Question 1

An auditor was unable to obtain sufficient appropriate audit evidence concerning certain transactions due to an inadequacy in the entity's accounting records. The auditor would choose between issuing a(an):

Accepted Answer

Choice "D" is correct. Client-imposed restrictions of scope such as those caused by inadequate records would cause the auditor to choose between issuing a disclaimer of opinion and a qualified opinion. Choice "A" is incorrect. An unqualified opinion would only be justified if the transactions in question were not material, but in such situations, no explanatory paragraph would be required. Choices "B" and "C" are incorrect. An adverse opinion pertains to GAAP and would not be used for reporting restrictions of scope.

Question 2

When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented and the auditor concurs with the change, the auditor should:

Accepted Answer

Choice "A" 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 explanatory paragraph following the unqualified opinion paragraph. Choices "B" and "C" are incorrect. The auditor's concurrence with a change in GAAP is implicit, not explicit. Choice "D" is incorrect. An unqualified opinion should be issued, not an "except for" qualified opinion.

Question 3

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:

Accepted Answer

Choice "D" 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 the introductory paragraph of the report 1) that the financial statements of the prior period were audited by another auditor, 2) the date of his report, 3) the type of report issued by the predecessor auditor, and 4) if the report was other than a standard unqualified report, the substantive reasons therefor. 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. Choices "A", "B", and "C" are incorrect, based on the above Explanation.

Question 4

In May X4, an auditor reissues the auditor's report on the X2 financial statements at a continuing client's request. The X2 financial statements are not restated and the auditor does not revise the wording of the report. The auditor should:

Accepted Answer

Choice "C" is correct. 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. Choice "A" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date. Choice "B" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date. Choice "D" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date.

Question 5

An auditor expressed a qualified opinion on the prior year's financial statements because of a lack of adequate disclosure. These financial statements are properly restated 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:

Accepted Answer

Choice "D" is correct. If an auditor has previously qualified his or her opinion on financial statements of a prior period, and the prior period statements are restated to conform with GAAP, the auditor should express an unqualified opinion on the restated financial statements. In addition, the auditor would state the substantive reasons for the change in opinion in an explanatory paragraph preceding the opinion paragraph. Choice "A" is incorrect. The original report would not be presented. Choice "B" is incorrect. The auditor would change the opinion on the restated financial statements from that previously issued. Choice "C" is incorrect. The auditor would state the substantive reasons for the change in opinion in an explanatory paragraph preceding the opinion paragraph.

Question 6

An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(an):

Accepted Answer

Choice "C" is correct. If an accounting change has no material effect on the financial statements in the current year, but a material future effect, the auditor must ensure that the change is disclosed in the footnotes whenever the financial statements of the change period are presented, but does not have to recognize the change in the current year's audit report. Choice "A" is incorrect. Accounting changes that are accounted for properly do not result in qualified opinions. Choices "B" and "D" are incorrect. A consistency modification (explanatory paragraph) is not necessary when the effect of a change is immaterial.

Question 7

When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate explanatory paragraph and modify the:

Accepted Answer

Choice "D" is correct. In a report qualified for inadequate disclosure, the auditor would add an explanatory paragraph and modify the opinion paragraph, but the introductory and scope paragraphs would not be modified. Choices "A", "B", and "C" are incorrect, as per the above Explanation.

Question 8

An auditor may reasonably issue an "except for" qualified opinion for a(an):

Accepted Answer

Choice "c" is correct. Yes - Yes. An "except for" qualified opinion is expressed when the "exceptions to GAAP" are not material enough to warrant an adverse opinion, or when scope restrictions are not material enough to warrant a disclaimer. Choices "a", "b", and "d" are incorrect, per rule above.

Question 9

A CPA's standard report on audited financial statements would be inappropriate if it referred to:

Accepted Answer

Choice "D" is correct. The CPA's standard report on audited financial statements does not include matters related to the auditor's assessment of specific risk factors. Choice "A" is incorrect. The CPA's standard report on audited financial statements states that, "These financial statements are the responsibility of the Company's management." Choices "B" and "C" are incorrect. The CPA's standard report on audited financial statements states that, "An audit also includes assessing the accounting principles used and significant estimates made by management."

Question 10

When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the auditor's report. This paragraph should identify the nature of the change and:

Accepted Answer

Choice "D" is correct. The paragraph should refer to the note in the financial statements that discusses the change in detail. Following is an example of an appropriate explanatory paragraph: "As discussed in Note X to the financial statements, the company changed its method of accounting for income taxes in X2." Choice "A" is incorrect. The auditor need not explain why a change from one generally accepted accounting principle to another is justified. Choice "B" is incorrect. The paragraph should not identify the cumulative effect of the change on the audited financial statements. Choice "C" is incorrect. The auditor should never explicitly state concurrence with a change. If the auditor opposes the change, a qualified or adverse opinion should be issued.

Question 11

When a qualified opinion results from a limitation on the scope of the audit, the situation should be described in an explanatory paragraph:

Accepted Answer

Choice "D" is correct. When a qualified opinion results from a limitation of scope, it should be described in an explanatory paragraph preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report. Choices "A", "B", and "C" are incorrect, as they do not comply with the rule above.

Question 12

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:

Accepted Answer

Choice "C" is correct. Leasing rather than purchasing operating facilities results in reduced (or at least delayed) expenditures, which is a mitigating factor in a going concern situation. Choice "A" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Repurchasing stock is an outflow of cash that would reduce ownership equity; as such, it is not a mitigating factor. Choice "B" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Issuing stock options does not fall into any of these categories and would not be considered a mitigating factor. Choice "D" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Accelerating the due date of an existing mortgage would increase expenditures, and therefore would not be a mitigating factor.

Question 13

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include a(an):

Accepted Answer

Choice "D" is correct. Yes - No. If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern and that the entity's disclosures are adequate, then the audit report may be either: -Unqualified with explanatory paragraph, or -Disclaimed. (Generally, an unqualified opinion is issued, but the auditor is not prohibited from choosing to issue a disclaimer.) Choice "A" is incorrect. An "except for" qualified opinion would be appropriate if the entity's disclosures were inadequate. Choice "B" is incorrect. While an unqualified opinion is generally issued, the auditor is not prohibited from choosing to issue a disclaimer; for example, in areas involving a high degree of uncertainty. Choice "C" is incorrect, per above.

Question 14

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 "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 "A" is incorrect. A "compilation report" refers to a report related to a non-public entity. Choice "C" is incorrect. There is no such thing as an "unaudited association report." Choice "D" is incorrect. The auditor did not audit the FS, so he/she cannot issue an opinion on them.

Question 15

Under which of the following circumstances would an auditor's expression of an unqualified opinion be inappropriate?

Accepted Answer

Choice "A" is correct. If the auditor is unable to obtain the audited financial statements of a significant subsidiary, a scope limitation exists. Assuming the effect is material, the auditor would issue either a qualified opinion or a disclaimer of opinion. Choice "B" is incorrect. Financial statements prepared on an entity's income tax basis are "other comprehensive basis of accounting" (OCBOA) financial statements. The auditor may issue a special report, which can include an unqualified opinion, on OCBOA financial statements. Choice "C" is incorrect. Significant deficiencies in the design and operation of an entity's internal control do not preclude issuance of an unqualified opinion, although they do increase the risk of material misstatement and will likely result in modifications to the nature, timing, and extent of the auditor's testing. Choice "D" is incorrect. An unqualified opinion may still be expressed when there are significant changes in year-end account balances as compared to prior year balances, as long as the auditor has obtained sufficient appropriate audit evidence about the current balances. Reports on Comparative Financial Statements

Question 16

Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of fieldwork made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditor's report most likely contained a(an):

Accepted Answer

Choice "A" is correct. There is a presumption that the auditor will request the confirmation of accounts receivable during an audit unless accounts receivable are immaterial, the use of confirmations would be ineffective, or the assessed inherent risk is so low that the evidence expected to be provided by analytical procedures or other substantive tests of details would be sufficient. In this example, the confirmation of accounts receivable by direct communication with the debtors would be ineffective. If Green was able to apply alternative audit procedures and was satisfied as to the reasonableness of the account balances, then an unqualified opinion could be issued. Choice "B" is incorrect. Since Green was satisfied as far as the accounts receivable balances, there is no need to add an explanatory paragraph. Choice "C" is incorrect. Since Green was able to perform alternative procedures and was satisfied as far as the reasonableness of the account balances, there is no scope limitation. Choice "D" is incorrect. Since Green was able to perform alternative procedures and was satisfied as far as the reasonableness of the account balances, there is no departure from generally accepted auditing standards.

Question 17

Which of the following is true regarding the standard audit report for an issuer?

Accepted Answer

Choice "C" is correct. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards, and should refer to GAAP in the opinion paragraph. Choice "A" is incorrect. An auditor reporting on the audit of financial statements of a nonissuer may (but is not required to) refer to both PCAOB standards and generally accepted auditing standards in the scope paragraph. Audit reports for audits of issuers refer only to PCAOB standards in the scope paragraph. Choice "B" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed. Choice "D" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. Referring to generally accepted auditing standards instead is not an option, as audits of issuers must follow PCAOB standards.

Question 18

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 19

Which of the following 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 "D" is correct. If a liability is significant enough, it may give rise to a situation in which there is substantial doubt about an entity's ability to continue as a going concern. Inquiring of an entity's legal counsel about litigation, claims, and assessments is one way to determine whether such a liability exists. Choice "A" is incorrect. Cutoff tests are used to determine whether sales are recorded in the proper period. Applying such tests to customer accounts with long-standing receivable balances would not provide information about the entity's ability to continue a as a going concern. Choice "B" is incorrect. Evaluating the entity's procedures for identifying and recording related party transactions is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues. Choice "C" is incorrect. Identifying situations in which real property is pledged as collateral is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues.

Question 20

How does an auditor make the following representations when issuing the standard auditor's report on comparative financial statements?

Accepted Answer

Choice "D" is correct. Explicitly - Implicitly. The auditor explicitly states in the scope paragraph of his opinion: "an audit includes examining, on a test basis, evidence supporting..." Consistency is implied in the auditor's standard report. Choices "A", "B", and "C" are incorrect, as per above Explanation.

Exam 1: CPA Auditing and Attestation Exam

An auditor was unable to obtain sufficient appropriate audit evidence concerning certain transactions due to an inadequacy in the entity's accounting records. The auditor would choose between issuing a(an) :