Question 1

Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion rather than an unqualified opinion most likely would be determined by the:

Accepted Answer

Choice "A" is correct. Lack of sufficient evidence to support management's assertions would most likely cause an auditor to issue a qualified or disclaimer of opinion. Choice "B" is incorrect. As long as it is fully disclosed, an inability to estimate the amount of loss from a future event (outcome of pending legislation) would most likely result in an unqualified opinion. Choices "C" and "D" are incorrect. Neither a lack of experience nor a lack of insurance coverage would impact the auditor's report.

Question 2

Does an auditor make the following representations explicitly or implicitly when issuing the standard auditor's report on comparative financial statements?

Accepted Answer

Choice "C" is correct. Implicitly - Explicitly. When issuing the standard auditor's report on comparative FS, an auditor implicitly represents consistent application of GAAP, but explicitly states, "An audit includes examining, on a test basis, evidence supporting . . ." (Again, it is essential that you memorize the "auditor's standard report.") Choices "A", "B", and "D" are incorrect, based on the above Explanation.

Question 3

An annual shareholders' report includes audited financial statements and contains supplementary information required by GAAP. Is it permissible for the auditor to report on such information?

Accepted Answer

Choice "D" is correct. If the auditor performs sufficient procedures, he or she may report on whether the information is fairly stated, in all material respects, in relation to the financial statements. Choices "A" and "B" are incorrect. The auditor may report on such information. Choice "C" is incorrect. The report provides positive assurance about whether the information is fairly stated, in all material respects, in relation to the financial statements.

Question 4

The nature and extent of a CPA firm's quality control policies and procedures depend on:

Accepted Answer

Choice "A" is correct. The nature and extent of a CPA firm's quality controls depend on a number of factors, such as its size, the degree of operating autonomy allowed its personnel and its practice offices, the nature of its practice, its organization, and appropriate cost-benefit considerations. Choices "B", "C", and "D" are incorrect, based on the above Explanation.

Question 5

Would the following factors ordinarily be considered in planning an audit engagement's personnel requirements?

Accepted Answer

Choice "a" is correct. When assigning personnel to an engagement, the firm should consider the following factors in achieving a balance of engagement manpower requirements, personnel skills, and individual development and utilization: 1) engagement size and complexity, 2) personnel availability, 3) special expertise required, 4) timing of the work to be performed, 5) continuity and periodic rotation of personnel, and 6) opportunities for on-the-job training. Choices "B", "C", and "D" are incorrect, based on the above Explanation.

Question 6

This question presents independent factual situations an auditor might encounter in conducting an audit. List B represents the report modifications (if any) that would be necessary. Select as the best answer for each item, the action the auditor normally would take. The report modifications in List B may be selected once, more than once, or not at all. Assume: - The auditor is independent. - The auditor previously expressed an unqualified opinion on the prior year's financial statements. - Only single-year (not comparative) statements are presented for the current year. - The conditions for an unqualified opinion exist unless contradicted in the factual situations. - The conditions stated in the factual situations are material. - No report modifications are to be made except in response to the factual situation. Item to Be Answered An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However, the ultimate outcome of the litigation cannot be reasonably estimated by management. The auditor believes there is a reasonable possibility of a significantly material loss, but the lawsuit is adequately disclosed in the notes to the financial statements. List B Report Modifications

Accepted Answer

Choice "J" is the correct modification. The standard auditor's report should be issued without modification.

Question 7

How are management's responsibility and the auditor's responsibility represented in the standard auditor's report?

Accepted Answer

Choice "a" is correct. The responsibility of the auditor and the responsibility of management are stated explicitly in the introductory paragraph of the standard auditor's report. Choices "b", "c", and "d" are incorrect, as explained above.

Question 8

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

Accepted Answer

Choice "D" is correct. No No. A qualified opinion phrase is, "in our opinion, except for [ of problem] as discussed in the preceding paragraph . . ." Choice "A" is incorrect, as "when read in conjunction with Note X" is not a phrase included in the opinion paragraph of a qualified opinion. Choice "B" is incorrect, as "with the foregoing " is not a phrase included in the opinion paragraph of a qualified opinion. Choice "C" is incorrect. Neither phrase is included in the opinion paragraph of a qualified opinion. (This is why it's important to memorize the qualifying phrases as well as the standard independent auditor's report.)

Question 9

Which of the following procedures should an auditor generally perform regarding subsequent events?

Accepted Answer

Choice "A" is correct. When performing procedures regarding subsequent events, the auditor generally will compare the latest available interim financial statements with the financial statements being audited to determine if any significant subsequent event occurred that would need to be reflected in the statements being audited. Choice "B" is incorrect. Sending second requests to the client's customers who failed to respond to initial A/R confirmation requests is a substantive procedure that provides evidence about receivables existing at year end, not about subsequent events. Choice "C" is incorrect. Internal control weaknesses should be communicated to those charged with governance, but this communication provides no evidence about subsequent events. Choice "D" is incorrect. Bank cut-off statements generally are reviewed for only a week to ten days subsequent to year-end. Reviewing them for a longer period such as "several months" would provide little additional audit evidence regarding the YE FS and thus would not be a cost beneficial procedure.

Question 10

This question presents independent factual situations an auditor might encounter in conducting an audit. List A represents the types of opinions the auditor ordinarily would issue. Select as the best answer for this item, the action the auditor normally would take. The types of opinions in List A may be selected once, more than once, or not at all. Assume: - The auditor is independent. - The auditor previously expressed an unqualified opinion on the prior year's financial statements. - Only single-year (not comparative) statements are presented for the current year. - The conditions for an unqualified opinion exist unless contradicted in the factual situations. - The conditions stated in the factual situations are material. - No report modifications are to be made except in response to the factual situation. Item to Be Answered Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate. List A Types of Options

Accepted Answer

Choice "B" is the correct opinion. In a going concern situation that is properly disclosed, an unqualified opinion should be issued.

Question 11

According to the profession's ethical standards, which of the following events may justify a departure from a Statement of Financial Accounting Standards?

Accepted Answer

Choice "C" is correct. Yes - Yes. Rule 203 of the code of professional conduct of the AICPA states that if the financial statements or data contain a GAAP departure, the departure may be justified if the CPA can demonstrate that due to unusual circumstances, such as new legislation or the evolution of a new form of business transaction, the FS would otherwise be misleading. Under these circumstances, the auditor's report should describe the departure, its approximate effects, if practicable, and the reasons why compliance with the generally accepted principle would result in a misleading statement. Choices "A", "B", and "D" are incorrect, per the above Explanation.

Question 12

The first general standard requires that an audit of financial statements is to be performed by a person or persons having:

Accepted Answer

Choice "B" is correct. The "first" general standard states that the auditor must have adequate technical training and proficiency to perform the audit. Comment: It is important to memorize the 10 auditing standards. Choices "A", "C", and "D" are incorrect, as they do not represent a requirement of the first general standard of reporting.

Question 13

An auditor may issue a qualified opinion under which of the following circumstances?

Accepted Answer

Choice "A" is correct. Yes - Yes. An auditor may issue a qualified opinion (or a disclaimer, depending on materiality) when there is a lack of sufficient appropriate audit evidence, or when there are restrictions on the scope of the audit. Choices "B", "C", and "Dd" are incorrect, as explained above.

Question 14

An auditor's responsibility to express an opinion on the financial statements is:

Accepted Answer

Choice "B" is correct. The auditor's responsibility to express an opinion on the FS is explicitly represented in the last sentence of the opening paragraph: "Our responsibility is to express an opinion on these financial statements based on our audit." Choice "A" is incorrect. The responsibility to express an opinion is explicitly represented (i.e., clearly stated), not implicitly represented (i.e., assumed). Choice "C" is incorrect. There are no words in the scope paragraph that represent an auditor's responsibility to express an opinion. Choice "D" is incorrect. The opinion paragraph includes the auditor's opinion, but does not specifically mention the auditor's responsibility to express an opinion.

Question 15

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor:

Accepted Answer

Choice "A" is correct. The auditor may accept the engagement because there is no scope limitation, merely a limited reporting objective. It is acceptable to give an opinion on one FS and not report on the other FS, if the scope is not limited. Choices "B" and "C" are incorrect. The client is not imposing any audit scope limitations. Choice "D" is incorrect. A limited reporting objective is not a departure from GAAS.

Question 16

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?

Accepted Answer

Choice "A" is correct. Negative cash flows from operating activities most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Choices "B" and "D" are incorrect. Plans to reduce or delay cash expenditures are mitigating factors conserving cash (e.g., postponing R&D projects and replacing cash dividends with stock dividends). This would not ordinarily cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Choice "C" is incorrect. The existence of significant related party transactions should be disclosed but would not ordinarily cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.

Question 17

For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected:

Accepted Answer

Choice "D" is correct. For a particular entity's FS to be presented fairly in conformity with GAAP, it is not required that the principles selected be applied on a basis consistent with those followed in the prior year, merely that any changes in accounting principle be properly accounted for and disclosed. Choice "A" is incorrect. The principles selected must be appropriate in the circumstances for the particular entity. Choice "B" is incorrect. The principles selected must reflect transactions in a manner that present the FS within a range of acceptable limits. Choice "C" is incorrect. The principles selected must present information in the FS that is classified and summarized in a reasonable manner.

Question 18

What is an auditor's responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?

Accepted Answer

Choice "C" is correct. With respect to supplementary information required by the GASB that is placed outside the basic financial statements, the auditor should apply limited procedures to the information (to determine that it is consistent with the basic audited financial statements) and report deficiencies in or the omission of the information (via an explanatory paragraph). Choice "A" is incorrect. If the information is labeled "unaudited," a disclaimer generally would not be necessary. Choice "B" is incorrect. The explanatory paragraph is only added if the supplemental information required by the GASB is deficient, omitted entirely, if the auditor cannot complete procedures, or if there is doubt about conformity with guidelines. Choice "D" is incorrect. The supplementary information required by the GASB is not required to be audited since it is placed outside of the basic financial statements; however, an opinion is permitted.

Question 19

This question presents independent factual situations an auditor might encounter in conducting an audit. List B represents the report modifications (if any) that would be necessary. Select as the best answer for each item, the action the auditor normally would take. The report modifications in List B may be selected once, more than once, or not at all. Assume: - The auditor is independent. - The auditor previously expressed an unqualified opinion on the prior year's financial statements. - Only single-year (not comparative) statements are presented for the current year. - The conditions for an unqualified opinion exist unless contradicted in the factual situations. - The conditions stated in the factual situations are material. - No report modifications are to be made except in response to the factual situation. Item to Be Answered An entity changes its depreciation method for production equipment from the straight-line to a units-of production method based on hours of utilization. The auditor concurs with the change although it has a material effect on the comparability of the entity's financial statements. List B Report Modifications

Accepted Answer

Choice "B" is the correct modification. Such changes should be described in an explanatory paragraph following the opinion paragraph without modifying the three standard paragraphs.

Question 20

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 "D" is correct. When an independent CPA assists in preparing the FS of a publicly held entity, but has not "audited" or "reviewed" them, the CPA should issue a disclaimer of opinion and has only the responsibility to read the FS for obvious material misstatements. Choice "A" is incorrect. A disclaimer does not require ascertaining whether the FS are in conformity with GAAP. Choice "B" is incorrect. A disclaimer does not require ascertaining whether management has elected to omit substantially all required disclosures. Choice "C" is incorrect. A disclaimer of opinion does not require ascertaining whether or not the internal control structure is being relied upon.

Exam 1: CPA Auditing and Attestation Exam