook, CPA, is engaged to express an opinion
on a description of PDC’s internal controls implemented
as of a specifi c date. These controls are relevant to the
retailer’s internal control, so Cook’s report may be useful
in providing the retailer’s independent auditor with
information necessary to plan a fi nancial statement audit.
Cook’s report should
a. Contain a disclaimer of opinion on the operating
effectiveness of PDC’s controls.
b. State whether PDC’s controls were suitably designed
to achieve the retailer’s objectives.
c. Identify PDC’s controls relevant to specifi c fi nancial
statement assertions.
d. Disclose Cook’s assessed level of control risk for PDC.
A
- (a) The requirement is to identify a CPA’s reporting
responsibility when reporting on internal control implemented
for a service organization that processes payroll transactions.
Answer (a) is correct because since the CPA is only expressing
an opinion on whether controls have been implemented, a
disclaimer should be provided on operating effectiveness.
Answer (b) is incorrect because no specifi c statement is made
with respect to earlier objectives. Answer (c) is incorrect because
controls relevant to fi nancial statement assertions are not so
identifi ed. Answer (d) is incorrect because the assessed level of
control risk is not disclosed. See AU-C 402 for information on
processing of transactions by service organizations.
195
Q
- The auditor who audits the processing of transactions by
a service organization may issue a report on controls
Implemented Operating effectiveness
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
- (a) The requirement is to determine whether an
auditor who audits the processing of transactions by a service
organization may issue a report on either, or both, of whether
controls have been implemented and control operating
effectiveness. Answer (a) is correct because AU-C 402
indicates that such “service auditors” may issue either of the
two types of reports.
196
Q
- Computer Services Company (CSC) processes payroll
transactions for schools. Drake, CPA, is engaged to report on
CSC’s policies and procedures implemented as of a specifi c
date. These policies and procedures are relevant to the schools’
internal control, so Drake’s report will be useful in providing
the schools’ independent auditors with information necessary
to plan their audits. Drake’s report expressing an opinion on
CSC’s policies and procedures implemented as of a specifi c
date should contain a(n)
a. Description of the scope and nature of Drake’s
procedures.
b. Statement that CSC’s management has disclosed to
Drake all design defi ciencies of which it is aware.
c. Opinion on the operating effectiveness of CSC’s
policies and procedures.
d. Paragraph indicating the basis for Drake’s assessment
of control risk.
A
- (a) The requirement is to identify the proper
information to be included in a service auditor’s report on
whether a client’s controls have been implemented. Answer (a) is correct because such a report should include a description of
the scope and nature of the client’s procedures
197
Q
- Lake, CPA, is auditing the fi nancial statements of Gill
Co. Gill uses the EDP Service Center, Inc. to process its
payroll transactions. EDP’s fi nancial statements are audited
by Cope, CPA, who recently issued a report on EDP’s internal
control. Lake is considering Cope’s report on EDP’s internal
control in assessing control risk on the Gill engagement. What
is Lake’s responsibility concerning making reference to Cope
as a basis, in part, for Lake’s own opinion?
a. Lake may refer to Cope only if Lake is satisfi ed as to
Cope’s professional reputation and independence.
b. Lake may refer to Cope only if Lake relies on Cope’s
report in restricting the extent of substantive tests.
c. Lake may refer to Cope only if Lake’s report
indicates the division of responsibility.
d. Lake may not refer to Cope under the circumstances
above.
A
- (d) The requirement is to determine the propriety of a
computer “user” auditor (Lake) making reference to a service
auditor’s (Cope) report. Answer (d) is correct because the
user auditor should not make reference to the report of the
service auditor. See AU-C 402 for reports on the processing of
transactions by service organizations.
198
Q
- Which of the following is correct relating to service orga -
nization control (SOC) reports referred to as “SOC 2” re ports?
a. They are primarily to assist fi nancial statement au ditors
when processing services have been out sourced
to a service provider.
b. They are generally available to anyone.
c. They relate most directly to internal control over fi -
nan cial reporting.
d. They are meant for management of service
or ganiza tions, user entities and certain other specifi
ed entities.
A
- (d) The requirement is to identify the item that is true
about SOC 2 reports. Answer (d) is correct as such reports are
meant for management of service organizations, user entities and
certain other specifi ed entities. Answer (a) is incorrect because
it is SOC 1 reports that are meant pri marily to assist fi nancial
statement auditors. Answer (b) is incorrect because the reports
are not meant to be generally available. Answer (c) is incorrect
because they relate more directly to the SysTrust principles than
they do to internal control over fi nancial reporting.
199
Q
149. The type of service organization control (SOC) report that is for general use is a. SOC 1. b. SOC 2. c. SOC 3. d. SOC 4.
A
- (c) Answer (c) is correct because an SOC 3 report is a
general-use report. Answers (a) and (b) are incorrect be cause
SOC 1 and SOC 2 reports are restricted-use reports. Answer
(d) is incorrect because no SOC 4 report exists.
200
Q
- The AICPA has outlined auditor reports based on
three services that may be provided on service organization
controls (SOC). The type most likely to result in a restricted
use report on controls at a service organization related to
security, availabil ity, processing integrity, confi dentiality,
and/or privacy is
a. SOC 2.
b. SOC SYS.
c. SOC 6.
d. SOC OC.
A
- (a) The requirement is to identify the type of service
organization control report most likely to result in a restricted
use report on security, availability, processing integrity,
confi dential ity, and/or privacy. Answer (a) is correct as an SOC
2 report is restricted and on such content. Answers (b), (c) and
(d) are all incorrect because no such reports exist. The AICPA
has issued three service organizations control reports:
• SOC 1: Restricted use reports on controls at a service
organization relevant to a user entity’s internal control over
fi nancial reporting.
• SOC 2: Restricted use reports on controls at a service
organization related to security, availability, processing
integrity, confi dentiality, and/or privacy.
• SOC 3: General use SysTrust reports related to secu rity,
availability, processing integrity, confi dentiality, and/or privacy.
201
Q
- The internal control provisions of the Sarbanes-Oxley
Act of 2002 apply to which companies in the United States?
a. All companies.
b. SEC registrants.
c. All issuer (public) companies and nonissuer (nonpublic)
companies with more than $100,000,000 of net worth.
d. All nonissuer companies
A
- (b) The requirement is to identify the type of
companies to which the internal control provisions of the
Sarbanes-Oxley Act of 2002 apply. Answer (b) is correct
because the provisions apply to public companies that are
registered with the Securities and Exchange Commission.
Answer (a) is incorrect because nonissuer companies are
not directly affected by the control provisions. Answer (c)
is incorrect; there is no $100,000,000 requirement. Answer
(d) is incorrect because nonissuer companies are not directly
affected by the internal control provisions of the Act.
202
Q
- The framework most likely to be used by management
in its internal control assessment under requirements of the
Sarbanes-Oxley Act of 2002 is the
a. COSO internal framework.
b. COSO enterprise risk management framework.
c. FASB 37 internal control defi nitional framework.
d. AICPA internal control analysis manager.
A
- (a) The requirement is to identify the most likely
framework to be used by management in its internal control
assessment. Answer (a) is correct as the COSO internal control
framework (either the original, or the 2013 revision) is by far the
most frequently used one. Answer (b) is incorrect because while
a COSO enterprise risk management framework does exist,
it is not ordinarily used by management in its internal control
assessment. Answers (c) and (d) are incorrect because there
is no such thing as a “FASB 37 internal control defi nitional
framework” or an “AICPA internal control analysis manager.”
203
Q
- In an integrated audit, which of the following is defi ned
as a weakness in internal control that is less severe than a
material weakness but important enough to warrant attention
by those responsible for oversight of the fi nancial reporting
function?
a. Control defi ciency.
b. Unusual weakness.
c. Unusual defi ciency.
d. Signifi cant defi ciency.
A
- (d) The requirement is to identify the term that is
defi ned as a weakness in internal control that is less severe than
a material weakness but important enough to warrant attention
by those responsible for oversight of the fi nancial reporting function. Answer (d) is correct because this is the defi nition of a
signifi cant defi ciency. Answer (a) is incorrect because a control
defi ciency exists when the design or operation of a control does
not allow management, or employees, in the normal course of
performing their functions to prevent or detect misstatements
on a timely basis. Answer (b) is incorrect because an unusual
weakness is not used in the standards for integrated audits.
Answer (c) is incorrect because the term unusual defi ciency is
not used in the standards for integrated audits.
204
Q
- A material weakness is a signifi cant defi ciency (or
combination of signifi cant defi ciencies) that results in a
reasonable possibility that a misstatement of at least what
amount will not be prevented or detected?
a. An amount greater than zero.
b. An amount greater than zero, but at least
inconsequential.
c. An amount greater than inconsequential.
d. A material amount.
A
- (d) The requirement is to identify the amount involved
with a material weakness. Answer (d) is correct because a
material amount is involved. Answers (a), (b), and (c) are all
incorrect because they suggest smaller amounts.
205
Q
- The minimum likelihood of loss involved in the
consideration of a control defi ciency is
a. Remote.
b. More than remote.
c. Probable.
d. Not explicitly considered.
A
- (d) The requirement is to identify the minimum
likelihood of loss involved in the consideration of a control
defi ciency. Answer (d) is correct because a control defi ciency
is a condition in which the operation of a control does not
allow management, or employees, in the normal course of
performing their functions to prevent or detect misstatements
on a timely basis—it does not explicitly consider likelihood of
loss. Answer (a) is incorrect because the minimum likelihood
of loss is not considered. Answer (b) is incorrect because the
control defi ciency occurrence of loss need not be more than
remote. Answer (c) is incorrect because whether the minimum
likelihood of loss is probable is not considered.
206
Q
- Assume that a company has a control defi ciency
regarding the processing of cash receipts. Reconciliation
of cash accounts by a competent individual otherwise
independent of the cash function might make the likelihood of
a signifi cant misstatement due to the control defi ciency remote.
In this situation, reconciliation may be referred to as what type
of control?
a. Compensating.
b. Preventive.
c. Adjustive.
d. Nonroutine.
A
- (a) The requirement is to identify the type of control
that reconciliation of cash accounts represents. Answer (a) is
correct in that it is a compensating control which supplements
a basic underlying control, in this case basic information
processing controls related to cash. Answer (b) is incorrect
because a preventive control prevents errors or fraud from
occurring. Answer (c) is incorrect because the term “adjustive”
control is not ordinarily used. Answer (d) is incorrect because
“nonroutine” is ordinarily considered a type of transaction
(e.g., the year-end close process), not a type of control.
207
Q
- According to Public Company Accounting Oversight
Board auditing standards, what type of transaction involves
establishing a loan loss reserve?
a. Substantive transaction.
b. Routine transaction.
c. Nonroutine transaction.
d. Estimation transaction.
A
- (d) The requirement is to identify the type of transaction
that establishing loan loss reserves is. Answer (d) is correct
because estimation transactions are activities involving
management’s judgments or assumptions, such as determining the
allowance for doubtful accounts, establishing warranty reserves,
and assessing assets for impairment. Answer (a) is incorrect
because the term substantive transaction is not used in PCAOB
standards. Answer (b) is incorrect because routine transactions
are those for recurring activities, such as sales, purchases, cash
receipts and disbursements, and payroll. Answer (c) is incorrect
because nonroutine transactions occur only periodically, such as
the taking of physical inventory, calculating depreciation expense,
or adjusting for foreign currencies; nonroutine transactions
generally are not a part of the routine fl ow of transactions.
