Question 1

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 2

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 potentially provide cash inflows to mitigate the adverse effects of events causing the auditor to believe there is substantial doubt about the entity's ability to continue as a going concern. The other options do not directly address the entity's ability to continue as a going concern.

Question 3

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

Including a separate paragraph to emphasize significant transactions with related parties is appropriate and would not negate the unqualified/unmodified opinion. This is because the auditor is merely providing additional information to the users of the financial statements, and is not modifying their opinion on whether the financial statements are fairly presented in all material respects.

Question 4

When the client 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 opinion if the omission is material but not pervasive, or an adverse opinion if the omission is both material and pervasive.

Question 5

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 answer of An auditor was unable to obtain audited...

Question 6

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 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 finance its operations. This may suggest that the entity may face difficulty in continuing its operations in the long run.

Question 8

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 above.

Accepted Answer

A change in accounting principle would affect consistency since it involves a change in the method of accounting for a specific item or event, and could result in a change in financial statement presentation. A change in accounting estimate and a change in classification and reclassification would not affect consistency, as they do not involve a change in accounting principle.

Question 9

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

Denial of trade credit from suppliers is a strong indicator that the entity is having financial difficulties and may not be able to meet its obligations as they become due. This is a significant event that could cause an auditor to have substantial doubt about the going concern assumption. Pervasive related party transactions or restrictions on asset disposal may also raise audit concerns, but they do not necessarily indicate imminent financial distress. Payment of arrears in preferred stock dividends may be a positive sign, but it does not directly address the entity's ability to continue as a going concern.

Question 10

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 the above are considered changes that do not affect consistency.

Accepted Answer

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

Question 11

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

The answer of When an auditor expresses an adverse opinion,the...

Question 12

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

If the entity has the capability of extending the due dates of existing debt, it can delay or reduce the cash outflow required for debt repayment, which can help maintain adequate cash flow. Additionally, it shows that the entity has a good relationship with its lenders and may be able to negotiate better terms in the future. The other options do not directly address the entity's ability to maintain adequate cash flow.

Question 13

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 14

When the auditor is unable to determine the amounts associated with the illegal acts of client 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

A disclaimer of opinion is appropriate when the auditor is unable to obtain sufficient audit evidence and concludes that the possible effects on the financial statements could be both material and pervasive. This is the case when the auditor is unable to determine the amounts associated with illegal acts of client personnel. A qualified opinion is not appropriate, as the auditor is unable to estimate the financial effects of the illegal acts. An adverse opinion is only appropriate when the financial statements are materially misstated. An unqualified/unmodified opinion with a separate explanatory/emphasis-of-matter paragraph is not appropriate, as it suggests that the financial statements are free from material misstatement, which is not the case when the auditor is unable to determine the amounts associated with illegal acts of client personnel.

Question 15

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 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 is the auditing procedure most likely to help an auditor identify conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern. The confirmation helps the auditor to determine whether the entity has arranged for financial support, which is important for its survival beyond the current fiscal year. The other procedures listed may assist the auditor in verifying other aspects of the financial statements, but they are not as effective in identifying going concern issues.

Question 17

An accountant has been engaged to report on an entity's internal controls without performing an audit of the financial statements.What restrictions,if any,should the accountant place on the use of this report?
A) This report should be restricted for use by management.
B) This report should be restricted for use by the audit committee.
C) This report should be restricted for use by a specified regulatory agency.
D) The accountant does not need to place any restrictions on the use of this report.

Accepted Answer

The answer of An accountant has been engaged to report...

Question 18

The predecessor auditor,after properly communicating with the successor auditor,has reissued a report because the audit client 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 19

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 financial statements are materially misstated and do not fairly present the financial condition and results of operations of the company. This is the most serious type of opinion that can be given by an auditor.

Question 20

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 relative to the consolidated financial statements and is willing to accept responsibility for the work of the other auditor, no reference to the report of the other auditor is necessary in Abbot's report. Abbot's report can be unqualified.

Quiz 18: Reports on Audited Financial Statements

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?

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

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

When the client 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)

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

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?

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

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?

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

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

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?

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

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

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?

An accountant has been engaged to report on an entity's internal controls without performing an audit of the financial statements.What restrictions,if any,should the accountant place on the use of this report?

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

An auditor would issue an adverse opinion if