Question 1

Which of the following would be considered a change that affects consistency?
A) Change in accounting estimate.
B) Change in accounting principle.
C) Change in classification and reclassification.
D) All of the other options are correct.

Accepted Answer

A change in accounting principle would result in a change in the way transactions are recorded, which would affect the consistency of financial statements. The other options (change in accounting estimate and change in classification/reclassification) may not necessarily affect consistency.

Question 2

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a large foreign subsidiary.Between which of the following reports should the auditor choose?
A) Adverse and unqualified with an explanatory/emphasis-of-matter paragraph added.
B) Disclaimer and unqualified with an explanatory/emphasis-of-matter paragraph added.
C) Qualified and adverse.
D) Qualified and disclaimer.

Accepted Answer

The auditor should choose between a qualified opinion and a disclaimer of opinion. A qualified opinion is appropriate when the auditor concludes that misstatements, individually or in the aggregate, are material but not pervasive. A disclaimer of opinion is appropriate when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion, and the possible effects on the financial statements could be both material and pervasive.

Question 3

Other bases of accounting (special purpose frameworks)include all of the following except:
A) tax basis.
B) non-GAAP methods used for internal reporting.
C) cash basis.
D) regulatory basis.

Accepted Answer

Tax basis, cash basis, and regulatory basis are all examples of special purpose frameworks. Non-GAAP methods used for internal reporting are not necessarily a separate basis of accounting, but rather a different method of reporting financial information within a particular basis of accounting (such as GAAP or tax basis).

Question 4

When a question arises about an entity's continued existence,the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow.An example of such a factor is the
A) possibility of purchasing certain assets rather than leasing them.
B) capability of extending the due dates of existing debt.
C) appropriateness of changing depreciation methods from double declining balance to straight line.
D) marketability of property and equipment that management plans to keep.

Accepted Answer

One factor that can mitigate the significance of negative information concerning an entity's means for maintaining adequate cash flow is the capability of extending the due dates of existing debt. This means the entity can negotiate with its lenders to stretch out the repayment terms, thereby reducing the near-term cash outflows and improving its liquidity position. It is important for the auditor to consider such factors in assessing the going concern assumption of the entity.

Question 5

When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence,the auditor should issue a(n)
A) "subject to" qualified opinion.
B) disclaimer of opinion.
C) adverse opinion.
D) unqualified opinion with a separate explanatory/emphasis-of-matter paragraph.

Accepted Answer

When the auditor is unable to obtain adequate evidence to determine the amounts associated with illegal acts, the auditor is unable to determine the impact on the financial statements. This uncertainty requires a disclaimer of opinion, which states that the audit was unable to be performed in accordance with auditing standards and therefore the auditor is unable to express an opinion. A "subject to" qualified opinion implies that the financial statements are fairly presented except for the effects of the illegal acts, which is not appropriate in this situation. An adverse opinion implies that the financial statements are materially misstated, which may not be the case if the auditor is unable to determine the impact. An unqualified opinion with an explanatory/emphasis-of-matter paragraph may be appropriate to disclose the illegal acts, but it would still require the auditor to be able to determine the impact on the financial statements.

Question 6

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 continue as a going concern?
A) Inspecting title documents to verify whether any assets are pledged as collateral.
B) Confirming with third parties the details of arrangements to maintain financial support.
C) Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.
D) Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

Accepted Answer

Confirming with third parties the details of arrangements to maintain financial support would best assist the auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern. This procedure would help determine if the entity has obtained any financial support from outside sources to continue its operations.

Question 7

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) Significant 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.

Accepted Answer

When usual trade credit from suppliers is denied, it can be an indication that the entity is experiencing financial difficulties and may not be able to meet its obligations. This condition can lead to a heightened risk of the entity not being able to continue as a going concern.

Question 8

Abbot,CPA,as principal auditor for consolidated financial statements,is using a qualified report of another auditor.Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor.What recognition,if any,must Abbot make in his report to the report of the other audit?
A) He need make no reference.
B) He must refer to the qualification of the other auditor and qualify his report likewise.
C) He must include the other auditor's report with his report but need not qualify his report.
D) He must include the other auditor's report with his report and give an explanation of its significance.

Accepted Answer

Abbot is not required to make any reference to the qualification of the other auditor in his report. As he is willing to accept responsibility for the work of the other auditor, Abbot's report should focus solely on the consolidated financial statements and the results of his own audit work.

Question 9

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 flows from operating activities are negative.
B) Research and development projects are postponed.
C) Significant related party transactions are pervasive.
D) Stock dividends replace annual cash dividends.

Accepted Answer

Negative cash flows from operating activities indicate that the entity is not generating enough cash to fund its operations, which is a strong indication that it may not be able to continue as a going concern.

Question 10

The predecessor auditor,after properly communicating with the successor auditor,has reissued a report because the entity desires comparative financial statements.The predecessor auditor's report should make
A) no reference to the report or the work of the successor auditor.
B) reference to the work of the successor auditor in the scope paragraph.
C) reference to both the work and the report of the successor auditor in the opinion paragraph.
D) reference to the report of the successor auditor in the scope paragraph.

Accepted Answer

When a predecessor auditor reissues a report for the purpose of presenting comparative financial statements, the report should not make any reference to the work or report of the successor auditor. The predecessor's report should focus solely on the financial statements for the period they audited.

Question 11

When an auditor expresses an adverse opinion,the opinion paragraph should include
A) the principal effects of the departure from generally accepted accounting principles.
B) a direct reference to a separate paragraph disclosing the basis for the opinion.
C) the substantive reasons for the financial statements being misleading.
D) a description of the uncertainty or scope limitation that prevents an unqualified opinion.

Accepted Answer

An adverse opinion indicates that the financial statements are materially misstated. The opinion paragraph should include a direct reference to a separate paragraph that discloses the basis for the adverse opinion, explaining the reasons for the auditor's conclusion.

Question 12

An auditor is reporting on cash basis financial statements.These statements are best referred to in his or her report by which one of the following descriptions?
A) Financial position and results of operations arising from cash transactions.
B) Assets and liabilities arising from cash transactions and revenue collected and expenses paid.
C) Balance sheet and income statement resulting from cash transactions.
D) Cash balance sheet and the source and application of funds.

Accepted Answer

The answer of An auditor is reporting on cash basis...

Question 13

An auditor would issue an adverse opinion if
A) the audit was begun by other independent auditors who withdrew from the engagement.
B) a qualified opinion cannot be given because the auditor lacks independence.
C) a restriction on the scope of the audit was significant.
D) the statements taken as a whole do not fairly present the financial condition and results of operations of the company.

Accepted Answer

An adverse opinion is issued when the financial statements taken as a whole do not fairly present the financial condition and results of operations of the company. This means that the auditor has found material misstatements in the financial statements that are pervasive or fundamental in nature, and thus cannot be overlooked or corrected. It is the most severe type of audit opinion that can be issued.

Question 14

Which of the following would be considered a change that does not affect consistency?
A) Change in accounting estimate.
B) Change in accounting principle.
C) Correction of an error in principle.
D) None of these are considered changes that do not affect consistency.

Accepted Answer

A change in accounting estimate does not affect consistency because it involves revising an estimate based on new information or developments and does not alter the fundamental accounting principles used by the company. Changes in accounting principle and the correction of errors in principle both affect consistency because they involve a change in the overall approach to accounting for a particular item or transaction.

Question 15

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties.The inclusion of this separate paragraph
A) is considered an "except for" qualification of the opinion.
B) violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
C) necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
D) is appropriate and would not negate the unqualified opinion.

Accepted Answer

Including a separate paragraph to emphasize significant transactions with related parties is appropriate and would not negate the unqualified opinion. While it may indicate a potential risk or concern, it does not necessarily mean the financial statements are misstated. The auditor is simply providing additional information to users of the financial statements.

Question 16

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating 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.

Accepted Answer

The marketability of assets that management plans to sell would indicate that the entity has a plan to generate cash to meet its obligations and continue operating. This evidence would help mitigate the adverse effects of events causing substantial doubt about the entity's ability to continue as a going concern. The other choices do not specifically address the entity's ability to continue as a going concern.

Question 17

Which of the following circumstances should be recognized as a consistency modification in the auditor's report,whether or not the item is fully disclosed in the financial statements?
A) A change in accounting estimate.
B) A change from an unacceptable accounting principle to a generally accepted one.
C) Correction of an error not involving a change in accounting principle.
D) A change in classification.

Accepted Answer

A change from an unacceptable accounting principle to a generally accepted one is a consistency modification that should be recognized in the auditor's report, as it affects the comparability of financial statements across periods.

Question 18

When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes,it is the responsibility of the auditor to present the information,if practicable,in the auditor's report and express a(n)
A) qualified opinion or a disclaimer of opinion.
B) qualified opinion or an adverse opinion.
C) adverse opinion or a disclaimer of opinion.
D) qualified opinion or an unqualified opinion.

Accepted Answer

When necessary information is omitted, the auditor should express a qualified or adverse opinion, depending on the materiality and pervasiveness of the omission.

Question 19

In the auditor's report,the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary.The principal auditor could justify this decision if,among other requirements,the principal auditor
A) issues an unqualified opinion on the consolidated financial statements.
B) learns that the other CPA issued an unqualified opinion on the subsidiary's financial statements.
C) is unable to review the other CPA's audit programs and working papers.
D) is satisfied as to the other CPA's independence and professional reputation.

Accepted Answer

The principal auditor can decide not to make reference to another CPA if they are satisfied with the other CPA's independence and professional reputation. This indicates trust in the quality of the other CPA's work, making it unnecessary to mention them in the audit report.

Question 20

Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report?
A) A change in accounting estimate.
B) A change in accounting principle.
C) A change in the companies included in combined financial statements.
D) A correction of an error in principle.

Accepted Answer

A change in accounting estimate does not affect the consistency phrase because it is considered a normal part of business operations and does not represent a change in accounting principles or policies.

Quiz 18: Reports on Audited Financial Statements

Which of the following would be considered a change that affects consistency?

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a large foreign subsidiary.Between which of the following reports should the auditor choose?

Other bases of accounting (special purpose frameworks) include all of the following except:

When a question arises about an entity's continued existence,the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow.An example of such a factor is the

When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence,the auditor should issue a(n)

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 continue as a going concern?

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?

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?

The predecessor auditor,after properly communicating with the successor auditor,has reissued a report because the entity desires comparative financial statements.The predecessor auditor's report should make

When an auditor expresses an adverse opinion,the opinion paragraph should include

An auditor is reporting on cash basis financial statements.These statements are best referred to in his or her report by which one of the following descriptions?

An auditor would issue an adverse opinion if

Which of the following would be considered a change that does not affect consistency?

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties.The inclusion of this separate paragraph

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the

Which of the following circumstances should be recognized as a consistency modification in the auditor's report,whether or not the item is fully disclosed in the financial statements?

When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes,it is the responsibility of the auditor to present the information,if practicable,in the auditor's report and express a(n)

In the auditor's report,the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary.The principal auditor could justify this decision if,among other requirements,the principal auditor

Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report?