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.
