Question 1

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.

Accepted Answer

Choice "b" is correct. If the auditor concurred with the change, a lack of consistency in applying GAAP would result in an unqualified opinion with an explanatory paragraph following the opinion paragraph. Choice "c" is incorrect. If the change in accounting principle is not accounted for properly, then a qualified opinion would be appropriate and the explanatory paragraph would appear before the opinion paragraph. Choices "a" and "d" are incorrect, per the above rules.

Question 2

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

Accepted Answer

Choice "A" is correct. The failure of the financial statements to contain adequate disclosure of related party transactions, or other required disclosures, would result in a qualified or adverse opinion, not a disclaimer of opinion. Choice "B" is incorrect. A client's refusal to permit its attorney to furnish information requested in a letter of audit inquiry would generally result in a disclaimer of opinion. Choice "C" is incorrect. The auditor's inability to observe physical inventories or apply alternative procedures to verify their balances could result in a disclaimer. Choice "D" is incorrect. The auditor's inability to determine the amounts associated with illegal acts committed by the client's management could result in a disclaimer.

Question 3

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

Accepted Answer

Choice "A" is correct. When the principal auditor assumes responsibility for the other auditor's work, the principal auditor would not mention the other auditor in his audit report (opinion). The principal auditor would generally assume responsibility after reviewing the audit documentation of the other auditor and performing supplemental audit tests, or by reputation, e.g., if the other auditor is a correspondent (foreign) firm in which the principal auditor has developed confidence. Choices "B" and "C" are incorrect. When the principal auditor finds it impractical to review the other auditor's work, or when the FS audited by the other auditor are material, it is more likely that the principal auditor will divide responsibility and make reference to the other auditor. Choice "D" is incorrect. The principal auditor should always make inquiries regarding the independence and professional reputation of the other auditor. Inability to become satisfied in this regard would constitute a scope limitation, resulting in a qualified opinion or disclaimer of opinion. In either of these scenarios, it is likely that the other auditor would be mentioned within an explanatory paragraph.

Question 4

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:

Accepted Answer

Choice "D" is correct. If, among other requirements, the principal auditor is satisfied as to the independence and the professional reputation of the other auditor, the principal auditor may express an opinion on the financial statements taken as a whole without making reference to the audit of the other auditor. Choice "A" is incorrect. Whether or not an unqualified opinion is issued is not the determining factor as to whether the principal auditor must make reference to another CPA. Choice "B" is incorrect. Whether or not an unqualified opinion is issued on the subsidiary's financial statements is not the determining factor as to whether the principal auditor must make reference to another CPA. Choice "C" is incorrect. If the principal auditor is unable to review the audit programs and audit documentation of the other CPA, he or she is likely to divide responsibility by making reference to the other CPA in the auditor's report.

Question 5

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

Accepted Answer

Choice "B" is correct. The opinion paragraph in an adverse opinion reads, "in our opinion, because of the effects of the matters discussed in the preceding paragraphs, the financial statements...." Choice "A" is incorrect. The principal effects of the departure from GAAP are included in the explanatory paragraph, not the opinion paragraph. Choice "C" is incorrect. The "substantive reasons for the financial statements being misleading" are discussed in the explanatory paragraph, not the opinion paragraph. Choice "D" is incorrect. Scope limitations pertain to disclaimers of opinion, not adverse opinions. (It is very important to memorize the qualifying phrases in the qualified, adverse, and disclaimer of opinions.)

Question 6

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:

Accepted Answer

Choice "B" is correct. The accountant is only required to read the financial statements for obvious material misstatements. Choice "B" is incorrect. The accountant need not document that internal control is not being relied on. Choices "C" and "D" are incorrect. The accountant is not required to evaluate conformity with GAAP, but any known departures (including inadequate disclosure) should be described in the disclaimer.

Question 7

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

Accepted Answer

Choice "B" is correct. An auditor would generally issue an unqualified audit opinion without an explanatory paragraph when the auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion. The auditor would modify his/her report (all three paragraphs), but would not add an explanatory paragraph. Choices "A" and "D" are incorrect. An auditor ordinarily would issue an unqualified opinion with an explanatory paragraph if he or she wishes to emphasize that the entity had significant related party transactions, or if the auditor has substantial doubt about the entity's ability to continue as a going concern (even if the circumstances are fully disclosed in the financial statements). Choice "C" is incorrect. If the entity issues financial statements that present financial position and results of operations but omit the statement of cash flows, the opinion will be qualified.

Question 8

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

Accepted Answer

Choice "D" is correct. Since only single-year financial statements are presented, the fact that another CPA audited the prior year's financial statements is not relevant. Therefore, the auditor would express an unqualified opinion in an unmodified report. Choice "A" is incorrect. The situation described would result in a qualified opinion or disclaimer of opinion due to a scope limitation. Choice "B" is incorrect. The situation described would result in a qualified opinion due to inadequate disclosure. Choice "C" is incorrect. The situation described would result in an otherwise unqualified opinion modified by adding an additional explanatory paragraph after the opinion paragraph.

Question 9

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?

Accepted Answer

Choice "B" is correct. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph to reflect that conclusion. Choice "A" is incorrect. Reporting on just the balance sheet is acceptable provided access to financial information is not limited. Such reporting does not require an explanatory paragraph. Choice "C" is incorrect. If the auditor concludes that management's estimate is unreasonable and that its effect is to cause the financial statements to be materially misstated, the auditor should express a qualified or an adverse opinion. Choice "D" is incorrect. Restrictions on the scope of the audit, whether imposed by the client or by circumstances, may require the auditor to qualify or to disclaim an opinion.

Question 10

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:

Accepted Answer

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. The auditor should also omit the scope paragraph. The opinion paragraph is not omitted; however, it indicates that no opinion is expressed. Choices "a", "b", and "c" are incorrect, as per the above Explanation.

Question 11

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

Accepted Answer

Choice "B" is correct. Failure to disclose information that is required by GAAP is a departure from GAAP. Departures from GAAP result in a qualified or an adverse opinion. Choice "A" is incorrect. If the auditor is unable to observe physical inventory and is unable to become satisfied through alternative means, that is a scope limitation. Scope limitations result in either a qualified opinion or a disclaimer of opinion. Choice "C" is incorrect. The auditor can report on one financial statement and not the others. This does not preclude issuance of an unqualified opinion. Choice "D" is incorrect. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph (after the opinion paragraph in the unqualified report) to reflect that conclusion.

Question 12

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?

Accepted Answer

Choice "B" is correct. Confirming with third parties the details of arrangements to provide or "maintain (needed) financial support" is an audit procedure that may identify doubts about an entity's ability to continue as a going concern. Choice "A" is incorrect. Inspecting title documents provides evidence of ownership of assets but would not necessarily identify conditions affecting an entity's ability to continue as a going concern. Choice "C" is incorrect. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation provides evidence of completeness and valuation, but would not necessarily identify conditions affecting an entity's ability to continue as a going concern. Choice "D" is incorrect. Comparing an entity's policies to other entities in the industry would not necessarily identify conditions affecting an entity's ability to continue as a going concern.

Question 13

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):

Accepted Answer

Choice "B" is correct. R,estrictions of scope imposed on the audit of such a large (35%) asset would require a disclaimer of opinion. C,hoices "A," and "C," are incorrect. T,he asset not audited is too large for a qualified opinion and much too large for an unqualified opinion. C,hoice "D," is incorrect. E,xplanatory language does not get inserted into the scope paragraph, nor is an unqualified opinion appropriate.

Question 14

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

Accepted Answer

Choice "A" is correct. Restrictions on the scope of the audit, such as the timing of the work, the inability to obtain sufficient appropriate audit evidence, or an inadequacy in the accounting records, may require the auditor to qualify or disclaim an opinion. Inability to obtain audited financial statements supporting the entity's investment in a foreign subsidiary is such a restriction on the scope of the audit. Choice "B" is incorrect. Client refusal to disclose related party transactions in the notes to the financial statements is a GAAP problem, not a scope problem. For a GAAP problem, the auditor must either issue a qualified or adverse opinion. Choice "C" is incorrect. The auditor sends an engagement letter to the client, not vice versa. Choice "D" is incorrect. Management may choose not to correct a significant deficiency in internal control if the cost of correcting the condition outweighs the benefit.

Question 15

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:

Accepted Answer

Choice "a" is correct. "Yes - Yes - Yes." When a CPA concludes that there is substantial doubt about an entity's ability to continue as a going concern and the entity adequately discloses its financial difficulties, an unqualified opinion is appropriate. An explanatory paragraph (following the opinion paragraph) should be used to highlight the situation. This paragraph should include the phrases "substantial doubt" and "going concern." Choices "b", "c", and "d" are incorrect, per above.

Question 16

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):

Accepted Answer

Choice "D" is correct. When an accountant is associated with the financial statements of a public entity, but has not audited or reviewed such statements, the accountant must issue a report disclaiming any opinion on the statements. Choices "A", "B", and "C" are incorrect since a disclaimer is required in this case.

Question 17

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):

Accepted Answer

Choice "B" is correct. If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires qualification of the opinion. Choice "A" is incorrect. If the company fails to present its statement of cash flows, this is considered inadequate disclosure. The auditor would not issue a disclaimer of opinion for inadequate disclosure. Choice "C" is incorrect. The auditor would not issue a review report when performing an audit. Choice "D" is incorrect. The auditor cannot issue an unqualified report if the client omits a statement of cash flows from the financial statements.

Question 18

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:

Accepted Answer

Choice "A" is correct. Reference to another auditor indicates division of responsibility for the audits of the components of the overall financial statements. Choice "B" is incorrect. Reference to another auditor would not generally be made if the other auditor's portion of the financial statements were immaterial. Choice "C" is incorrect. The reference in the report is not meant to recognize the qualifications of the other auditor, but simply to divide the responsibility between the two auditors. Choice "D" is incorrect. The reference to the other auditor would be made regardless of what type of opinion is expressed by each auditor.

Question 19

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:

Accepted Answer

Choice "D" is correct. Negotiating reductions in required dividends would conserve cash, which would be a mitigating factor in Davis' concerns about Hill's ability to continue as a going concern. Choice "A" is incorrect. Accelerating R&D projects would use cash and impair the company's ability to continue as a going concern. Choice "B" is incorrect. Accumulating treasury stock would consume cash and aggravate the situation. Choice "C" is incorrect. Purchasing equipment that is currently leased would use cash and impair the company further.

Question 20

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:

Accepted Answer

Choice "D" is correct. Emphasis of a matter should be disclosed in an explanatory paragraph appended to an otherwise unqualified opinion. Choice "A" is incorrect. An "except for" qualification is used for a scope limitation or a departure from GAAP, but not for emphasis of a matter. Choice "B" is incorrect. The auditor may emphasize a matter even if it is included in the footnotes. Choice "C" is incorrect. A phrase such as "with the foregoing Explanation" should not be used in an unqualified opinion.

Exam 1: CPA Auditing and Attestation Exam