Question 1

It is not appropriate to refer a reader of an auditor's report to a financial statement footnote for details concerning:

Accepted Answer

Choice "D" is correct. Details concerning the results of audit procedures (such as the results of confirmation of receivables) generally do not appear in the footnotes. Choice "A" is incorrect. Subsequent events may be discussed in an explanatory paragraph of the auditor's report, which would also refer to the related footnote. Choice "B" is incorrect. The pro forma effects of a business combination may be included in an explanatory paragraph of the auditor's report, which would also refer to the related footnote. Choice "C" is incorrect. Sale of a discontinued operation may be discussed in an explanatory paragraph of the auditor's report, which would also refer to the related footnote.

Question 2

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 In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. List A Types of Options

Accepted Answer

Choice "F" is the correct opinion. This is a scope limitation. Either a disclaimer of opinion (if the item is very material) or an "except for" qualified opinion (if the item is material) should be issued.

Question 3

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 4

Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?

Accepted Answer

Choice "B" is correct. An auditor would most likely obtain a letter from the entity's legal counsel describing any pending litigation, unasserted claims, or loss contingencies, to obtain evidence that might impact the year-end financial statements. Choice "A" is incorrect. Reviewing cut-off bank statements for the period after year-end generally is performed to evaluate the year-end cash balance, not to identify subsequent events. Choice "C" is incorrect. Investigating significant deficiencies in internal control previously communicated to the client would be a procedure performed as part of the planning process and would provide the auditor with information regarding the internal control structure, not subsequent events. Choice "D" is incorrect. Analyzing related party transactions to discover possible irregularities generally is performed to evaluate financial statement disclosure, not to identify subsequent events.

Question 5

Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide's legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme. Under these circumstances, Morris should:

Accepted Answer

Choice "B" is correct. Since the CPA could not determine whether the suspected illegal bribes were material to the financial statements, or whether senior management was involved in the scheme, Morris should disclaim an opinion on the financial statements. Choice "A" is incorrect. An unqualified opinion with a separate explanatory paragraph is not appropriate if suspected material illegal bribes cannot be disproven. Choice "C" is incorrect. An adverse opinion is inappropriate since the suspected material illegal bribes have not been proven, nor has any material effect on the financial statements been determined. Choice "D" is incorrect. Special reports are not issued regarding illegal bribes.

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 In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. List B Report Modifications

Accepted Answer

Choice "E" is the correct modification. The situation calls for a qualified opinion or a disclaimer of opinion, but none of the choices adequately describes a disclaimer. Therefore, a qualified opinion is the best answer. The circumstances should be described in an explanatory paragraph preceding the opinion paragraph and the scope and opinion paragraphs should be modified.

Question 7

Information accompanying the basic financial statements in an auditor-submitted document should not include:

Accepted Answer

Choice "B" is correct. A statement that the "allowance for doubtful accounts is adequate" is generally not included in information accompanying the basic FS in an auditor-submitted document (ASD) because it expresses an opinion rather than providing details or s. Choices "A", "C", and "D" are incorrect, because the following information, which contains additional details or s, may accompany the basic FS in an ASD: A. An analysis of inventory by location. C. Depreciable lives of assets. D. An analysis of revenue by product line.

Question 8

If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be:

Accepted Answer

Choice "B" is correct. If an accounting change does not have a material effect on the FS of the current year, it will be disclosed in the notes to the FS for the current year, but no modification of the auditor's report is necessary. Choices "A" and "C" are incorrect. If the change in accounting principle were material for the current year, it would be treated as a consistency modification in the auditor's report for the current year. Since there is no material effect in the current year, no modification to the auditor's report is required. Choice "D" is incorrect. A change in accounting principle is not a "subsequent event."

Question 9

To exercise due professional care an auditor should:

Accepted Answer

Choice "A" is correct. To exercise due professional care, an auditor should critically review the judgment exercised by those assisting in the audit. Choice "B" is incorrect. An auditor examines some (but not all) available corroborating evidence supporting management's assertions. Examination of all evidence would not be feasible. Choice "C" is incorrect. An auditor has a reasonable responsibility to design the audit to detect material instances of illegal acts, errors, and irregularities. It would not be feasible to design an audit to detect all instances of illegal acts. Choice "D" is incorrect. "Due professional care" pertains to the performance of the audit and the preparation of the report. The training standard relates to the balance of professional experience and formal education of those performing the audit.

Question 10

An auditor's report that refers to the use of an accounting principle at variance with generally accepted accounting principles contains the words, "In our opinion, with the foregoing Explanation, the financial statements referred to above present fairly...." This is considered an:

Accepted Answer

Choice "D" is correct. "In our opinion, with the foregoing Explanation the FS referred to above present fairly" is an example of inappropriate reporting. When an auditor's report refers to the use of an accounting principle at variance with GAAP, the words, "in our opinion, except for the effects of the matters discussed in the preceding paragraph, the FS referred to above present fairly…" should be used. Choice "A" is incorrect. An adverse opinion would include the phrase, "...do not present fairly..." Choice "B" is incorrect. A qualified opinion would include the phrase, "In our opinion, except for the [problem] discussed in the preceding paragraph…" Choice "C" is incorrect. An unqualified opinion would not include the phrase "with the foregoing " in an explanatory paragraph.

Question 11

Management of Hill Company has decided not to account for a material transaction in accordance with the provisions of an FASB Standard. In setting forth its reasons in a note to the financial statements, management has clearly demonstrated that due to unusual circumstances the financial statements presented in accordance with the FASB Standard would be misleading. The auditor's report should include a separate explanatory paragraph and contain a(an):

Accepted Answer

Choice "D" is correct. In unusual circumstances, where the literal application of accounting standards would make the FS misleading (e.g., new legislation or new business practices), the proper accounting treatment is that which will more fairly present the FS. In such a case, the auditor should express an unqualified opinion on the financial statements and include a separate explanatory paragraph. Choice "A" is incorrect. Under the circumstances, the method of accounting selected by the client is justified. There is no need for an "except for" qualification. Choice "B" is incorrect. "Subject to" opinions are not acceptable under any circumstances. Choice "C" is incorrect. An adverse opinion is not appropriate since the statements as prepared by the client are fairly presented.

Question 12

When a principal auditor decides to make reference to another auditor's examination, the principal auditor's report should always indicate clearly, in the introductory, scope, and opinion paragraphs, the:

Accepted Answer

Choice "D" is correct. Reference to the division of responsibility should be made in the introductory, scope and opinion paragraphs of the principal auditor's report. Choice "A" is incorrect. The magnitude of the portion of the FS examined by the other auditor appears only in the introductory paragraph. Choice "B" is incorrect. The principal auditor is not disclaiming responsibility, just dividing it. Choice "C" is incorrect. The name of the other auditor is generally not mentioned, but may be mentioned with permission and if the other auditor's report is also presented. (Watch out for exclusive words such as "always" or "never.")

Question 13

A former client requests a predecessor auditor to reissue an audit report on a prior period's financial statements. The financial statements are not restated and the report is not revised. What date(s) should the predecessor auditor use in the reissued report?

Accepted Answer

Choice "A" is correct. The date of the prior-period report should be used as long as the FS are not restated, the report is not revised, and no significant changes have occurred that would affect the prior FS. Choices "B" and "C" are incorrect. Using the date of the client's request or the date of reissue would extend the auditor's responsibility to that date. Choice "D" is incorrect. The auditor may dual date the report if a material subsequent event has occurred, but dual dating is not used for reissuing a report.

Question 14

Grant Company's financial statements adequately disclose uncertainties that concern future events, the outcome of which are not susceptible of reasonable estimation. The auditor's report should include a (an):

Accepted Answer

Choice "A" is correct. The auditor should issue an "unqualified opinion" when management adequately discloses future events, the outcome of which are not susceptible of reasonable estimation. No reference to the uncertainty need be made in the auditor's opinion. Choice "B" is incorrect. "Subject to" qualified opinions are not permitted. Choice "C" is incorrect. An "except for" qualified opinion would not be used as there is adequate disclosure and there are no scope limitations. Choice "D" is incorrect. An adverse opinion would not be used because the FS are presented "fairly" in conformity with GAAP.

Question 15

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 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 B Report Modifications

Accepted Answer

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

Question 16

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 A principal auditor decides to take responsibility for the work of another CPA who audited a wholly-owned subsidiary of the entity and issued an unqualified opinion. The total assets and revenues of the subsidiary represent 17% and 18%, respectively, of the total assets and revenues of the entity being audited. List A Types of Options

Accepted Answer

Choice "B" is the correct opinion. An unqualified opinion should be issued.

Question 17

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 18

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 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 A principal auditor decides to take responsibility for the work of another CPA who audited a wholly-owned subsidiary of the entity and issued an unqualified opinion. The total assets and revenues of the subsidiary represent 17% and 18%, respectively, of the total assets and revenues of the entity being audited. List B Report Modifications

Accepted Answer

Choice "J" is the correct modification. When assuming responsibility for another auditor's work, the principal auditor should issue the standard auditor's report without modification.

Question 20

When there is a significant change in accounting principle, an auditor's report should refer to the lack of consistency in:

Accepted Answer

Choice "D" is correct. When there is a significant change in accounting principle, the auditor's report should refer to the lack of consistency in an explanatory paragraph following the opinion paragraph. The explanatory paragraph should identify the change and refer to the note in the FS that discusses the change in detail. The auditor's concurrence with the change in GAAP is implicit, unless he or she takes exception. Choice "A" is incorrect. Lack of consistency is not a scope limitation. Choice "B" is incorrect. An explanatory paragraph is often inserted between the second paragraph and opinion paragraph. However, where a change is accounted for in accordance with GAAP, the explanatory paragraph should follow the unqualified opinion paragraph. Choice "C" is incorrect. The lack of consistency would not be disclosed in an opinion paragraph unless the auditor does not concur and wishes to qualify the opinion. In such case an explanatory paragraph would precede the opinion paragraph and the opinion paragraph would be qualified.

Exam 1: CPA Auditing and Attestation Exam