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Question 1

Which of the following events occurring after the issuance of an auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
A.
The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report.
B.
A technological development that could affect the entity’s future ability to continue as a going concern.
C.
The discovery of information regarding a contingency that existed before the financial statements were issued.
D.
The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated sales.

Answer 1

C. With respect to events occurring after the issuance of an auditor’s report, the auditor is only responsible for information that existed at the audit report date.

Question 2

When do you disclose the reasons for an inability to obtain sufficient appropriate audit evidence in a basis-for-modification paragraph?

Answer 2

Following the opinion paragraph.

An auditor should disclose the reasons for an inability to obtain sufficient appropriate audit evidence in a basis-for-modification paragraph following the opinion paragraph.

Question 3

Which of the following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other than generally accepted accounting principles?
I.
Basis of accounting used by an entity to file its income tax return.
II.
Cash receipts and disbursements basis of accounting.

Answer 3

B. Both

Both the basis of accounting used by an entity to file its income tax return and the cash receipts and disbursements basis of accounting are comprehensive bases of accounting other than GAAP.

Question 4

For an auditor of an issuer, critical audit matters should be communicated in the Critical Audit Matters section, which:

Answer 4

Immediately follows the Basis for Opinion section.

Order:

1. The Opinion on the Financial Statements
2. Basis for Opinion
3. Critical Audit Matters section

Question 5

The inclusion of an emphasis-of-matter paragraph in the auditor’s report:
A.
May be used as a substitute for the auditor expressing a qualified opinion.
B.
Affects the auditor’s opinion.
C.
May be used as a substitute for financial statement disclosures excluded by management.
D.
Does not affect the auditor’s opinion.

Answer 5

D. The inclusion of an emphasis-of-matter paragraph in the auditor’s report does not affect the auditor’s opinion. The emphasis-of-matter paragraph should indicate that “Our opinion is not modified with respect to this matter.”

Question 6

A registration statement filed with the SEC contains the reports of two independent auditors on their audits of financial statements for different periods. The predecessor auditor who audited the prior-period financial statements generally should obtain a letter of representation from the:
A.
Client’s audit committee.
B.
Successor independent auditor.
C.
Principal underwriter.
D.
Securities and Exchange Commission.

Answer 6

B. Successor independent auditor

Before reissuing the prior year’s audit report on the financial statements of a former client, the auditor should 1) read the financial statements of the current period, 2) compare the prior period information that the auditor reported on with the financial statements to be presented for comparative purposes, and 3) obtain letters of representation from management of the former client and from the successor auditor. The representation letter from management should indicate whether any of management’s previous representations should be modified and whether there have been any subsequent events that would affect the previous financial statements. The representation letter from the successor auditor should state whether the successor auditor’s audit disclosed any issues of a material nature that might affect the previous financial statements.

Question 7

After issuing an auditor’s report, an auditor becomes aware of facts that existed at the report date that would have affected the report had the auditor known of the facts at the time. What is the first thing the auditor should do?
A.
Determine whether there are persons currently relying on, or likely to rely on, the financial statements and whether those persons would attach importance to the information.
B.
Notify regulatory agencies having jurisdiction over the client that the auditor’s report should not be relied upon from this point forward.
C.
Issue revised financial statements and auditor’s report describing the reason for the revision in a note to the financial statements.
D.
Notify each member of the board of directors that the auditor’s report may not be associated with the financial statements from this point forward.

Answer 7

A. If an auditor becomes aware of material information that would have affected the report, and that persons are currently relying or are likely to rely on the financial statements covered by the report, the auditor should take appropriate action. In order to do this, the auditor must first determine whether there are indeed persons relying or likely to rely on the financial statements.

Question 8

Which of the following is a condition that must be met in order for an auditor to issue an opinion on supplementary information in relation to the financial statements as a whole?
A.
The supplementary information was derived from and relates directly to the information used to prepare the financial statements.
B.
The auditor must consider subsequent events with respect to supplementary information.
C.
The supplementary information must be in a separate document from the audited financial statements.
D.
A modified opinion was not issued on the financial statements.

Answer 8

A. A condition that must be met in order for an auditor to issue an opinion on supplementary information is that the supplementary information was derived from and relates directly to the information used to prepare the financial statements.

Question 9

Which of the following procedures would an auditor generally perform regarding subsequent events?
A.
Inspect inventory items that were ordered before the year-end but arrived after the year-end.
B.
Test internal control activities that were previously reported to management as inadequate.
C.
Compare the latest available interim financial statements with the statements being audited.
D.
Review the client’s cutoff bank statements for several months after the year-end.

Answer 9

C An auditor generally would compare the latest available interim financial statements with the statements being audited when performing procedures regarding subsequent events.

Question 10

The auditor’s report should include reference to the United States as the country of origin of:
I.
The accounting principles used to prepare the financial statements.
II.
The auditing standards the auditor followed in performing the audit.

Answer 10

Both

Question 11

Which best describes the auditor’s responsibility for required supplementary information that is outside the basic financial statements but required by the FASB?
A.
The auditor has no responsibility to apply procedures to the required supplementary information, as it is outside the basic financial statements.
B.
The auditor’s report on the financial statements should include both an opinion on the supplementary information and a statement restricting the use of the report.
C.
Read the required supplementary information and only add an other-matter paragraph when the auditor identifies material departures in the required supplementary information.
D.
Apply certain limited procedures to the required supplementary information and add a separate section with the heading “Required Supplementary Information” to the financial statement audit report.

Answer 11

D. When audited financial statements are presented in a client’s document containing required supplementary information that is outside the basic financial statements, the auditor should apply certain limited procedures to the required supplementary information and add a separate section with the heading “Required Supplementary Information” to the financial statement audit report.

Question 12

Reference in a group engagement partner’s report to the fact that part of the audit was performed by another auditor most likely would be an indication of the:
A.
Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.
B.
Different opinions the auditors are expressing on the components of the financial statements that each audited.
C.
Group engagement partner’s recognition of the component auditor’s competence, reputation, and professional certification.
D.
Lack of materiality of the portion of the financial statements audited by the other auditor.

Answer 12

A. Reference to a component auditor indicates division of responsibility for the audits of the components of the overall financial statements.

Question 13

Reference in a group engagement partner’s report to the fact that part of the audit was performed by another auditor most likely would be an indication of the:
A.
Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.
B.
Different opinions the auditors are expressing on the components of the financial statements that each audited.
C.
Group engagement partner’s recognition of the component auditor’s competence, reputation, and professional certification.
D.
Lack of materiality of the portion of the financial statements audited by the other auditor.

Answer 13

A. Reference to a component auditor indicates division of responsibility for the audits of the components of the overall financial statements.

Question 14

An auditor of a nonissuer may not issue a qualified opinion when:
A.
The auditor’s report refers to the work of an actuary.
B.
Management prevents the auditor from observing the entity’s inventory.
C.
The entity omits the statement of cash flows from its financial statements.
D.
The auditor lacks independence with respect to the entity.

Answer 14

D. An auditor of a nonissuer may not issue a qualified opinion when the auditor lacks independence with respect to the entity. A disclaimer of opinion should be issued when an auditor lacks independence.

Question 15

An auditor expressed an adverse opinion on the prior year’s financial statements because of a lack of adequate disclosure. These statements are properly stated in the current year and presented in comparative form with the current year’s financial statements. The auditor’s updated report on the prior year’s financial statements should:
A.
Express an unmodified opinion with an emphasis-of-matter paragraph added to the report.
B.
Not change.
C.
Express a qualified opinion with an emphasis-of-matter paragraph added to the report.
D.
Make no reference to the type of opinion expressed on the prior year’s financial statements.

Answer 15

A. The emphasis-of-matter paragraph (or an other-matter paragraph) should be added to the auditor’s report to explain the situation.

Question 16

Which of the following procedures is an auditor least likely to perform if material disclosures required by GAAP are omitted?
A.
Disclose the omitted information in the notes to the financial statements.
B.
Discuss the omission of such information with management.
C.
Disclose the omitted information in the basis-for-modification paragraph.
D.
Discuss the omission of such information with those charged with governance.

Answer 16

A. Management is responsible for the financial statements. The auditor may include information within the auditor’s report, but may not include information within the financial statements and the related notes.

Question 17

In May, Year 4, an auditor reissues the auditor’s report on the Year 2 financial statements at a continuing client’s request. The Year 2 financial 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 current-period auditor’s report date on the reissued report.
C.
Use the original report date on the reissued report.
D.
Use the release date of the reissued report.

Answer 17

C. If the auditor reissues the audit report at the client’s request, the auditor should use the original report date on the reissued report. Use of a subsequent date implies that the auditor has done additional work.

Question 18

If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be:
A.
Treated as a consistency modification in the auditor’s report for the current year.
B.
Disclosed in the notes to the financial statements of the current year.
C.
Disclosed in the notes to the financial statements and referred to in the auditor’s report for the current year.
D.
Treated as a subsequent event.

Answer 18

Choice “B” is correct. If an accounting change does not have a material effect on the FS of the current year, it will be disclosed in the notes to the FS for the current year, but no modification of the auditor’s report is necessary.

Question 19

If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be:
A.
Treated as a consistency modification in the auditor’s report for the current year.
B.
Disclosed in the notes to the financial statements of the current year.
C.
Disclosed in the notes to the financial statements and referred to in the auditor’s report for the current year.
D.
Treated as a subsequent event.

Answer 19

Choice “B” is correct. If an accounting change does not have a material effect on the FS of the current year, it will be disclosed in the notes to the FS for the current year, but no modification of the auditor’s report is necessary.

Question 20

In which of the following situations would a disclaimer of opinion be the most appropriate?
A.
The internal auditor lacks independence.
B.
There is insufficient disclosure in the notes to the financial statements of reportable segments.
C.
The auditor is unable to obtain the audited financial statements of a significant subsidiary.
D.
The financial statements are presented in accordance with the cash basis of accounting.

Answer 20

Choice “C” is correct. If the auditor is unable to obtain the audited financial statements of a significant subsidiary, a scope limitation exists. Assuming that the effect is material and pervasive, the auditor would issue a disclaimer of opinion.
Choice “A” is incorrect. The internal auditor is not independent. If the external auditor is not independent, then the auditor must issue a disclaimer of opinion.

Question 21

Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
A.
The auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme.
B.
Management refuses to produce documentation verifying the ownership of its equipment and production facilities.
C.
The chief financial officer and the chief executive officer are unwilling to sign the management representation letter.
D.
The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows.

Answer 21

Choice “D” is correct. An expression of a disclaimer of opinion would be inappropriate when the company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows. The statement of cash flows is a requirement of GAAP to be considered a complete set of financial statements. A material misstatement of financial statements, such as the omission of information that is required to be presented, would result in a qualified or adverse opinion.

Question 22

A client changes from FIFO to LIFO for accounting for inventory and appropriately discloses the change in the footnotes. This change does not have a material effect on the financial statements in the current year but the change is expected to have a material effect in later years. In the current-year auditor’s report, the auditor should:
A.
Issue an unmodified opinion.
B.
Issue an unmodified opinion with an other-matter paragraph.
C.
Issue an unmodified opinion with an emphasis-of-matter paragraph.
D.
Issue a qualified or adverse opinion.

Answer 22

Choice “A” is correct. If a change in accounting principle, such as a change in accounting for inventory, does not have a material effect on the financial statements in the current year but the change is expected to have a material effect in later years, the auditor is not required to recognize the change in the auditor’s report in the current year. Therefore, the auditor should issue an unmodified opinion and does not need to describe the change in an emphasis-of-matter paragraph.

Question 23

When opining on whether supplementary information presented with audited financial statements is fairly stated in all material respects and in relation to the financial statements as a whole, an auditor of a nonissuer must ensure that:
A.
Neither an adverse opinion nor a disclaimer of opinion was issued on the financial statements.
B.
The supplementary information is measurable.
C.
The supplementary information complies with applicable federal and state laws.
D.
The board of directors has reviewed the supplementary information.

Answer 23

Choice “A” is correct. In order to issue an opinion on supplementary information, the auditor must determine that, along with other conditions, neither an adverse opinion nor a disclaimer of opinion was issued on the financial statements.

Question 24

When disclaiming an opinion because of an insufficiency of audit evidence in an audit of a nonissuer, an auditor should refer to the situation in the:
Responsibilities
of Management
section
Notes to the
financial statements
A.
Yes
Yes
B.
No
Yes
C.
No
No
D.
Yes
No

Answer 24

Choice “C” is correct. When a disclaimer of opinion is issued due to a lack of sufficient audit evidence, the lack of evidence should be disclosed in the Basis for Disclaimer of Opinion section rather than the Responsibilities of Management section of the auditor’s report.

Question 25

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A.
Confirming bank accounts established after year-end.
B.
Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising after year-end.
C.
Investigating changes in stockholders’ equity occurring after year-end.
D.
Recomputing a sample of large-dollar transactions occurring after year-end for arithmetic accuracy.

Answer 25

Choice “B” is correct. The auditor would most likely inquire of the entity’s legal counsel concerning litigation, claims and assessments arising after year-end in order to obtain evidence about the occurrence of subsequent events. Claims arising after year-end might well impact the year-end financial statements.

Choice “C” is incorrect. The auditor would inquire about changes in stockholders’ equity occurring after year-end, but would not generally perform an investigation of such items.

Question 26

When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond:
A.
Reading the financial statements for obvious material misstatements.
B.
Ascertaining whether the financial statements are in conformity with GAAP.
C.
Determining whether management has elected to omit substantially all required disclosures.
D.
Documenting that internal control is not being relied on.

Answer 26

Choice “A” is correct. The accountant is only required to read the financial statements for obvious material misstatements.

Question 27

An auditor most likely would express an unmodified opinion and would not add emphasis-of-matter or other-matter paragraphs to the report if the auditor:
A.
Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.
B.
The auditor uncovers material misstatements that require a change in audit opinion.
C.
Concurs with the entity’s change in its method of computing depreciation.
D.
Wishes to emphasize that the entity had significant transactions with related parties.

Answer 27

Choice “A” is correct. An auditor most likely would express an unmodified opinion and would not add an additional paragraph to the report if the auditor believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.

Question 28

When disclaiming an opinion due to a client-imposed scope limitation in an audit of a nonissuer, an auditor should indicate in the Basis for Disclaimer of Opinion section why the auditor could not obtain sufficient appropriate audit evidence. The auditor should also omit the:

Auditor’s
Responsibility
section
Opinion
section
A.
No
Yes
B.
Yes
Yes
C.
Yes
No
D.
No
No

Answer 28

Choice “D” is correct. When disclaiming an opinion because of scope limitations, the auditor should indicate in a separate paragraph(s) the reasons that the audit did not comply with GAAS (in the Basis for Disclaimer of Opinion section). The Auditor’s Responsibility section is revised to mention the disclaimer, but is not omitted. The Opinion section is not omitted; however it indicates that no opinion is expressed

Question 29

When disclaiming an opinion due to a client-imposed scope limitation in an audit of a nonissuer, an auditor should indicate in the Basis for Disclaimer of Opinion section why the auditor could not obtain sufficient appropriate audit evidence. The auditor should also omit the:

Auditor’s
Responsibility
section
Opinion
section
A.
No
Yes
B.
Yes
Yes
C.
Yes
No
D.
No
No

Answer 29

Choice “D” is correct. When disclaiming an opinion because of scope limitations, the auditor should indicate in a separate paragraph(s) the reasons that the audit did not comply with GAAS (in the Basis for Disclaimer of Opinion section). The Auditor’s Responsibility section is revised to mention the disclaimer, but is not omitted. The Opinion section is not omitted; however it indicates that no opinion is expressed

Question 30

A CPA firm has decided to rely on the audit work performed by another audit firm. Which of the following procedures should the CPA firm perform when taking responsibility for the other firm’s audit work?
A.
Reference the reliance on the other firm’s work in the first paragraph of the opinion in the audit report.
B.
Obtain and attach a copy of the other firm’s representation letter and audit report to the opinion that the CPA firm issues.
C.
Reference the reliance on the other firm’s work in a footnote disclosure to the financial statements.
D.
Review the other firm’s audit workpapers and reperform a subset of audit testing to validate the firm’s conclusions.

Answer 30

Choice “D” is correct. When a CPA firm decides to take responsibility for another firm’s audit work, the CPA firm should review the other firm’s audit workpapers and reperform a subset of audit testing to validate the firm’s conclusions.

Question 31

Which of the following is a true statement regarding other information included in documents containing audited financial statements?
A.
The auditor is not required to reference the other information in the audit report on the financial statements.
B.
The auditor may choose to add an emphasis-of-matter paragraph, which includes a disclaimer of opinion on other information, in the audit report on the financial statements.
C.
The auditor has no responsibility for other information as long as it is outside the basic financial statements.
D.
The auditor should add a separate section with the heading “Other Information,” which includes a disclaimer of opinion on other information, in the audit report on the financial statements.

Answer 31

Choice “D” is correct. The auditor should add a separate section with the heading “Other Information,” which includes a disclaimer of opinion on other information, in the audit report on the financial statements. Disclaimer of opinion means to deny providing an opinion. The section will include the statement, “we do not express an opinion . . . .”

Question 32

When there has been a change in accounting principle that materially affects the comparability of the nonissuer’s comparative financial statements presented and the auditor concurs with the change, the auditor should:
Concur
explicitly with
the change
Issue an
“except for”
qualified
opinion
Refer to the
change in an
emphasis-of-matter
paragraph
A.
Yes
No
Yes
B.
No
No
Yes
C.
Yes
Yes
No
D.
No
Yes
No

Answer 32

Choice “B” is correct. No - No - Yes.
When a change in accounting principle materially affects the comparability of the comparative FS, the auditor should refer to the change in an emphasis-of-matter paragraph. An unmodified opinion would be appropriate and the auditor’s concurrence with the change in GAAP would be implicit through the issuance of the unmodified opinion.

Question 33

Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?
When read in
conjunction with
Note X
With the foregoing
explanation
A.
Yes
No
B.
No
Yes
C.
Yes
Yes
D.
No
No

Answer 33

Choice “D” is correct. No − No.
A qualified opinion phrase is, “In our opinion, except for [reference to matter giving rise to qualification] described in the Basis for Qualification section of our report…”

Question 34

A nonissuer changes from an accounting principle not in accordance with the applicable reporting framework to an accounting principle in accordance with the applicable reporting framework. How should the auditor characterize such a change?
A.
As a correction of a misstatement.
B.
As a change in classification.
C.
As a change in accounting principle.
D.
As a change in reporting entity.

Answer 34

Choice “A” is correct. Because the original accounting principle was not in accordance with the applicable reporting framework, the change is considered the correction of a previous misstatement. The auditor would need to evaluate the materiality of the misstatement and consider whether the previous opinion requires modification.

Question 35

A nonissuer entity adequately discloses in the footnotes that there is substantial doubt about the entity’s ability to continue as a going concern. An auditor decides to issue an unmodified opinion on the financial statements and determines that management’s plans do not alleviate the doubt. The auditor’s report should refer to going concern in:
A.
An other-matter paragraph.
B.
A separate section of the report.
C.
The Opinion section.
D.
The Basis for Opinion section.

Answer 35

Choice “B” is correct. When substantial doubt about an entity’s ability to continue as a going concern remains, the auditor’s report should be modified to include a separate section with the heading “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern.”

Question 36

An auditor is unable to complete a procedure during an audit. Based on this situation, which opinion is least likely to be rendered?
A.
A disclaimer of opinion.
B.
A qualified opinion.
C.
An adverse opinion.
D.
An unmodified opinion.

Answer 36

Choice “C” is correct. An adverse opinion is rendered when there is a departure from GAAP, which is not the case in this question.

Choice “D” is incorrect. An unmodified opinion would be rendered if the effect on the financial statements were immaterial, or if acceptable alternative procedures could be performed.

Question 37

An annual shareholders’ report includes audited financial statements and contains a report by management on operations. The audited financial statements are fairly stated. The auditor is not engaged to report on the other information included in the annual report, but the auditor notices that there is a material inconsistency between the amount of revenue reported by management in the report on operations and the amount of revenue reported in the audited financial statements. If management refuses to make the revision to the revenue included in management’s report on operations, the auditor least likely would:
A.
Withhold the use of the auditor’s report.
B.
Withdraw from the engagement.
C.
Include in the auditor’s report a separate section with the heading “Other Information” describing the inconsistency.
D.
Modify the opinion on the audited financial statements to a qualified or adverse opinion.

Answer 37

Choice “D” is correct. The auditor’s opinion on the audited financial statements relates to the basic financial statements and related footnotes. The information included in the financial statements is fairly stated; therefore, the opinion related to these financial statements and footnotes should not be modified.

Question 38

Which of the following reporting options is least likely with regard to supplementary information that is required by GAAP?
A.
The auditor’s report on the financial statements includes a separate section stating that the auditor has applied the required procedures.
B.
The auditor’s report on the financial statements includes both an opinion on the supplementary information and a statement restricting the use of the report.
C.
The auditor’s report on the financial statements includes an opinion regarding whether the supplementary information is fairly stated in all material respects in relation to the financial statements taken as a whole.
D.
A disclaimer of opinion is issued on supplementary information.

Answer 38

Choice “B” is correct. There is no requirement that the auditor’s report on supplementary information required by GAAP be restricted.

Question 39

Jules, CPA, is reporting on comparative financial statements, but Shah, CPA conducted the previous year’s audit. Which of the following is not true in this situation?
A.
If Shah’s report will be presented, management will need to provide a representation letter to Shah.
B.
Dual dating may be used to indicate the appropriate dates for each audit.
C.
If Shah’s report was qualified due to a scope limitation, Jules may still issue an unmodified opinion on the current year’s financial statements.
D.
If Shah’s report is not presented, an other-matter paragraph should be included to describe this situation.

Answer 39

Choice “B” is correct. Dual dating is used when there is a subsequent event occurring after the original date of the auditor’s report, and the auditor wishes to extend responsibility only for the one event. It is not used for comparative financial statements (the date appropriate for the most recent audit is used in this case).

Question 40

Subsequently discovered facts that lead to a change in an audit opinion may be presented in:
Emphasis-of-Matter
Paragraph
Other-Matter
Paragraph
A.
Yes
No
B.
Yes
Yes
C.
No
Yes
D.
No
No

Answer 40

Choice “B” is correct. Subsequently discovered facts that lead to a change in an audit opinion may be presented in an emphasis-of-matter paragraph or other-matter paragraph.

Question 41

Jewel, CPA, audited Infinite Co.’s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel’s auditor’s report, which expressed a qualified 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 qualification.
A.
II and III only.
B.
I, II, and III.
C.
I and II only.
D.
I only.

Answer 41

Choice “B” is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an Other-Matter (Explanatory) paragraph of the report 1) that the financial statements of the prior period were audited by another auditor, 2) the date of the previous report, 3) the type of report issued by the predecessor auditor, and if the report was modified, the substantive reasons therefor and 4) the nature of any emphasis-of-matter, other-matter, or explanatory paragraph included in the previous report. The successor auditor may name the predecessor auditor only if the predecessor auditor’s practice was acquired by or merged with that of the successor auditor.

Question 42

An auditor’s report under U.S. auditing standards that refers to a scope limitation that is material but not pervasive contains the words, “In our opinion, except for the below-mentioned limitation on the scope of our audit . . . .” This is considered a(n):
A.
Qualified opinion
B.
Example of inappropriate wording
C.
Disclaimer of opinion
D.
Adverse opinion

Answer 42

Choice “B” is correct. “In our opinion, except for the below-mentioned limitation on the scope of our audit . . .” is an example of inappropriate wording. When the auditor expresses a qualified opinion due to a scope limitation, the auditor should state in the opinion paragraph that the qualification pertains to the possible effects of the matter on the financial statements and not to the scope limitation itself. The wording used should be, “In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section . . .

Question 43

When financial statements contain a departure from U.S. GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should express an opinion that is:
A.
Qualified.
B.
Unmodified.
C.
Qualified or adverse, depending on pervasiveness.
D.
Adverse.

Answer 43

Choice “B” is correct. When circumstances indicate that a financial presentation in accordance with U.S. GAAP would be misleading, a departure from U.S. GAAP is permissible. In such cases, the auditor should issue an unmodified opinion because the financial statements are not materially misstated.

Question 44

Subsequent to the issuance of an auditor’s report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
A.
Request that management disclose the newly discovered information by issuing revised financial statements.
B.
Issue revised pro forma financial statements taking into consideration the newly discovered information.
C.
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
D.
Give public notice that the auditor is no longer associated with financial statements.

Answer 44

Choice “C” is correct. When subsequently discovered information is found both to be reliable and to have existed at the date of the auditor’s report, the auditor should determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Choice “A” is incorrect. The auditor would request that management disclose the newly discovered information only after determining whether there are persons relying on the information.

Question 45

The phrase “U.S. generally accepted accounting principles” is an accounting term that:
A.
Includes broad guidelines of general application but not detailed practices and procedures.
B.
Encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time.
C.
Provides a measure of conventions, rules, and procedures governed by the AICPA.
D.
Is included in the audit report to indicate that the audit has been conducted in accordance with generally accepted auditing standards (GAAS).

Answer 45

Choice “B” is correct. The literature pertaining to U.S. GAAP changes over time, and therefore U.S. generally accepted accounting principles can be said to encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. U.S. GAAP is one of the financial reporting frameworks acceptable for preparation of financial statements. IFRS is another one.
Choice “A” is incorrect. The literature pertaining to U.S. GAAP does provide detailed practices and procedures.
Choice “C” is incorrect. The phrase “U.S. generally accepted accounting principles” does not provide a measure of conventions, rules, and procedures governed by the AICPA. The AICPA provides Statements on Auditing Standards, which relate to proper performance of a financial statement audit, not to accounting principles.
Choice “D” is incorrect. Inclusion of the phrase “U.S. generally accepted accounting principles” in the audit report indicates whether the financial statements are presented in accordance with the conventions, rules, and procedures that define accepted accounting practice in the United States. Inclusion of this phrase does not indicate whether the audit has been conducted in accordance with generally accepted auditing standards (GAAS).

Question 46

When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):
A.
Qualified opinion.
B.
Disclaimer of opinion.
C.
Unaudited association report.
D.
Compilation report.

Answer 46

Choice “B” is correct. A “disclaimer of opinion” must be issued when a CPA is “associated” with FS of a publicly held entity, but has not audited or (interim) reviewed such FS.

Choice “D” is incorrect. A “compilation report” refers to a report related to a non-public entity.

Question 47

Management of a nonissuer believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the auditor should express a (an):
A.
Qualified opinion due to a scope limitation.
B.
Unmodified opinion.
C.
Qualified opinion due to a material misstatement of the financial statements.
D.
Unmodified opinion with an other-matter paragraph.

Answer 47

Choice “B” is correct. If a contingent liability is probable, but not estimable, and it is disclosed in the footnotes, the auditor should issue an unmodified opinion.

Choice “D” is incorrect. If a contingent liability is probable, but not estimable, and it is disclosed in the footnotes, the auditor should issue an unmodified opinion. An other-matter paragraph would not be used in this situation, although the auditor could choose to add a emphasis-of-matter paragraph describing the uncertainty.