Question 1

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?

Accepted Answer

Choice "D" is correct. The third general standard is: "The auditor must exercise due professional care in the planning and performance of the audit and the preparation of the report." This standard is interpreted to require a critical review of the work performed and the judgment exercised at every level of supervision. Choice "A" is incorrect. Proficiency relates to the first general standard (technical training and proficiency of an auditor). Choice "B" is incorrect. Audit risk and materiality underlie the application of all the standards of fieldwork and reporting, but are not standards themselves. Choice "C" is incorrect. Inspection pertains to the audit evidence standard, which is the third standard of fieldwork.

Question 2

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:

Accepted Answer

Choice "B" is correct. When an auditor qualifies his or her opinion because of a scope limitation, such as the inability to confirm A/R, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the FS and not to the scope limitation itself. The opinion paragraph should not refer to the scope limitation itself, the lack of evidence, or the departure from GAAS. Choices "A", "C", and "D" are incorrect, based on the above

Question 3

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

Accepted Answer

Choice "D" is correct. When an auditor submits a document containing audited financial statements to the client or others, the auditor has a responsibility to report on all the information included in the document. Choice "A" is incorrect. The auditor does have additional reporting responsibilities concerning information that accompanies the basic financial statements in an auditor-submitted document. Choice "B" is incorrect. The auditor has responsibility to report on any additional information regardless of whether the auditor participated in the preparation of the information. Choice "C" is incorrect. The auditor has reporting responsibilities regardless of whether the auditor participated in the preparation of the information.

Question 4

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:

Accepted Answer

Choice "B" is correct. The report indicates a division of responsibility. Choice "A" is incorrect. Words describing the percentages of revenues and assets audited by other auditors are proper in dividing responsibility. Choice "C" is incorrect. Dividing responsibility does not affect the unqualified opinion, nor does it require a disclaimer of opinion. Choice "D" is incorrect. Dividing responsibility does not affect the unqualified opinion, nor does it require a qualified opinion.

Question 5

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:

Accepted Answer

Choice "B" is correct. The auditor would not perform a review or express negative assurance on supplementary information required by GAAP that is included in an auditor-submitted document. Choice "A" is incorrect. The auditor may express an opinion on the information, if he or she has been engaged to examine it. Choice "C" is incorrect. The auditor may 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. Choice "D" is incorrect. The auditor may disclaim an opinion on the information.

Question 6

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

Accepted Answer

Choice "D" is correct. Management's refusal to furnish written representations is a significant client imposed restriction on the scope of an audit, ordinarily warranting a disclaimer of opinion. Choice "A" is incorrect. Inadequate disclosure would result in a qualified or adverse opinion. Choice "B" is incorrect. A qualified report would be appropriate when a "statement of cash flows" is omitted and the scope of the audit is not restricted. Choice "C" is incorrect. A departure from GAAP would result in either a qualified or adverse opinion, depending on materiality.

Question 7

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

Accepted Answer

Choice "C" is correct. Generally accepted auditing standards ("GAAS") are measures of the quality of the auditor's performance. Choice "A" is incorrect. GAAS are not "rules," nor are they universally applicable. GAAS are measures of the quality of an auditor's performance. Choice "B" is incorrect. The Auditing Standards Board (ASB) issues many types of pronouncements, including (but not limited to) "Statements on Auditing Standards" (SASs). While SASs are considered to be interpretations of GAAS, not all ASB pronouncements relate to audits. Therefore, just because something is issued by the ASB does not make it GAAS. Choice "D" is incorrect. Auditing standards differ from auditing procedures in that procedures relate to acts to be performed, whereas standards deal with the quality of the performance of those acts.

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

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?

Accepted Answer

Choice "D" is correct. If the auditor discovers a material inconsistency in other information accompanying the audited financial statements, the financial statements do not require revision, and the client refuses to eliminate or revise the inconsistency, the auditor should consider 1) revising the report to include a separate paragraph describing the inconsistency, 2) withholding the report, or 3) withdrawing from the engagement. Choice "A" is incorrect. Even though the auditor has no responsibility to audit or otherwise corroborate other information accompanying the financial statements, the auditor has a responsibility to read the other information accompanying the financial statements for consistency and to identify any material misstatements of fact included therein. Choice "B" is incorrect. A qualified opinion is generally not warranted because the financial statements are fairly stated. Choice "C" is incorrect. A disclaimer of opinion is generally not warranted because there is no limitation on scope.

Question 10

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:

Accepted Answer

Choice "C" is correct. When an auditor discovers the omission of an audit procedure related to a previously issued report, the auditor should first assess the importance of the omitted procedure to the auditor's ability to support the previously expressed opinion. Choice "A" is incorrect. The auditor would request the permission of the client to undertake the confirmation of accounts receivable only after determining that the procedure was necessary to support the previously expressed opinion and no other alternative procedure had been performed. Choice "B" is incorrect. Alternative procedures would be performed only after the auditor determined that the procedure was necessary to support the previously expressed opinion. Choice "D" is incorrect. The auditor needs to be able to support (or revise) the previously issued opinion regardless of whether or not there are persons currently relying on it.

Question 11

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?

Accepted Answer

Choice "D" is correct. The auditor should read other information accompanying the basic financial statements and consider whether it contains a material inconsistency or material misstatement of fact. Choice "A" is incorrect. The auditor generally does not add a disclaimer paragraph in this situation. Choice "B" is incorrect. The auditor should read other information accompanying the basic financial statements and consider whether it contains a material inconsistency or material misstatement of fact. Choice "C" is incorrect. Even if the management report were included in the annual report, the auditor still has the same responsibility regarding both the management report and the annual report: the auditor should read the information and consider whether it contains a material inconsistency or material misstatement of fact.

Question 12

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:

Accepted Answer

Choice "C" is correct. When an auditor issues a report that is 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 of the auditor's report is limited to the specific event referenced. Choices "A", "B", and "D" are incorrect. The auditor takes responsibility for only the specific event noted in the dual dating and for no other event occurring subsequent to the original date of the auditor's report.

Question 13

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:

Accepted Answer

Choice "B" is correct. The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived. Choice "A" is incorrect. Condensed financial statements do not include all of the disclosures required by GAAP, and therefore would not typically be presented in conformity with GAAP. Choice "C" is incorrect. Condensed financial statements are presented in less detail than complete financial statements, but the fact pattern gives no indication that any comprehensive basis of accounting other than GAAP has been used. Choice "D" is incorrect. The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived, not in relation to supplementary filings under federal security statutes.

Question 14

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

Accepted Answer

Choice "D" is correct. The auditor's standard report generally does not make reference to the entity's internal control. Note that for an entity that does receive governmental financial assistance, a written report on internal control is required. Also, note that an auditor may (but is not required to) expand his or her audit report to clarify that a GAAS audit does not require the level of testing and reporting on internal control that is required for issuers. Choices "A" and "B" are incorrect. The scope paragraph states that, "an audit also includes assessing the accounting principles used and significant estimates made by management." Choice "C" is incorrect. The introductory paragraph states that the "financial statements are the responsibility of the company's management."

Question 15

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

Accepted Answer

Choice "D" is correct. The auditor should read the "other information" in a client's document containing audited FS to determine that it is consistent with the audited FS. Choice "A" is incorrect. Performing analytical procedures or any other procedure is not necessary. Choice "B" is incorrect. An explanatory paragraph is not required. Choice "C" is incorrect. The auditor has no obligation to perform any procedure to corroborate "other information" contained in a document such as an annual report.

Question 16

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:

Accepted Answer

Choice "A" is correct. An auditor's report on selected information included in a client-prepared document containing audited financial statements should be limited to data derived from audited financial statements. Choice "B" is incorrect. It is not necessary to limit distribution of such a report. Choice "C" is incorrect. Selected financial data is not an "other comprehensive basis of accounting." Choice "D" is incorrect. The auditor indicates whether the selected financial data is fairly stated, in all material respects, in relation to the financial statements from which it has been derived.

Question 17

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?

Accepted Answer

Choice "D" is correct. When an auditor is unable to obtain audited financial statements or other evidence supporting an entity's investment in a subsidiary (foreign or domestic), the auditor should issue a qualified or disclaimer of opinion depending on the materiality of the investment in the subsidiary. Choices "A", "B", and "C" are incorrect. An adverse opinion is only issued when the FS are not presented fairly in conformity with GAAP, and an unqualified opinion with an explanatory paragraph is not appropriate for a scope limitation.

Question 18

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

Accepted Answer

Choice "C" is correct. An auditor may report on condensed financial statements that are derived from financial statements that he or she has audited, indicating (1) that he or she has audited and expressed an opinion on the complete financial statements, (2) the date of the auditor's report, (3) the type of opinion expressed, and (4) that the information contained 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. Choice "A" is incorrect. The condensed financial statements do not have to be distributed to the stockholders. Choice "B" is incorrect. The audit report on condensed financial statements does not require that additional procedures be described. Choice "D" is incorrect. Condensed financial statements do not need to be presented in comparative form with the prior year's financial statements.

Question 19

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:

Accepted Answer

Choice "C" is correct. The adverse effects of events causing an auditor to believe there is a substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the marketability of assets that management plans to sell. By providing evidence that there is a ready market for assets that could be converted to cash, management has demonstrated that the company could remain in operation for a longer period of time, thereby mitigating the need for an explanatory paragraph describing the matter. Choices "A", "B", and "D" are incorrect. Evidence regarding the ability to expand operations into new product lines in the future, the feasibility of plans to purchase leased equipment at less than market value, or committed arrangements to convert preferred stock to long-term debt would not be sufficient to mitigate doubts about an entity's ability to continue as a going concern, unless it could also be demonstrated that the events would provide adequate cash flow to fund operations for at least the next year.

Question 20

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

Accepted Answer

Choice "c" is correct. The auditor would most likely inquire of the entity's legal counsel concerning litigation, claims and assessments arising after year-end in order to obtain evidence about the occurrence of subsequent events. Claims arising after year-end might well impact the year-end financial statements. Choice "a" is incorrect. Recomputing a sample of large-dollar transactions occurring after year-end for arithmetic accuracy would not provide evidence about year-end amounts. Choice "b" is incorrect. The auditor would inquire about changes in stockholders' equity occurring after year-end, but would not generally perform an investigation of such items. Choice "d" is incorrect. Confirming bank accounts established after year-end is generally not done (only those in existence at year-end are confirmed). Accounts established after year-end generally would not be relevant to year-end amounts.

Exam 1: CPA Auditing and Attestation Exam