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Total 1030 questions
In which of the following situations would an auditor ordinarily issue an unqualified audit opinion without an explanatory paragraph?
- A. The auditor wishes to emphasize that the entity had significant related party transactions.
- B. The auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion.
- C. The entity issues financial statements that present financial position and results of operations, but omits the statement of cash flows.
- D. The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.
Answer : B
Explanation:
Choice "B" is correct. An auditor would generally issue an unqualified audit opinion without an explanatory paragraph when the auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion. The auditor would modify his/her report (all three paragraphs), but would not add an explanatory paragraph.
Choices "A" and "D" are incorrect. An auditor ordinarily would issue an unqualified opinion with an explanatory paragraph if he or she wishes to emphasize that the entity had significant related party transactions, or if the auditor has substantial doubt about the entity's ability to continue as a going concern (even if the circumstances are fully disclosed in the financial statements).
Choice "C" is incorrect. If the entity issues financial statements that present financial position and results of operations but omit the statement of cash flows, the opinion will be qualified.
When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented and the auditor concurs with the change, the auditor should:
- A. Option A
- B. Option B
- C. Option C
- D. Option D
Answer : A
Explanation:
Choice "A" is correct. No - No - Yes. When a change in accounting principle materially affects the comparability of the comparative FS, the auditor should refer to the change in an explanatory paragraph following the unqualified opinion paragraph.
Choices "B" and "C" are incorrect. The auditor's concurrence with a change in GAAP is implicit, not explicit.
Choice "D" is incorrect. An unqualified opinion should be issued, not an "except for" qualified opinion.
When a qualified opinion results from a limitation on the scope of the audit, the situation should be described in an explanatory paragraph:
- A. Preceding the opinion paragraph and referred to only in the scope paragraph of the auditor's report.
- B. Following the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.
- C. Following the opinion paragraph and referred to only in the scope paragraph of the auditor's report.
- D. Preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.
Answer : D
Explanation:
Choice "D" is correct. When a qualified opinion results from a limitation of scope, it should be described in an explanatory paragraph preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.
Choices "A", "B", and "C" are incorrect, as they do not comply with the rule above.
Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35% of all assets. Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should issue a(an):
- A. "Except for" qualified opinion.
- B. Disclaimer of opinion.
- C. Unqualified opinion with a separate explanatory paragraph.
- D. Unqualified opinion with an Explanation: in the scope paragraph.
Answer : B
Explanation:
Choice "B" is correct. Restrictions of scope imposed on the audit of such a large (35%) asset would require a disclaimer of opinion.
Choices "A" and "C" are incorrect. The asset not audited is too large for a qualified opinion and much too large for an unqualified opinion.
Choice "D" is incorrect. Explanatory language does not get inserted into the scope paragraph, nor is an unqualified opinion appropriate.
An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include a(an):
- A. Option A
- B. Option B
- C. Option C
- D. Option D
Answer : D
Explanation:
Choice "D" is correct. Yes - No. If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern and that the entity's disclosures are adequate, then the audit report may be either: -Unqualified with explanatory paragraph, or -Disclaimed. (Generally, an unqualified opinion is issued, but the auditor is not prohibited from choosing to issue a disclaimer.)
Choice "A" is incorrect. An "except for" qualified opinion would be appropriate if the entity's disclosures were inadequate.
Choice "B" is incorrect. While an unqualified opinion is generally issued, the auditor is not prohibited from choosing to issue a disclaimer; for example, in areas involving a high degree of uncertainty.
Choice "C" is incorrect, per Explanation: above.
An auditor should disclose the substantive reasons for expressing an adverse opinion in an explanatory paragraph:
- A. Preceding the scope paragraph.
- B. Preceding the opinion paragraph.
- C. Following the opinion paragraph.
- D. Within the notes to the financial statements.
Answer : B
Explanation:
Choice "B" is correct. The auditor should disclose the substantive reasons for expressing an adverse opinion in a separate explanatory paragraph preceding the opinion paragraph.
Choice "A" is incorrect. There are no circumstances where an explanatory paragraph precedes the scope paragraph.
Choice "C" is incorrect. The explanatory paragraph follows the opinion paragraph when there is a change in accounting principle or when there is doubt as to going concern.
Choice "D" is incorrect. The auditor cannot include an explanatory paragraph in the financial statements, which are the responsibility of management.
When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative financial statements, the auditor should express a qualified opinion:
- A. Only in the year of the accounting principle change.
- B. Each year that the financial statements initially reflecting the change are presented.
- C. Each year until management changes back to the accounting principle formerly used.
- D. Only if the change is to an accounting principle that is not generally accepted.
Answer : B
Explanation:
Choice "B" is correct. When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative
FS, the auditor should express a qualified opinion each year that the FS initially reflecting the change are presented.
Choices "A", "C", and "D" are incorrect, per the rule stated above.
When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):
- A. Compilation report.
- B. Disclaimer of opinion.
- C. Unaudited association report.
- D. Qualified opinion.
Answer : B
Explanation:
Choice "B" is correct. A "disclaimer of opinion" must be issued when a CPA is "associated" with FS of a publicly held entity, but has not audited or (interim) reviewed such FS.
Choice "A" is incorrect. A "compilation report" refers to a report related to a non-public entity.
Choice "C" is incorrect. There is no such thing as an "unaudited association report."
Choice "D" is incorrect. The auditor did not audit the FS, so he/she cannot issue an opinion on them.
Restrictions imposed by a retail entity that is a new client prevent an auditor from observing any physical inventories. These inventories account for 40% of the entity's assets. Alternative auditing procedures cannot be applied due to the nature of the entity's records. Under these circumstances, the auditor should express a(an):
- A. Disclaimer of opinion.
- B. Qualified opinion.
- C. Adverse opinion.
- D. Unqualified opinion with an explanatory paragraph.
Answer : A
Explanation:
Choice "A" is correct. Since the auditor is unable to observe inventory or apply alternative audit procedures, a scope limitation exists. Due to the significance of the inventory balance (40% of total assets is quite material), a disclaimer of opinion (rather than simply a qualification) is appropriate.
Choice "B" is incorrect. Since the inventory balance is so material, a qualified opinion is not sufficient in this case.
Choice "C" is incorrect. An adverse opinion is not an appropriate response to a scope limitation.
Choice "D" is incorrect. Since the scope limitation relates to a material balance, an unqualified opinion is not appropriate.
Which of the following audit 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. Reading the minutes of meetings of the stockholders and the board of directors.
- B. Comparing the market value of property to amounts owed on the property.
- C. Reviewing lease agreements to determine whether leased assets should be capitalized.
- D. Inspecting title documents to verify whether any assets are pledged as collateral.
Answer : A
Explanation:
Choice "A" is correct. The auditor should examine any evidence that appears contrary to the basic principle of going concern. Reviewing the minutes from stockholder and board of director meetings is one procedure that is used in this regard.
Choice "B" is incorrect. Comparison of the market value of property to amounts owed on the property determines its net value, but would not necessarily indicate a going concern issue.
Choice "C" is incorrect. Reviewing lease agreements to determine whether leased assets should be capitalized is important in evaluating the financial statements, but it would not provide evidence of going concern issues.
Choice "D" is incorrect. Inspecting title documents to verify whether any assets are pledged as collateral provides information regarding presentation and disclosure, but would not provide evidence of going concern issues.
Which of the following 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. Performing cutoff tests of sales transactions with customers with long-standing receivable balances.
- B. Evaluating the entity's procedures for identifying and recording related party transactions.
- C. Inspecting title documents to verify whether any real property is pledged as collateral.
- D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.
Answer : D
Explanation:
Choice "D" is correct. If a liability is significant enough, it may give rise to a situation in which there is substantial doubt about an entity's ability to continue as a going concern. Inquiring of an entity's legal counsel about litigation, claims, and assessments is one way to determine whether such a liability exists.
Choice "A" is incorrect. Cutoff tests are used to determine whether sales are recorded in the proper period. Applying such tests to customer accounts with long- standing receivable balances would not provide information about the entity's ability to continue a as a going concern.
Choice "B" is incorrect. Evaluating the entity's procedures for identifying and recording related party transactions is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues.
Choice "C" is incorrect. Identifying situations in which real property is pledged as collateral is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues.
A CPA's standard report on audited financial statements would be inappropriate if it referred to:
- A. Management's responsibility for the financial statements.
- B. An assessment of the entity's accounting principles.
- C. Significant estimates made by management.
- D. The CPA's assessment of sampling risk factors.
Answer : D
Explanation:
Choice "D" is correct. The CPA's standard report on audited financial statements does not include matters related to the auditor's assessment of specific risk factors.
Choice "A" is incorrect. The CPA's standard report on audited financial statements states that, "These financial statements are the responsibility of the Company's management."
Choices "B" and "C" are incorrect. The CPA's standard report on audited financial statements states that, "An audit also includes assessing the accounting principles used and significant estimates made by management."
When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if:
- A. The effects of the adverse financial conditions likely will cause a bankruptcy filing.
- B. Information about the entity's ability to continue as a going concern is not disclosed.
- C. Management has no plans to reduce or delay future expenditures.
- D. Negative trends and recurring operating losses appear to be irreversible.
Answer : B
Explanation:
Choice "B" is correct. In a situation where it is likely that an entity's operations will be discontinued, disclosure of information about the entity's ability to continue as a going concern is required by GAAP. Failure to make such disclosure would be a departure from GAAP, resulting in either a qualified or adverse opinion.
Choice "A" is incorrect. As long as the going concern situation is adequately disclosed, the fact that there will be a bankruptcy filing would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "C" is incorrect. As long as the going concern situation is adequately disclosed, the fact that management does not intend to reduce or delay future expenditures would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "D" is incorrect. As long as the going concern situation is adequately disclosed, the fact that negative trends and recurring operating loses appear to be irreversible would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:
- A. Repurchase the entity's stock at a price below its book value.
- B. Issue stock options to key executives.
- C. Lease rather than purchase operating facilities.
- D. Accelerate the due date of an existing mortgage.
Answer : C
Explanation:
Choice "C" is correct. Leasing rather than purchasing operating facilities results in reduced (or at least delayed) expenditures, which is a mitigating factor in a going concern situation.
Choice "A" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Repurchasing stock is an outflow of cash that would reduce ownership equity; as such, it is not a mitigating factor.
Choice "B" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Issuing stock options does not fall into any of these categories and would not be considered a mitigating factor.
Choice "D" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Accelerating the due date of an existing mortgage would increase expenditures, and therefore would not be a mitigating factor.
Which of the following is true regarding the standard audit report for an issuer?
- A. Reference should be made in the scope paragraph to both PCAOB standards and generally accepted auditing standards.
- B. PCAOB standards should not be mentioned at all, although their use is implied in the standard auditor's report.
- C. Reference should be made in the scope paragraph to PCAOB standards, and in the opinion paragraph to generally accepted accounting principles.
- D. Reference may be made in the scope paragraph to either PCAOB standards or generally accepted auditing standards.
Answer : C
Explanation:
Choice "C" is correct. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards, and should refer to GAAP in the opinion paragraph.
Choice "A" is incorrect. An auditor reporting on the audit of financial statements of a nonissuer may (but is not required to) refer to both PCAOB standards and generally accepted auditing standards in the scope paragraph. Audit reports for audits of issuers refer only to PCAOB standards in the scope paragraph.
Choice "B" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed.
Choice "D" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. Referring to generally accepted auditing standards instead is not an option, as audits of issuers must follow
PCAOB standards.
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