Question 1

When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the information, if practicable, in the auditor's report and express a(n)
A) Qualified opinion or a disclaimer of opinion.
B) Qualified opinion or an adverse opinion.
C) Adverse opinion or a disclaimer of opinion.
D) Qualified opinion or an unqualified opinion.

Accepted Answer

When necessary information is omitted, the auditor should express a qualified or adverse opinion, depending on the materiality and pervasiveness of the omission.

Question 2

Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report?
A) A change in accounting estimate.
B) A change in accounting principle.
C) A change in the companies included in combined financial statements.
D) A correction of an error in principle.

Accepted Answer

The answer of Which of the following circumstances normally does...

Question 3

Abbot, CPA, as principal auditor for consolidated financial statements, is using a qualified report of another auditor. Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor. What recognition, if any, must Abbot make in his report to the report of the other audit?
A) He need make no reference.
B) He must refer to the qualification of the other auditor and qualify his report likewise.
C) He must include the other auditor's report with his report but need not qualify his report.
D) He must include the other auditor's report with his report and give an explanation of its significance.

Accepted Answer

Since Abbot does not consider the qualification material to be material to the consolidated financial statements, he can make no reference to the report of the other auditor in his report. However, he may choose to include the report of the other auditor for the benefit of the users of the financial statements.

Question 4

When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the
A) Possibility of purchasing certain assets rather than leasing them.
B) Capability of extending the due dates of existing debt.
C) Appropriateness of changing depreciation methods from double declining balance to straight line.
D) Marketability of property and equipment that management plans to keep.

Accepted Answer

The capability of extending the due dates of existing debt would allow the entity more time to generate the necessary cash flow to meet its obligations. This would mitigate the significance of negative information about the entity's means for maintaining adequate cash flow. The other options are not directly related to cash flow and do not address the entity's ability to continue its operations.

Question 5

In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor
A) Issues an unqualified/unmodified opinion on the consolidated financial statements.
B) Learns that the other CPA issued an unqualified/unmodified opinion on the subsidiary's financial statements.
C) Is unable to review the other CPA's audit programs and working papers.
D) Is satisfied as to the other CPA's independence and professional reputation.

Accepted Answer

The principal auditor can decide not to make reference to another CPA if they are satisfied with the other CPA's independence and professional reputation, indicating trust in their work.

Question 6

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a large foreign subsidiary. Between which of the following reports should the auditor choose?
A) Adverse and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added.
B) Disclaimer and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added.
C) Qualified and adverse.
D) Qualified and disclaimer.

Accepted Answer

The auditor should choose between a qualified opinion and a disclaimer of opinion when they are unable to obtain sufficient appropriate audit evidence, which constitutes a scope limitation.

Question 7

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?
A) Cash flows from operating activities are negative.
B) Research and development projects are postponed.
C) Significant related party transactions are pervasive.
D) Stock dividends replace annual cash dividends.

Accepted Answer

Negative cash flows from operating activities indicate that the entity is not generating enough cash to cover its operating expenses and may have difficulty meeting its obligations as they come due. This is a significant indicator of possible going concern issues. The postponed research and development projects, significant related party transactions, and stock dividends replacing annual cash dividends may indicate other issues, but none are as definitive as negative cash flows from operating activities.

Question 8

The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the entity desires comparative financial statements. The predecessor auditor's report should make
A) No reference to the report or the work of the successor auditor.
B) Reference to the work of the successor auditor in the scope paragraph.
C) Reference to both the work and the report of the successor auditor in the opinion paragraph.
D) Reference to the report of the successor auditor in the scope paragraph.

Accepted Answer

The predecessor auditor's report should stand on its own and not reference the work or report of the successor auditor.

Question 9

Which of the following would be considered a change that affects consistency?
A) Change in accounting estimate.
B) Change in accounting principle.
C) Change in classification and reclassification.
D) All of the other options are correct.

Accepted Answer

A change in accounting principle means that the company is changing the method in which they are recording or reporting financial transactions. This would affect consistency because it changes the way information is reported and makes it difficult to compare data from previous periods.

Question 10

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
A) Ability to expand operations into new product lines in the future.
B) Feasibility of plans to purchase leased equipment at less than market value.
C) Marketability of assets that management plans to sell.
D) Committed arrangements to convert preferred stock to long-term debt.

Accepted Answer

The marketability of assets that management plans to sell can provide evidence that the entity has the ability to generate cash flow in the short term to meet its obligations, thereby decreasing the risk of going concern. Choices A, B, and D do not directly relate to the entity's ability to generate cash flow in the short term.

Question 11

Other bases of accounting (special purpose frameworks) include all of the following except:
A) Tax basis.
B) Non-GAAP methods used for internal reporting.
C) Cash basis.
D) Regulatory basis.

Accepted Answer

All the other options (tax basis, cash basis, regulatory basis) are examples of special purpose frameworks used for financial reporting in specific industries or situations. Non-GAAP methods used for internal reporting are not a specific framework, but rather a company-specific approach that is not necessarily accepted by external parties such as auditors or investors.

Question 12

An auditor would issue an adverse opinion if
A) The audit was begun by other independent auditors who withdrew from the engagement.
B) A qualified opinion cannot be given because the auditor lacks independence.
C) A restriction on the scope of the audit was significant.
D) The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

Accepted Answer

An adverse opinion is issued when the statements taken as a whole do not fairly present the financial condition and results of operations of the company. This means that the auditor has determined that the financial statements are materially misstated and cannot be relied upon by stakeholders.

Question 13

When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence, the auditor should issue a(n)
A) "Subject to" qualified opinion.
B) Disclaimer of opinion.
C) Adverse opinion.
D) Unqualified/unmodified opinion with a separate explanatory/emphasis-of-matter paragraph.

Accepted Answer

When the auditor is unable to obtain adequate evidence to determine the amounts associated with illegal acts, the auditor should issue a disclaimer of opinion because the auditor is unable to provide an opinion on the financial statements as a whole. A qualified opinion (choice A) is not appropriate because it suggests that the financial statements are fairly presented except for a specific matter, but the illegal acts may have a pervasive effect on the financial statements. An adverse opinion (choice C) would only be appropriate if the financial statements are materially misstated, which may not be the case if the amounts associated with the illegal acts cannot be determined. An unqualified/unmodified opinion with an explanatory/emphasis-of-matter paragraph (choice D) would not provide sufficient emphasis on the limitations of the audit evidence related to the illegal acts.

Question 14

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?
A) Significant related party transactions are pervasive.
B) Usual trade credit from suppliers is denied.
C) Arrearages in preferred stock dividends are paid.
D) Restrictions on the disposal of principal assets are present.

Accepted Answer

The denial of usual trade credit from suppliers indicates a lack of confidence in the entity's ability to pay its debts in the future, which is a strong indicator of potential financial distress and the auditor may have substantial doubt about the entity's ability to continue as a going concern. Choices A, C, and D may indicate some financial difficulties, but they are not as strong indicators as the denial of trade credit.

Question 15

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
A) Is considered an "except for" qualification of the opinion.
B) Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
C) Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
D) Is appropriate and would not negate the unqualified/unmodified opinion.

Accepted Answer

The inclusion of a separate paragraph to emphasize significant transactions with related parties is considered an appropriate and necessary disclosure, and would not negate an unmodified opinion. It may also be required by auditing standards depending on the circumstances.

Question 16

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?
A) Inspecting title documents to verify whether any assets are pledged as collateral.
B) Confirming with third parties the details of arrangements to maintain financial support.
C) Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.
D) Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

Accepted Answer

Confirming with third parties the details of arrangements to maintain financial support 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. This would help the auditor to assess the likelihood that the entity will be able to continue operating and meet its obligations. Inspecting title documents, reconciling cash balances, and comparing depreciation policies would not necessarily provide information about the entity's ability to continue as a going concern.

Question 17

Which of the following circumstances should be recognized as a consistency modification in the auditor's report, whether or not the item is fully disclosed in the financial statements?
A) A change in accounting estimate.
B) A change from an unacceptable accounting principle to a generally accepted one.
C) Correction of an error not involving a change in accounting principle.
D) A change in classification.

Accepted Answer

The answer of Which of the following circumstances should be...

Question 18

An auditor is reporting on cash basis financial statements. These statements are best referred to in his or her report by which one of the following descriptions?
A) Financial position and results of operations arising from cash transactions.
B) Assets and liabilities arising from cash transactions and revenue collected and expenses paid.
C) Balance sheet and income statement resulting from cash transactions.
D) Cash balance sheet and the source and application of funds.

Accepted Answer

The answer of An auditor is reporting on cash basis...

Question 19

Which of the following would be considered a change that does not affect consistency?
A) Change expected to have a material future effect.
B) Change in accounting principle.
C) Correction of an error in principle.
D) None of these are considered changes that do not affect consistency.

Accepted Answer

The answer of Which of the following would be considered...

Question 20

When an auditor expresses an adverse opinion, the opinion paragraph should include
A) The principal effects of the departure from generally accepted accounting principles.
B) A direct reference to a separate paragraph disclosing the basis for the opinion.
C) The substantive reasons for the financial statements being misleading.
D) A description of the uncertainty or scope limitation that prevents an unqualified opinion.

Accepted Answer

An adverse opinion requires a direct reference to a separate paragraph that discloses the basis for the opinion, explaining why the financial statements are not presented fairly.

Quiz 18: Reports on Audited Financial Statements

When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the information, if practicable, in the auditor's report and express a(n)

Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report?

When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the

In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a large foreign subsidiary. Between which of the following reports should the auditor choose?

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?

The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the entity desires comparative financial statements. The predecessor auditor's report should make

Which of the following would be considered a change that affects consistency?

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

Other bases of accounting (special purpose frameworks) include all of the following except:

An auditor would issue an adverse opinion if

When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence, the auditor should issue a(n)

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?

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

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?

Which of the following circumstances should be recognized as a consistency modification in the auditor's report, whether or not the item is fully disclosed in the financial statements?

An auditor is reporting on cash basis financial statements. These statements are best referred to in his or her report by which one of the following descriptions?

Which of the following would be considered a change that does not affect consistency?

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