Exam 1: CPA Auditing and Attestation Exam

Question 1

Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?

A) FASB Technical Bulletins.
B) AICPA Accounting Interpretations.
C) FASB Statements of Financial Accounting Concepts.
D) AICPA Technical Practice Aids.

Answer 1

A
Explanation: Choice "A" is correct. In accordance with the GAAP hierarchy, FASB Technical Bulletins are considered the most authoritative of the sources listed in the question. Choice "B" is incorrect. Of the sources listed, AICPA Accounting Interpretations would be considered the second most authoritative. Choice "C" is incorrect. FASB Statements of Financial Accounting Concepts are among the least authoritative sources of GAAP available to auditors. Choice "D" is incorrect. AICPA Technical Practice Aids are among the least authoritative sources of GAAP available to auditors.

Question 2

March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing 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.

Answer 2

A
Explanation: Choice "A" is correct. The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday. Choice "B" is incorrect. Wall Corp. did not engage the auditors and thus the report should not be addressed to them. Choices "C" and "D" are incorrect. Even though the bank will be relying on the audited financial statements in determining whether to make the loan, the bank did not directly engage the auditing firm and accordingly, the report should not be addressed to them.

Question 3

In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If the amounts in question could materially affect current operating results, the auditor would:

A) Be unable to express an opinion on the current year's results of operations and cash flows.
B) Express a qualified opinion on the financial statements because of a client-imposed scope limitation.
C) Withdraw from the engagement and refuse to be associated with the financial statements.
D) Specifically state that the financial statements are not comparable to the prior year due to an uncertainty.

Answer 3

A
Explanation: Choice "A" is correct. Since the auditor was unable to gather sufficient evidence on the beginning balances of the balance sheet accounts, the auditor would be unable to express an opinion on the current year's results of operations and cash flows. The auditor could express an opinion on the statement of financial position. Choice "B" is incorrect. Since the scope limitation could have a pervasive effect on the financial statements (affecting all assets and liabilities), a disclaimer of opinion (and not merely a qualified opinion) is required on the income statement and statement of cash flows. An opinion may be expressed on the year-end statement of financial position. Choice "C" is incorrect. The auditor does not need to withdraw from the engagement and refuse to be associated with the financial statements. Choice "D" is incorrect. An uncertainty does not exist. The auditor can express an opinion on one of the financial statements.

Question 4

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:

A) Objective judgment.
B) Independent integrity.
C) Professional skepticism.
D) Impartial conservatism.

Question 5

Management of Edington Industries plans to disclose an uncertainty as follows: The Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. The auditor is satisfied that sufficient audit evidence supports management's assertions about the nature and disclosure of the uncertainty. What type of opinion should the auditor express under these circumstances?

A) Unqualified without an explanatory paragraph.
B) "Subject to" qualified.
C) "Except for" qualified.
D) Disclaimer of opinion.

Question 6

In which of the following circumstances would an auditor not express an unqualified opinion?

A) There has been a material change between periods in accounting principles.
B) Quarterly financial data required by the SEC has been omitted.
C) The auditor wishes to emphasize an unusually important subsequent event.
D) The auditor is unable to obtain audited financial statements of a consolidated investee.

Question 7

When an auditor believes there is substantial doubt about the ability of an entity to continue as a going concern, all of the following should be included in the audit documentation, except:

A) The conditions that gave rise to the substantial doubt.
B) The auditor's conclusion about whether substantial doubt remains or is alleviated.
C) Management's conclusion regarding whether substantial doubt remains or is alleviated.
D) The effect of the auditor's conclusion on the auditor's report.

Question 8

In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient 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 applied consistently.

Question 9

Which of the following provides the most authoritative guidance for an auditor?

A) An AICPA audit and accounting guide that provides specific guidance with respect to the accounting practices in the client's industry.
B) A Journal of Accountancy article discussing implementation of a new standard.
C) General guidance provided by a Statement on Auditing Standards.
D) Specific guidance provided by an interpretation of a Statement on Auditing Standards.

Question 10

Which of the following statements is correct concerning an auditor's responsibilities regarding financial statements?

A) An auditor may not draft an entity's financial statements based on information from management's accounting system.
B) The adoption of sound accounting policies is an implicit part of an auditor's responsibilities.
C) An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.
D) Making suggestions that are adopted about an entity's internal control environment impairs an auditor's independence.

Question 11

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?

A) The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures.
B) Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.
C) There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements.
D) The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method.

Question 12

An auditor may not issue a qualified opinion when:

A) An accounting principle at variance with GAAP is used
B) The auditor lacks independence with respect to the audited entity.
C) A scope limitation prevents the auditor from completing an important audit procedure.
D) The auditor's report refers to the work of a specialist.

Question 13

Which of the following accurately depicts the auditor's responsibility with respect to Statements on Auditing Standards?

A) The auditor is required to follow the guidance provided by the Standards, without exception.
B) The auditor is generally required to follow the guidance provided by Standards with which he or she is familiar, but will not be held responsible for departing from provisions of which he or she was unaware.
C) The auditor is generally required to follow the guidance provided by the Standards, unless following such guidance would result in an audit that is not cost-effective.
D) The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures.

Question 14

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the:

A) Option A
B) Option B
C) Option C
D) Option D

Question 15

An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor:

A) Wishes to emphasize that the entity had significant transactions with related parties.
B) Concurs with the entity's change in its method of computing depreciation.
C) Discovers that supplementary information required by FASB has been omitted.
D) Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.

Question 16

Which of the following statements is a basic element of the auditor's standard report?

A) The disclosures provide reasonable assurance that the financial statements are free of material misstatement.
B) The auditor evaluated the overall internal control.
C) An audit includes assessing significant estimates made by management.
D) The financial statements are consistent with those of the prior period.

Question 17

After considering an entity's negative trends and financial difficulties, 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 management's plans to:

A) Increase current dividend distributions.
B) Reduce existing lines of credit.
C) Increase ownership equity.
D) Purchase assets formerly leased.

Question 18

Which of the following categories is included in generally accepted auditing standards?

A) Standards of review.
B) Standards of planning.
C) Standards of fieldwork.
D) Standards of evidence.

Question 19

For an entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, the principles selected should:

A) Be applied on a basis consistent with those followed in the prior year.
B) Be approved by the Auditing Standards Board or the appropriate industry subcommittee.
C) Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.
D) Match the principles used by most other entities within the entity's particular industry.

Question 20

Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an:

A) Unqualified opinion.
B) Opinion qualified because of a lack of consistency.
C) Opinion qualified because of a departure from GAAP.
D) Adverse opinion.

Question 21

The following explanatory paragraph was included in an auditor's report to indicate a lack of consistency: "As discussed in note T to the financial statements, the company changed its method of computing depreciation in X0." How should the auditor report on this matter if the auditor concurred with the change? Type of Location of opinion explanatory paragraph.

A) Unqualified Before opinion paragraph
B) Unqualified After opinion paragraph
C) Qualified Before opinion paragraph
D) Qualified After opinion paragraph

Question 22

Under which of the following circumstances would a disclaimer of opinion not be appropriate?

A) The financial statements fail to contain adequate disclosure of related party transactions.
B) The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.
C) The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances.
D) The auditor is unable to determine the amounts associated with illegal acts committed by the client's management.

Question 23

In which of the following situations would a principal auditor least likely make reference to another auditor who audited a subsidiary of the entity?

A) The other auditor was retained by the principal auditor and the work was performed under the principal auditor's guidance and control.
B) The principal auditor finds it impracticable to review the other auditor's work or otherwise be satisfied as to the other auditor's work.
C) The financial statements audited by the other auditor are material to the consolidated financial statements covered by the principal auditor's opinion.
D) The principal auditor is unable to be satisfied as to the independence and professional reputation of the other auditor.

Question 24

In the auditor's report, the principal auditor decides not to make reference to another CPA who audited a client'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 audit programs and audit documentation of the other CPA.
D) Is satisfied as to the independence and professional reputation of the other CPA.

Question 25

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.

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) Documenting that internal control is not being relied on.
B) Reading the financial statements for obvious material misstatements.
C) Ascertaining whether the financial statements are in conformity with GAAP.
D) Determining whether management has elected to omit substantially all required disclosures.

Question 27

In which of the following situations would an auditor ordinarily issue an unqualified audit opinion without an explanatory paragraph?

A) The auditor wishes to emphasize that the entity had significant related party transactions.
B) The auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion.
C) The entity issues financial statements that present financial position and results of operations, but omits the statement of cash flows.
D) The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.

Question 28

When single-year financial statements are presented, an auditor ordinarily would express an unqualified opinion in an unmodified report if the:

A) Auditor is unable to obtain audited financial statements supporting the entity's investment in a foreign affiliate.
B) Entity declines to present a statement of cash flows with its balance sheet and related statements of income and retained earnings.
C) Auditor wishes to emphasize an accounting matter affecting the comparability of the financial statements with those of the prior year.
D) Prior year's financial statements were audited by another CPA whose report, which expressed an unqualified opinion, is not presented.

Question 29

In which of the following circumstances would an auditor most likely add an explanatory paragraph to the standard report while not affecting the auditor's unqualified opinion?

A) The auditor is asked to report on the balance sheet, but not on the other basic financial 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.

Question 30

When disclaiming an opinion due to a client-imposed scope limitation, an auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards. The auditor should also omit the:

A) Option A
B) Option B
C) Option C
D) Option D

Question 31

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion?

A) The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures.
B) The financial statements fail to disclose information that is required by generally accepted accounting principles.
C) The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.
D) Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

Question 32

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.

Question 33

Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35% of all assets. Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should issue a(an):

A) "Except for" qualified opinion.
B) Disclaimer of opinion.
C) Unqualified opinion with a separate explanatory paragraph.
D) Unqualified opinion with an Explanation: in the scope paragraph. Unqualified opinion with an Explanation: in the scope paragraph.

Question 34

A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when management:

A) Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary.
B) Refuses to disclose in the notes to the financial statements related party transactions authorized by the Board of Directors.
C) Does not provide the auditor with an engagement letter specifying the responsibilities of both the entity and the auditor.
D) Fails to correct a significant deficiency in internal control communicated to those charged with governance after the prior year's audit.

Question 35

Green, CPA, concludes that there is substantial doubt about JKL Co.'s ability to continue as a going concern. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report should:

A) Option A
B) Option B
C) Option C
D) Option D

Question 36

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) Regulation S-X exemption.
B) Report on pro forma financial statements.
C) Unaudited association report.
D) Disclaimer of opinion.

Question 37

If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an):

A) Disclaimer of opinion.
B) Qualified opinion.
C) Review report.
D) Unqualified opinion with a separate explanatory paragraph.

Question 38

Reference in a principal auditor'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) Lack of materiality of the portion of the financial statements audited by the other auditor.
C) Principal auditor's recognition of the other auditor's competence, reputation, and professional certification.
D) Different opinions the auditors are expressing on the components of the financial statements that each audited.

Question 39

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 related to future products.
B) Accumulate treasury stock at prices favorable to Hill's historic price range.
C) Purchase equipment and production facilities currently being leased.
D) Negotiate reductions in required dividends being paid on preferred stock.

Question 40

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.

Question 41

Which of the following is not true regarding an engagement to provide a written report on the application of accounting principles?

A) An accountant is prohibited from providing a report on the application of accounting principles to a transaction not involving the facts and circumstances of a specific entity.
B) The accountant's written report on the application of accounting principles should include an identification of the specific entity involved.
C) An accountant is prohibited from providing a report on the application of accounting principles to a proposed future transaction involving the facts and circumstances of a specific entity.
D) The accountant's written report on the application of accounting principles should include a paragraph restricting the use of the report.

Question 42

An auditor is considering whether the omission of a substantive procedure considered necessary at the time of an audit may impair the auditor's present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if the:

A) Financial statements and auditor's report were not distributed beyond management and the board of directors.
B) Auditor's previously expressed opinion was qualified because of a departure from GAAP.
C) Results of other procedures that were applied tend to compensate for the procedure omitted.
D) Omission is due to unreasonable delays by client personnel in providing data on a timely basis.

Question 43

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 makes no reference to the supplementary information.
B) A disclaimer of opinion is issued on supplementary information that is not clearly distinguished from the financial statements and is not marked "unaudited."
C) 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.
D) 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.

Question 44

On February 9, Brown, CPA, expressed an unqualified opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first:

A) Request Web's permission to perform substantive procedures that would provide a satisfactory basis for the opinion.
B) Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements.
C) Take no additional action because subsequent events have no effect on the financial statements that were reported on.
D) Assess the importance of the omitted procedures to Brown's present ability to support the opinion.

Question 45

Which of the following statements is not true regarding the auditor's responsibility for subsequent events?

A) The auditor has an active responsibility to make continuing inquiries between the date of the auditor's report and the date on which the report is submitted.
B) The auditor has an active responsibility to make continuing inquiries between the date of the financial statements and the date of the auditor's report.
C) The auditor has an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained.
D) The auditor has no active responsibility to make continuing inquiries after the date of the auditor's report.

Question 46

Blue, CPA, has been asked to render an opinion on the application of accounting principles to a specific transaction by an entity that is audited by another CPA. Blue may accept this engagement, but should:

A) Consult with the continuing CPA to obtain information relevant to the transaction.
B) Report the engagement's findings to the entity's audit committee, the continuing CPA, and management.
C) Disclaim any opinion that the hypothetical application of accounting principles conforms with generally accepted accounting principles.
D) Notify the entity that the report is for the general use of all interested parties.

Question 47

Before reissuing the prior year's auditor's report on the financial statements of a former client, the predecessor auditor should obtain letters of representation from the:

A) Former client's management and the board of directors.
B) Former client's attorney and management.
C) Former client's board of directors and the successor auditor.
D) Successor auditor and the former client's management.

Question 48

When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative financial statements, the auditor should express a qualified opinion:

A) Only in the year of the accounting principle change.
B) Each year that the financial statements initially reflecting 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.

Question 49

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

A) Examine a sample of transactions that occurred since the year-end to verify the effectiveness of computer controls.
B) Inquire of management whether there have been significant changes in working capital since the year-end.
C) Recompute depreciation charges for plant assets sold for substantial gains since the year-end.
D) Reperform the tests of controls that indicated significant deficiencies in the operation of internal control.

Question 50

When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if:

A) The effects of the adverse financial conditions likely will cause a bankruptcy filing.
B) Information about the entity's ability to continue as a going concern is not disclosed.
C) Management has no plans to reduce or delay future expenditures.
D) Negative trends and recurring operating losses appear to be irreversible.

Question 51

After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless:

A) Information, which existed at the report date and may affect the report, comes to the auditor's attention.
B) Management of the entity requests the auditor to reissue the auditor's report.
C) Information about an event that occurred after the date of the auditor's report comes to the auditor's attention.
D) Final determinations or resolutions are made of contingencies that had been disclosed in the financial statements.

Question 52

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) A technological development that could affect the entity's future ability to continue as a going concern.
B) The discovery of information regarding a contingency that existed before the financial statements were issued.
C) The entity's sale of a subsidiary that accounts for 30% of the entity's consolidated sales.
D) The final resolution of a lawsuit explained in a separate paragraph of the auditor's report.

Question 53

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) An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern.
B) A contingency is resolved that had been disclosed in the audited financial statements.
C) New information is discovered concerning undisclosed lease transactions of the audited period.
D) A subsidiary is sold that accounts for 25% of the entity's consolidated net income.

Question 54

An auditor should disclose the substantive reasons for expressing an adverse opinion in an explanatory paragraph:

A) Preceding the scope paragraph.
B) Preceding the opinion paragraph.
C) Following the opinion paragraph.
D) Within the notes to the financial statements.

Question 55

Comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should:

A) Indicate the substantive reasons for the qualification in the predecessor auditor's opinion.
B) Request the client to reissue the predecessor's report on the prior year's statements.
C) Issue an updated comparative audit report indicating the division of responsibility.
D) Express an opinion only on the current year's statements and make no reference to the prior year's statements.

Question 56

Which of the following audit 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) Reading the minutes of meetings of the stockholders and the board of directors.
B) Comparing the market value of property to amounts owed on the property.
C) Reviewing lease agreements to determine whether leased assets should be capitalized.
D) Inspecting title documents to verify whether any assets are pledged as collateral.

Question 57

Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country's accounting principles, an auditor practicing in the U.S. should:

A) Understand the accounting principles generally accepted in the other country.
B) Be certified by the appropriate auditing or accountancy board of the other country.
C) Notify management that the auditor is required to disclaim an opinion on the financial statements.
D) Receive a waiver from the auditor's state board of accountancy to perform the engagement.

Question 58

Restrictions imposed by a retail entity that is a new client prevent an auditor from observing any physical inventories. These inventories account for 40% of the entity's assets. Alternative auditing procedures cannot be applied due to the nature of the entity's records. Under these circumstances, the auditor should express a(an):

A) Disclaimer of opinion.
B) Qualified opinion.
C) Adverse opinion.
D) Unqualified opinion with an explanatory paragraph.

Question 59

Wilson, CPA, obtained sufficient appropriate audit evidence to render an opinion on Abco's December 31, X1, financial statements on March 6, X2. A subsequent event requiring adjustment to the X1 financial statements occurred on April 10, X2, and came to Wilson's attention on April 24, X2. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated:

A) March 6, X2.
B) April 10, X2.
C) April 24, X2.
D) Using dual dating.

Question 60

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) Successor independent auditor.
B) Client's audit committee.
C) Principal underwriter.
D) Securities and Exchange Commission.

Question 61

Which of the following standards requires a critical review of the work done and the judgment exercised by those assisting in an audit at every level of supervision?

A) Proficiency.
B) Audit risk.
C) Inspection.
D) Due care.

Question 62

When an auditor qualifies an opinion because of the inability to confirm accounts receivable by direct communication with debtors, the wording of the opinion paragraph of the auditor's report should indicate that the qualification pertains to the:

A) Limitation on the auditor's scope.
B) Possible effects on the financial statements.
C) Lack of sufficient appropriate audit evidence.
D) Departure from generally accepted auditing standards.

Question 63

Which of the following best describes the auditor's reporting responsibility concerning information accompanying the basic financial statements in an auditor-submitted document?

A) The auditor has no reporting responsibility concerning information accompanying the basic financial statements.
B) The auditor should report on the information accompanying the basic financial statements only if the auditor participated in its preparation.
C) The auditor should report on the information accompanying the basic financial statements only if the auditor did not participate in its preparation.
D) The auditor should report on all the information included in the document.

Question 64

An auditor's report contains the following sentences: We did not audit the financial statements of JK Co., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 17 percent and 19 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for JK Co., is based solely on the report of the other auditors. These sentences:

A) Are an improper form of reporting.
B) Divide responsibility.
C) Disclaim an opinion.
D) Qualify the opinion.

Question 65

When an auditor submits a document containing audited financial statements to a client, and those financial statements include supplementary information required by GAAP, the auditor may choose any of the following options, except:

A) Express an opinion on the information, if he or she has been engaged to examine such information.
B) Express negative assurance on the information, if review procedures have been appropriately performed.
C) Report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate auditing procedures have been applied.
D) Disclaim an opinion on the information.

Question 66

An auditor most likely would issue a disclaimer of opinion because of:

A) Inadequate disclosure of material information.
B) The omission of the statement of cash flows.
C) A material departure from generally accepted accounting principles.
D) Management's refusal to furnish written representations.

Question 67

Which of the following best describes what is meant by the term generally accepted auditing standards?

A) Rules acknowledged by the accounting profession because of their universal application.
B) Pronouncements issued by the Auditing Standards Board.
C) Measures of the quality of the auditor's performance.
D) Procedures to be used to gather evidence to support financial statements.

Question 68

Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?

A) Option A
B) Option B
C) Option C
D) Option D

Question 69

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. The auditor believes that the financial statements do not require revision, but the client is unwilling to revise or eliminate the material inconsistency in the other information. Under these circumstances, what action would the auditor most likely take?

A) Consider the situation closed because the other information is not in the audited financial statements.
B) Issue an "except for" qualified opinion after discussing the matter with the client's audit committee.
C) Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory paragraph.
D) Revise the auditor's report to include a separate explanatory paragraph describing the material inconsistency.

Question 70

Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances. The auditor should first:

A) Request the permission of the client to undertake the confirmation of accounts receivable.
B) Perform alternative procedures to provide a satisfactory basis for the unqualified opinion.
C) Assess the importance of the omitted procedures to the auditor's ability to support the expressed opinion.
D) Inquire whether there are persons currently relying, or likely to rely, on the unqualified opinion.

Question 71

In its annual report to shareholders, Lake Co. included a separate management report that contained additional information. Lake's auditor is expressing an unqualified opinion on Lake's financial statements but has not been engaged to examine and report on this additional information. What is the auditor's responsibility concerning such a report?

A) The auditor should add an explanatory paragraph to the report on the financial statements disclaiming an opinion on the additional information.
B) The auditor has no obligation to read the management report or to verify the accuracy or appropriateness of its contents.
C) The auditor should request Lake to place the management report in its annual report where it will not be misinterpreted to be the auditor's assertion.
D) The auditor should read the management report and consider whether it contains a material misstatement of fact.

Question 72

An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor's report. The auditor's responsibility for events occurring subsequent to the original date was:

A) Extended to subsequent events occurring through the date of reissuance of the report.
B) Extended to include all events occurring since the original date of the auditor's report.
C) Limited to the specific event referenced.
D) Limited to include only events occurring up to the date of the last subsequent event referenced.

Question 73

An auditor is reporting on condensed financial statements for an annual period that are derived from the audited financial statements of a publicly-held entity. The auditor's opinion should indicate whether the information in the condensed financial statements is fairly stated in all material respects:

A) In conformity with accounting principles generally accepted in the United States of America.
B) In relation to the complete financial statements.
C) In conformity with another comprehensive basis of accounting.
D) In relation to supplementary filings under federal security statutes

Question 74

For an entity that does not receive governmental financial assistance, an auditor's standard report on financial statements generally would not refer to:

A) Significant estimates made by management.
B) An assessment of the entity's accounting principles.
C) Management's responsibility for the financial statements.
D) The entity's internal control.

Question 75

When audited financial statements are presented in a client's document containing other information, the auditor should:

A) Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
B) Add an explanatory paragraph to the auditor's report without changing the opinion on the financial statements.
C) Perform the appropriate substantive auditing procedures to corroborate the other information.
D) Read the other information to determine that it is consistent with the audited financial statements.

Question 76

An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should:

A) Be limited to data derived from the audited financial statements.
B) Be distributed only to senior management and the board of directors.
C) State that the presentation is a comprehensive basis of accounting other than GAAP.
D) Indicate that the data are not fairly stated in all material respects.

Question 77

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

A) Adverse and unqualified with an explanatory paragraph added.
B) Disclaimer and unqualified with an explanatory paragraph added.
C) Qualified and adverse.
D) Qualified and disclaimer.

Question 78

An auditor may report on condensed financial statements that are derived from complete financial statements if the:

A) Condensed financial statements are distributed to stockholders along with the complete financial statements.
B) Auditor describes the additional procedures performed on the condensed financial statements.
C) Auditor indicates whether the information in the condensed financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived.
D) Condensed financial statements are presented in comparative form with the prior year's condensed financial statements.

Question 79

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.

Question 80

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

A) Recomputing a sample of large-dollar transactions occurring after year-end for arithmetic accuracy.
B) Investigating changes in stockholders' equity occurring after year-end.
C) Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after yearend.
D) Confirming bank accounts established after year-end.