A1 - MCQ

Question 1

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

A. Rules acknowledged by the accounting profession because of their universal application.

B. Pronouncements issued by the Auditing Standards Board.

C. Measures of the quality of the auditor’s performance.

D. Procedures to be used to gather evidence to support financial statements.

Answer 1

Meant for Generally accepted auditing standards (GAAS)

C. Measures of the quality of the auditor’s performance.

Question 2

The phrase “U.S. generally accepted accounting principles” is an accounting term that:

A. Is included in the audit report to indicate that the audit has been conducted in accordance with generally accepted auditing standards (GAAS).

B. Provides a measure of conventions, rules, and procedures governed by the AICPA.

C. Encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time.

D. Includes broad guidelines of general application but not detailed practices and procedures.

Answer 2

C. Encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time.

US GAAP is an example of a financial reporting framework acceptable for preparing financial statements

Question 3

Which of the following terms used within standards indicates a presumptively mandatory requirement?

A. May
B. Must
C. Might
D. Should

Answer 3

D. Should

Must be followed in all cases, except in rare circumstances when departure from framework is permitted, if there’s appropriate justification

Question 4

Which of the following terms used within standards indicates a explanatory material that does not impose a professional requirement?

A. May
B. Must
C. Might
D. Should

Answer 4

A. May or C. Might

Question 5

Which of the following terms used within standards indicates unconditional requirement, which must be followed in all cases in which the requirement is relevant?

A. May
B. Must
C. Might
D. Should

Answer 5

B. Must

No exceptions, no if, ands or buts

Question 6

Match the audit guideline type with whom the audits apply to:

Audit guideline:
Statement on Auditing Standards (SAS)
Public Company Accounting Oversight Board (PCAOB)
Generally Accepted Government Auditing Standards (GAGAS)

Type of audit client:
Issuers
Non-issuers
Government organizations

Answer 6

-SAS applies for non-issuers (private/non public clients)
-PCAOB applies for issuers (public)
-GAGAS applies for government organizations

Question 7

Which of the following is not an example of the application of professional skepticism?

A. Designing additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion.

B. Obtaining corroboration of management’s explanations through consultation with a specialist.

C. Inquiring of prior year engagement personnel regarding their assessment of management’s honesty and integrity.

D. Using third-party confirmations to provide support for management’s representations.

Answer 7

C. Inquiring of prior year engagement personnel regarding their assessment of management’s honesty and integrity.

NOT an example, because assessing honesty and integrity in prior year engagement would not be effective for current year’s audit

Question 8

The responsibilities of an auditor include all of the following except which one?

A. Maintaining professional skepticism and exercising professional judgment throughout the planning and performance of the audit.

B. Complying with relevant ethical requirements.

C. Appropriate competence and capabilities to perform the audit.

D. A minimum amount of technical knowledge of and experience in the industry in which the audit client operates

Answer 8

D. A minimum amount of technical knowledge of and experience in the industry in which the audit client operates

This is NOT a responsibility of an auditor because technical knowledge can be obtained during the course of the audit. Experience in industry is not required

Question 9

In certain audit engagements, the auditor may be required to comply with auditing requirements in addition to GAAS. The auditor may conduct the audit in accordance with:

A. Both GAAS and government auditing standards (GAGAS)

B. Only GAAS or PCAOB, but not auditing standards of another jurisdiction or country.

C. Either GAAS as issued by the AICPA or PCAOB Standards, but not both.

D. International Standards on Auditing, but only if the audit is being conducted in another country outside the U.S.A.

Answer 9

A. Both GAAS and government auditing standards (GAGAS)

Auditor is allowed to apply two sets of standards fully. Language needs to be added to “Basis of Opinion” report to indicate that

Choice B, C and D mention “one or the other” making those incorrect

Question 10

To obtain reasonable assurance, an auditor should:

A. Ensure that management does not conceal any fraudulent activities on the part of employees.

B. Design the audit to detect all instances of illegal acts.

C. Examine all available corroborating evidence supporting management’s assertions.

D. Plan the work and properly supervise any assistants.

Answer 10

D. Plan the work and properly supervise any assistants.

In addition, apply materiality, identify and assess risk, obtain sufficient audit evidence

Question 11

Complete the blanks:

Auditor must obtain sufficient (1)_______________ audit evidence to afford a reasonable basis for the opinion

Auditor gains (2)_____________ assurance as the basis for the opinion

A) appropriate
B) reasonable
C) adequate
D) disconfirming

Answer 11

1) appropriate
2) reasonable

Question 12

List three responsibilities of MANAGEMENT:

Answer 12

1) preparation and presentation of financial statements
2) design, implement and maintenance of internal control
3) provide auditor with access to information

Question 13

List of responsibilities are for:

1) express opinion on financial statements
2) maintain professional skepticism
3) comply with ethical requirements
4) exercise professional judgment through planning and performance of audit
5) obtain sufficient appropriate audit evidence
6) comply with GAAS

Answer 13

AUDITOR

Question 14

Name a difference between non-issuers and issuers as it relates to the types of audit engagements they can do:

Answer 14

Non-issuers can EITHER do financial statement audit on fairness on FS (one opinion) OR integrated audit with financial statement audit and effectiveness on internal controls over financial reporting (two opinions)

Issuers MUST do integrated audits (Financial statements and internal controls over financial reporting (two opinions)

Question 15

An auditor of a nonissuer concludes that a client’s illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the pervasiveness of the effect on the financial statements, the auditor should express either a (an):

A. Unmodified opinion with an other-matter paragraph or a qualified opinion.
B. Disclaimer of opinion or an unmodified opinion with an emphasis-of-matter paragraph.
C. Qualified opinion or an adverse opinion.
D. Adverse opinion or a disclaimer of opinion

Answer 15

C. Qualified opinion or an adverse opinion

Material affect on FS, depending on pervasiveness = QUALIFIED OR ADVERSE

Question 16

If financial statements are materially correct, which type of opinion to form?

A) unmodified / unqualified
B) disclaimer of opinion
C) modified / qualified
D) adverse

Answer 16

A) unmodified / unqualified

For non-issuers, it’s unmodified - THINK N.I.M.
For issuers, it’s unqualified - THINK I.Q.

Question 17

If financial statements are material, but NOT pervasive, which type of audit opinion?

A) unmodified / unqualified
B) disclaimer of opinion
C) modified / qualified
D) adverse

Answer 17

C) modified / qualified

For non-issuers, it’s modified - THINK N.I.M.
For issuers, it’s qualified - THINK I.Q.

Question 18

If financial statements are material AND pervasive, which type of audit opinion?

A) unmodified / unqualified
B) disclaimer of opinion
C) modified / qualified
D) adverse

Answer 18

D) adverse

ADVERSE.FINANCIAL.STATEMENTS = AFS

Question 19

If audit issues are material, but NOT pervasive, which type of audit opinion?

A) unmodified / unqualified
B) disclaimer of opinion
C) modified / qualified
D) adverse

Answer 19

C) modified / qualified

For non-issuers, it’s modified - THINK N.I.M.
For issuers, it’s qualified - THINK I.Q.

Question 20

If audit issues are material AND pervasive, which type of audit opinion?

A) unmodified / unqualified
B) disclaimer of opinion
C) modified / qualified
D) adverse

Answer 20

B) disclaimer of opinion

DISCLAIMER.AUDIT.ISSUES = D.A.I.

Question 21

On audit report, For unmodified audit opinion (non-issuer), Generally accepted auditing standards (GAAS) belongs on:

A) Basis for opinion
B) Opinion
C) Auditors responsibility
D) Managements responsibility

Answer 21

A) Basis for opinion & C) Auditors responsibility

Question 22

On audit report, For unmodified audit opinion (non-issuer), Generally accepted accounting principles (GAAP) or any other financial reporting framework belongs on:

A) Basis for opinion
B) Opinion
C) Auditors responsibility
D) Managements responsibility

Answer 22

B) Opinion & D) Managements responsibility

Question 23

On audit report, For unqualified audit opinion (issuer), Public company accounting oversight board (PCAOB) belongs on:

A) Basis for opinion
B) Opinion on the Financial statements
C) Auditors responsibility
D) Managements responsibility

Answer 23

A) Basis for opinion

Question 24

On audit report, For unqualified audit opinion (issuer), Generally accepted accounting principles (GAAP) or any other financial reporting framework belongs on:

A) Basis for opinion
B) Opinion on Financial statements
C) Auditors responsibility
D) Managements responsibility

Answer 24

B) Opinion on Financial statements section

Question 25

When financial statements contain a departure from U.S. GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should express an opinion that is: A. Qualified or adverse, depending on pervasiveness. B. Adverse. C. Qualified. D. Unmodified.

Answer 25

D. Unmodified Because the departure from GAAP is justified to avoid misleading financials. Since now that the statements are stated fairly, you can express an unmodified opinion

Question 26

The opinion paragraph in an auditor's report for a nonissuer should include a statement that: A. Identifies the applicable financial reporting framework and its origin. B. Describes the auditor's responsibility for expressing an opinion on the financial statements. C. Includes the word independent to clearly indicate that the report is from an independent auditor. D. Indicates that management is responsible for the fair presentation of the financial statements

Answer 26

A. Identifies the applicable financial reporting framework and its origin Choice B is on separate paragraph with auditors responsibility Choice C would be included in report title Choice D is on separate paragraph with management responsibility

Question 27

In which of the following sections of an auditor's report for a nonissuer does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit? A. Basis for Opinion B. Opinion C. Emphasis-of-matter D. Scope

Answer 27

B. Opinion

Question 28

Which section references GAAS, auditor independence, and states whether or not the auditor believes sufficient appropriate evidence was obtained to provide a basis for the auditor's opinion A. Basis for Opinion B. Opinion C. Emphasis-of-matter D. Scope

Answer 28

A. Basis for Opinion

Question 29

Block, a CPA firm, is finalizing the audit of a nonissuer. In drafting the audit report containing an unmodified opinion, how should Block make the following representations in the audit opinion on comparative financial statements? Consistent application of accounting principles - IMPLICITLY / EXPLICITLY Examination of evidence on a test basis - IMPLICITLY / EXPLICITLY

Answer 29

Consistent application of accounting principles - IMPLICITLY Examination of evidence on a test basis - EXPLICITLY -Within Auditors responsibility report, explicit statement “Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements."

Question 30

Which of the following best describes the earliest date for an auditor's report? A. The date audit documentation was completed. B. The date the auditor has obtained sufficient appropriate audit evidence to support the opinion. C. The last day of audit fieldwork. D. The date all audit procedures have been completed and the audit file has been assembled.

Answer 30

B. The date the auditor has obtained sufficient appropriate audit evidence to support the opinion

Question 31

Which of the following statements is a basic element of the auditor's report under U.S. auditing standards? A. An audit includes evaluating the reasonableness of significant accounting estimates made by management. B. The disclosures provide reasonable assurance that the financial statements are free of material misstatement. C. The auditor evaluated the overall internal control. D. The financial statements are consistent with those of the prior period.

Answer 31

A. An audit includes evaluating the reasonableness of significant accounting estimates made by management "In performing an audit in accordance with GAAS, we evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management..."

Question 32

Which of the following items is explicitly included in an audit report expressing an unmodified opinion? A. We conducted our audit in accordance with generally accepted accounting principles. B. We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. C. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our review of the financial statements. D. The procedures selected depend on management's approval, including the assessment of the risks of any errors resulting from fraud.

Answer 32

B. We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks

Question 33

Which of the following is true regarding the audit report for an issuer? A. Reference may be made to either PCAOB standards or generally accepted auditing standards. B. PCAOB standards should not be mentioned at all, although their use is implied in the auditor's report. C. The report should include references to PCAOB standards and generally accepted accounting principles. D. Reference should be made to both PCAOB standards and generally accepted auditing standards.

Answer 33

C. The report should include references to PCAOB standards and generally accepted accounting principles For an issuer, the accounting standard, PCAOB, would be referenced in Basis for Opinion section And financial reporting framework, GAAP, would be referenced in Opinion on Financial statements section

Question 34

In an audit of an issuer, an auditor is LEAST LIKELY to include which of the following information related to a critical audit matter in the audit report? A. Reference to relevant financial statement accounts that relate to the critical audit matter. B. A statement that disclaims the auditor's responsibility for critical audit matters. C. Description of how the critical audit matter was addressed in the audit. D. Description of the principal considerations that led the auditor to determine that the matter was a critical audit matter.

Answer 34

B. A statement that disclaims the auditor's responsibility for critical audit matters Language that includes disclaiming, qualifying, restricting or minimizing auditors responsibility is not appropriate

Question 35

Definition of purport

Answer 35

Appearing or claimed to be true, when in actuality, it is stated unfairly. Alleged. Stated with no evidence

Question 36

If a company issues financial statements that purport to present financial position and results of operations, but omits statement of cash flows, what kind of opinion would the auditor express? A) unmodified / unqualified B) modified / qualified C) adverse D) disclaimer

Answer 36

B) modified / qualified Due to omission of statement of cash flows, auditor would express modified / qualified

Question 37

March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to: A. Monday Corp., the client that engaged March. B. Wall Corp., the entity audited by March. C. 1st Federal Bank. D. Both Monday Corp. and 1st Federal Ban

Answer 37

A. Monday Corp., the client that engaged March. The audit report should be addressed to the entity that engaged them, only Wall Corp did not engage the client. They are not March’s client 1st federal bank will rely on the FS, but they were not engaged to audit firm March CPA

Question 38

Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate? A. Management refuses to produce documentation verifying the ownership of its equipment and production facilities. B. The chief financial officer and the chief executive officer are unwilling to sign the management representation letter. C. The auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme. D. The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows.

Answer 38

D. The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows. Correct opinion would be either qualified or adverse, since the omission of cash flows on FS is a GAAP issue

Question 39

The auditor's report should include reference to the United States as the country of origin of: I.The accounting principles used to prepare the financial statements. II.The auditing standards the auditor followed in performing the audit. A. I only. B. II only. C. Neither I nor II. D. Both I and II.

Answer 39

D. Both I and II. Country of origin should be referenced for BOTH accounting principles and standards

Question 40

Which of the following procedures is an auditor least likely to perform if material disclosures required by GAAP are omitted? A. Discuss the omission of such information with those charged with governance. B. Disclose the omitted information in the basis-for-modification paragraph. C. Discuss the omission of such information with management. D. Disclose the omitted information in the notes to the financial statements.

Answer 40

D. Disclose the omitted information in the notes to the financial statements Auditor is least likely do disclose on FS, because this is the responsibility of management

Question 41

What audit opinion should auditor express if they are NOT independent, but they are required by law/regulation to report on the FS A) disclaimer of opinion B) adverse C) qualified D) unqualified

Answer 41

A) disclaimer of opinion In addition to this, auditor should note “lack of independence” as a reason

Question 42

If financial statements are false, fraudulent, deceptive or misleading, and management refuses to correct them, and modification of CPA report is NOT sufficient to correct them, what should auditors next step be? A) adverse opinion B) unmodified opinion C) consider withdraw from engagement D) qualified opinion

Answer 42

C) consider withdraw from engagement

Question 43

For a qualified opinion that is expressed due to a scope limitation, pick the language choice that is correct and incorrect 1) “In our opinion, except for the above-mentioned limitation on the scope of the audit” 2) In our opinion, except for the possible effects of the matters described in the Basis for Qualified Opinion section of our report.”

Answer 43

1 - INCORRECT & IMPROPER 2 - CORRECT

Question 44

Under which of the following circumstances would a disclaimer of opinion not be appropriate? A. The auditor is unable to determine the amounts associated with an employee fraud scheme. B. Management does not provide reasonable justification for a change in accounting principle. C. The chief executive officer is unwilling to sign the management representation letter. D. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.

Answer 44

B. Management does not provide reasonable justification for a change in accounting principle Unjustified change in accounting would result in qualified or adverse

Question 45

An auditor may issue a qualified opinion under which of the following circumstances? Lack of sufficient appropriate audit evidence - YES / NO Restrictions of the scope of the audit - YES / NO

Answer 45

Lack of sufficient appropriate audit evidence - YES Restrictions of the scope of the audit - YES Qualified opinion can be issued either for lack of sufficient evidence and for restrictions on scope

Question 46

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? A. Qualified and adverse. B. Disclaimer and unmodified with an emphasis-of-matter paragraph added. C. Qualified and disclaimer. D. Adverse and unmodified with an emphasis-of-matter paragraph added.

Answer 46

C. Qualified and disclaimer. DON’T GET TRICKED BY THE WORDING “AUDITED FINANCIAL STATEMENTS” IN THIS QUESTION. UNABLE TO OBTAIN FS OR OTHER EVIDENCE” IS CONSIDERED A SCOPE LIMITATION, THEREFORE DISCLAIMER IS MORE APPROPRIATE

Question 47

According to U.S. GAAS, when the auditor is not independent but is required by law or regulation to report on the financial statements, the auditor's report should disclaim an opinion and should: State That "The Auditor Is Not Independent" - YES / NO Provide the Reasons for Lack of Independence - YES / NO

Answer 47

State That "The Auditor Is Not Independent" - YES . State this explicitly Provide the Reasons for Lack of Independence - NO . This is not a requirement, but auditor may choose to mention

Question 48

The auditor may not issue a qualified opinion when: A. The auditor is not independent with respect to the audited entity. B. The financial statements contain a material departure from generally accepted accounting principles. C. The auditor is unable to observe a physical inventory count. D. A scope limitation prevents the auditor from completing an important procedure

Answer 48

A. The auditor is not independent with respect to the audited entity This is the only opinion where Disclaimer of opinion can be expressed. Choice B, C D all may result in qualified opinion

Question 49

If an auditor is precluded by the issuer from obtaining sufficient appropriate evidence to evaluate whether an illegal act that could be material to the financial statements has occurred, then the auditor generally should: A. Disclaim an opinion on the financial statements. B. Issue a qualified opinion on the financial statements. C. Issue an unqualified opinion on the financial statements with an explanatory paragraph. D. Issue an unqualified opinion on the financial statements with an other-matter paragraph.

Answer 49

A. Disclaim an opinion on the financial statements Most appropriate since auditor is unable to obtain sufficient appropriate audit evidence. Since an evaluation is still being done on whether the illegal act is material to the FS, auditor cannot issue qualified or adverse, in this case

Question 50

A scope limitation sufficient to preclude an unmodified opinion always will result when management: A. Prevents the auditor from reviewing the audit documentation of the predecessor auditor. B. Engages the auditor after the year-end physical inventory is completed. C. Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP. D. Requests that certain material accounts receivable not be confirmed.

Answer 50

C. Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP Choice A would be a reason to withdraw from engagement, and Choice B and D allows for alternative procedures that could be performed

Question 51

A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when management: A. Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary. B. Does not provide the auditor with an engagement letter specifying the responsibilities of both the entity and the auditor. C. Refuses to disclose in the notes to the financial statements related party transactions authorized by the Board of Directors. D. Fails to correct a significant deficiency in internal control communicated to those charged with governance after the prior year's audit.

Answer 51

A. Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary This is an example of restrictions on scope of audit (timing of work, inability to obtain audit evidence, or inadequate accounting records)

Question 52

If an auditor is unable to determine whether management's estimate of the effects of future events is reasonable, and the effect of those events is believed to be material, he or she should express: A. An unmodified opinion with no additional paragraphs. B. A qualified opinion or an adverse opinion. C. A qualified opinion or a disclaimer of opinion. D. An unmodified opinion with an emphasis-of-matter paragraph following the opinion paragraph.

Answer 52

C. A qualified opinion or a disclaimer of opinion UNABLE TO DETERMINE ESTIMATE = SCOPE LIMITATION = POSSIBLE DISCLAIMER

Question 53

When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond: A. Determining whether management has elected to omit substantially all required disclosures. B. Ascertaining whether the financial statements are in conformity with GAAP. C. Reading the financial statements for obvious material misstatements. D. Documenting that internal control is not being relied on.

Answer 53

C. Reading the financial statements for obvious material misstatements

Question 54

An auditor decides to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to: A. Inadequate disclosure of necessary information. B. The possible effects on the financial statements. C. A departure from generally accepted auditing standards. D. A client-imposed scope limitation.

Answer 54

B. The possible effects on the financial statements If auditor qualified opinion due to scope limitation, the proper language in opinion paragraph must state “due to possible effects on the financial statements”

Question 55

Lawsuit uncertainties: If loss is probable, what should management’s actions be if they CAN estimate the loss amount? A) Disclose, only B) Do nothing C) Accrue and disclose D) Generally ignore

Answer 55

C) Accrue and disclose Probable > if you can estimate loss, accrue and disclose - C.E.L.A.D.

Question 56

Lawsuit uncertainties: If loss is probable, what should management’s actions be if they CANNOT estimate the loss amount? A) Disclose, only B) Do nothing C) Accrue and disclose D) Generally ignore

Answer 56

A) Disclose, only Probable > if you CANNOT estimate loss, disclose only = C.T.E.L.D.O.

Question 57

Lawsuit uncertainties: If loss is reasonably possible, what should management’s actions be if they CAN estimate the loss amount? A) Disclose, only B) Do nothing C) Accrue and disclose D) Generally ignore

Answer 57

A) Disclose, only If reasonably possible > if CAN estimate loss, disclose only = R.P.C.E.L.D.O.

Question 58

Lawsuit uncertainties: If loss is reasonably possible, what should management’s actions be if they CANNOT estimate the loss amount? A) Disclose, only B) Do nothing C) Accrue and disclose D) Generally ignore

Answer 58

A) Disclose, only If reasonably possible, if CANNOT estimate loss amount, disclose only =. R.P.C.T.E.L.D.O

Question 59

Lawsuit uncertainties: If loss is remote, what should management’s actions be if they CAN OR CANNOT estimate the loss amount? A) Disclose, only B) Do nothing C) Accrue and disclose D) Generally ignore

Answer 59

D) Generally ignore FOR BOTH CAN AND CANNOT

Question 60

Management of a nonissuer believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the auditor should express a (an): A. Unmodified opinion with an other-matter paragraph. B. Unmodified opinion. C. Qualified opinion due to a material misstatement of the financial statements. D. Qualified opinion due to a scope limitation.

Answer 60

B. Unmodified opinion. Since the auditor is satisfied with a material loss that is probable, unable to make a reasonable estimate, but this is disclosed in the Fin Stat with no accrual, an unmodified opinion will suffice. Emphasis of Matter paragraph is open to be used, not an “other matter”

Question 61

For which of the following events would an auditor issue a report that omits any reference to consistency? A. A change from an accounting principle that is not generally accepted to one that is generally accepted that has a material impact on the financial statements. B. A material change in the method of accounting for inventories. C. A change in the useful life used to calculate the provision for depreciation expense. D. Management's lack of reasonable justification for a change in accounting principle.

Answer 61

CORRECT: C. A change in the useful life used to calculate the provision for depreciation expense This example is accounted for prospectively, and does not affect comparability of FS between periods. The unmodified opinion implies consistency exists. Choice A, B - Correction of material misstatement requires emphasis of matter (explanatory) paragraph that would affect consistency Choice D - lack of justification would result in report modification due to material misstatement

Question 63

An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report for: An unjustified accounting change -YES / NO A material weakness in internal control - YES / NO

Answer 63

An unjustified accounting change - NO - this would trigger a qualified or adverse opinion A material weakness in internal control - NO - this would be reported to management and charged with governance, no disclosure necessary

Question 64

In which of the following circumstances would an auditor most likely add an emphasis-of-matter paragraph to the report while not affecting the auditor's unmodified opinion? A. To describe a material but justified change in accounting principle. B. Certain transactions cannot be tested because of management's records retention policy. C. The auditor is asked to report on the balance sheet, but not on the other basic financial statements. D. Management's estimates of the effects of future events are unreasonable.

Answer 64

A. To describe a material but justified change in accounting principle

Question 65

An auditor’s report for financial statements prepared using the special purpose framework of the cash basis of accounting contains the following title and sentences: Basis of Accounting We draw attention to Note X of the financial statements, which describes the basis of accounting. The financial statements are prepared on the cash basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. This title and sentences: A. Should appear prior to the opinion paragraph and explain the reason for a modified opinion. B. Represent an other-matter paragraph. C. Are an improper form of reporting. D. Represent an emphasis-of-matter paragraph.

Answer 65

D. Represent an emphasis-of-matter paragraph EOM paragraph is required with accordance of applicable special purpose framework Title can be “Emphasis of Matter” or any other appropriate heading.

Question 66

An emphasis-of-matter paragraph is required when: A. The entity engages in significant related party transactions. B. A major catastrophe has a significant effect on the entity’s financial position. C. An entity appropriately changed the accounting for investments from the cost method to the equity method. This change had a material effect on the financial statements. D. The entity is engaged in an unusually important lawsuit that may result in a significant loss.

Answer 66

C. An entity appropriately changed the accounting for investments from the cost method to the equity method. This change had a material effect on the financial statements Key word is “required” when there’s a justified change in principle and it is material for FS Choice A, B and D are “options that may be used” to put Emphasis of Matter

Question 67

Management believes, and the auditor is satisfied, that a pending lawsuit is reasonably possible to result in a material loss of $100,000. The lawsuit has been adequately disclosed in the notes to the financial statements; however, no loss amount has been accrued related to the pending lawsuit. If management does not make an accrual in the financial statements, the auditor should express a(n): A. Qualified or adverse opinion. B. Unmodified opinion. C. Unmodified opinion with an emphasis-of-matter paragraph. D. Qualified or disclaimer.

Answer 67

B. Unmodified opinion Key word “reasonably possible” requires disclosure only. Since this was disclosed by management already in FS, recording accrual is not necessary. Recording accrual is only needed if loss is PROBABLE

Question 68

Which of the following is true? A. If an auditor believes there is substantial doubt about an entity's ability to continue as a going concern remains, and management has properly disclosed the situation, the auditor may not issue an unmodified opinion. B. The auditor may issue an unmodified opinion when a correction of an error in accounting principle occurs. C. When a material accounting change has been properly accounted for and disclosed, the auditor may not issue an unmodified opinion. D. When an auditor includes a paragraph emphasizing a significant related party transaction, the opinion would be considered a qualified opinion.

Answer 68

B. The auditor may issue an unmodified opinion when a correction of an error in accounting principle occurs. In this instance, consistency is affected, therefore making this a true statement

Question 69

In an audit of an issuer's financial statements, the auditor determined that there was substantial doubt about the issuer's ability to continue as a going concern for a reasonable period of time. If there were no other significant audit findings, which of the following indicates the proper form of the audit report that should be issued? A. An adverse opinion with an other-matter paragraph. B. A disclaimer of opinion. C. An unqualified opinion with an explanatory paragraph. D. A qualified opinion with an emphasis-of-matter paragraph.

Answer 69

C. An unqualified opinion with an explanatory paragraph Key word is “issuer” for them, their EOM paragraph is called “explanatory”

Question 70

In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should: A. State that the consistency standard does not apply. B. Not refer to consistency in the auditor's report. C. State that the accounting principles have been applied consistently. D. Not report on the client's income statement.

Answer 70

B. Not refer to consistency in the auditor's report The standard audit report implies that auditor is satisfied with comparability of FS. This also means auditor gathered sufficient evidence about consistency.

Question 71

An issuer changed its method of accounting for finished goods inventory from last in, first out (LIFO) to first in, first out (FIFO). This would be considered to be a change in which of the following? A. Reporting entity B. Accounting estimate C. Accounting principle D. Inventory classification

Answer 71

CORRECT: C. Accounting principle Change from LIFO to FIFO is accounting principle Incorrect: A - reporting entity is change in entity B - estimate is revising previous estimates based on new info D - classification is change on how items are categorized

Question 72

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should: A. Refer to the change in an emphasis-of-matter paragraph. B. Explicitly concur that the change is preferred. C. Refer to the change in the opinion paragraph. D. Not refer to consistency in the auditor's report

Answer 72

D. Not refer to consistency in the auditor's report Correct because the accounting change has no material effect on comparability of FS, there is no need to recognize the change in CY’s audit report

Question 73

When prior year F.S. were not audited, but the current year FS were audited, what kind of opinion should the auditor express? A) adverse B) disclaimer of opinion C) unmodified D) modified

Answer 73

B) disclaimer of opinion Because the auditor can be faced with a scope limitation with not auditing the beginning balances (statement of income, retained earning and cash flows)

Question 74

If prior year period statements wear NOT audited, reviewed or compiled, the FS should be marked, and auditors report should include A) emphasis of matter paragraph B) disclaimer of opinion C) unmodified opinion D) other matter / explanatory paragraph

Answer 74

D) other matter / explanatory paragraph This indicates that the auditor did not audit, review or compile prior period statements, and they assume no responsibility for it

Question 75

Group auditor making reference to component auditor. Which instance should reference be made, and which instance not to make reference? Group auditor assumes responsibility for the work of component auditor - YES / NO Component auditor has performed an audit in accordance with GAAS - YES / NO Component auditor’s report is not restricted use - YES / NO

Answer 75

Group auditor assumes responsibility for the work of component auditor - NO Component auditor has performed an audit in accordance with GAAS - YES Component auditor’s report is not restricted use - YES

Question 76

When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year's financial statements if the: A. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued report. B. Prior year's financial statements are restated following a change in reporting entity in the current year. C. Prior year's financial statements are restated to conform with generally accepted accounting principles. D. Prior year's opinion was unmodified and the opinion on the current year's financial statements is modified due to a lack of consistency.

Answer 76

C. Prior year's financial statements are restated to conform with generally accepted accounting principles Instance of expressing an adverse opinion in PY FS because of departure from GAAP would encourage this change

Question 77

Comparative financial statements include the prior year's statements that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was unmodified, the successor should: A. Express an opinion only on the current year's financial statements and make no reference to the prior year's financial statements. B. Add an emphasis-of-matter paragraph that expresses only limited assurance concerning the fair presentation of the prior year's financial statements. C. Obtain a letter of representation from the predecessor auditor concerning any matters that might affect the successor's opinion. D. Indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's financial statements

Answer 77

D. Indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's financial statements Reference should indeed be made to the prior year FS, in an “Other matter paragraph”

Question 78

The group auditor of a nonissuer decides not to refer to the component auditor who audited a subsidiary of the group auditor's client. In this situation, the group auditor most likely would: A. Add an emphasis-of-matter paragraph to the auditor's report indicating that the subsidiary's financial statements are not material to the consolidated financial statements. B. Document in the engagement letter that the group auditor assumes no responsibility for the component auditor's work and opinion. C. Obtain written permission from the component auditor to omit the reference in the group auditor's report. D. Determine the type of work to be performed by the group auditor on the financial information of the component.

Answer 78

D. Determine the type of work to be performed by the group auditor on the financial information of the component When no reference is made to component auditor, group auditor assumes all responsibility

Question 79

Before a predecessor auditor reissues the prior year’s audit report on the financial statements of a former client for inclusion with the successor auditor’s report on comparative financial statements, the predecessor does all of the following except: A.Review the audit documentation of the successor auditor. B.Obtain the current comparative financial statements. C.Compare the current period comparative financial statements with those of the prior year. D.Obtain a successor auditor representation letter.

Answer 79

A.Review the audit documentation of the successor auditor No review of audit documentation is necessary. Choice B, C and D are all what’s needed

Question 80

An auditor expressed a qualified opinion on the prior year's financial statements because of a lack of adequate disclosure. These financial statements are properly restated in the current year and presented in comparative form with the current year's financial statements. The auditor's updated report on the prior year's financial statements should: A. Be accompanied by the auditor's original report on the prior year's financial statements. B. Continue to express a qualified opinion on the prior year's financial statements. C. Make no reference to the type of opinion expressed on the prior year's financial statements. D. Express an unmodified opinion on the restated financial statements of the prior year.

Answer 80

D. Express an unmodified opinion on the restated financial statements of the prior year Unmodified opinion would now be expressed on the new restated FS of prior year, since the restated reports now conform with GAAP (lack of disclosure has now been addressed)

Question 81

Before reissuing the prior year's auditor's report on the financial statements of a former client, the predecessor auditor should obtain letters of representation from the: A. Former client's board of directors and the successor auditor. B. Former client's management and the board of directors. C. Former client's attorney and management. D. Successor auditor and the former client's management.

Answer 81

D. Successor auditor and the former client's management In addition to reading FS in current year, compare PY info to audited report, auditor would do choice D

Question 82

If a component auditor does not meet the independence requirements that are relevant to a group audit of a nonissuer's financial statements, then the group engagement team should first: A. Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor. B. Disclose the lack of independence to the nonissuer's management and consider revising the audit report. C. Communicate the lack of independence to the appropriate regulatory authority. D. Withdraw from the engagement when permissible under law or regulation.

Answer 82

A. Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor If component auditor is NOT independent, DO NOT make reference to or use work from them

Question 83

In the auditor's report of a nonissuer under U.S. GAAS, the group engagement partner decides not to make reference to another CPA who audited a client's subsidiary. The group engagement partner could justify this decision if, among other requirements, the group engagement partner: A. Is satisfied as to the independence and professional reputation of the component auditor. B. Is unable to review the audit programs and audit documentation of the component auditor. C. Learns that the component auditor issued an unmodified opinion on the subsidiary's financial statements. D. Issues an unmodified opinion on the consolidated financial statements.

Answer 83

A. Is satisfied as to the independence and professional reputation of the component auditor

Question 84

Under U.S. GAAS, in which of the following situations would a group engagement partner least likely make reference to component auditor who audited a subsidiary of the entity in the audit of a nonissuer? A. The group engagement partner finds it impractical to review the component auditor's work or otherwise be satisfied as to the component auditor's work. B. The component auditor was retained by the group engagement partner and the work was performed under the group engagement partner's guidance and control. C. The financial statements audited by the component auditor are material to the consolidated financial statements covered by the group engagement partner's opinion. D. The group engagement partner is unable to be satisfied as to the independence and professional reputation of the component auditor.

Answer 84

B. The component auditor was retained by the group engagement partner and the work was performed under the group engagement partner's guidance and control Group partner assumed full responsibility for component auditor, therefore, treating the work as their own without mentioning them

Question 85

In the audit of a nonissuer, a group engagement partner decides not to refer to the audit of a component auditor. After making inquiries about the component auditor's professional reputation and independence, the group engagement partner most likely would: A. Contact the component auditor and review the audit programs and working papers pertaining to the component. B. Obtain written permission from the component auditor to omit the reference in the group engagement auditor's report. C. Add an emphasis-of-matter paragraph to the auditor's report indicating that the component's financial statements are not material to the consolidated financial statements. D. Document in the engagement letter that the group engagement partner assumes no responsibility for the other CPA's work

Answer 85

A. Contact the component auditor and review the audit programs and working papers pertaining to the component Group auditor is accepting full responsibility for the work, while not mentioning component auditor at all. Therefore, they will review the audit programs and working papers

Question 86

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: A. Are an improper form of reporting. B. Divide responsibility. C. Disclaim an opinion. D. Qualify the opinion.

Answer 86

B. Divide responsibility Since the wording describes percentages of revenues and assets audited by other auditors

Question 87

Foley, CPA, is the group engagement partner for a nonissuer. Pente, CPA, audits a wholly owned subsidiary of this company. Which of the following is true about Foley's decision between assumption and division of responsibility under U.S. GAAS? A. If Foley chooses to divide responsibility, she need not evaluate Pente's reputation and independence. B. If Foley chooses to assume responsibility, the report will mention this assumption in the auditor's responsibility paragraph. C. If Foley chooses to divide responsibility, no reference to the work done by Pente will be included in the audit report. D. If Foley chooses to assume responsibility, she must not make reference to the component auditor in her report.

Answer 87

D. If Foley chooses to assume responsibility, she must not make reference to the component auditor in her report

Question 88

When a group engagement partner decides to make reference to a component auditor's audit under U.S. GAAS in the audit of a nonissuer, the group engagement partner's report should state "We did not audit the financial statements of X Company..." in which section of the audit report? A. An emphasis-of-matter paragraph B. Auditor's Responsibilities C. Opinion D. Not in the auditor's report, but in a separate report prepared by the component auditor and appended to the auditor's report

Answer 88

C. Opinion Question states “in the audit report”, this eliminates Choice A. Auditors responsibility would be unchanged from Choice B. There would be no separate report made from Choice D. Choice C is the best answer. Language would include: "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 X Company, is based solely on the report of the other auditors."

Question 89

As of August 13, a CPA had obtained sufficient appropriate audit evidence with respect to fieldwork on an engagement to audit financial statements for the year ended June 30. On August 27, an event came to the CPA's attention that should be disclosed in the notes to the financial statements. The event was properly disclosed by the entity, but the CPA decided not to dual date the auditor's report and dated the report August 27. Under these circumstances, the CPA was taking responsibility for: A. Only the subsequent events that occurred through August 13. B. All subsequent events that occurred through August 13 and the specific subsequent event disclosed by the entity. C. Only the specific subsequent event disclosed by the entity. D. All subsequent events that occurred through August 27.

Answer 89

D. All subsequent events that occurred through August 27 Since auditor decided not to dual date the report on 8/13 and 8/27, they took full responsibility all through 8/27 Choice B is an example of dual dating

Question 90

Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements? A. New convertible bonds are issued to expand the company's product line. B. A loss is reported on uncollectible accounts of an acknowledged distressed customer. C. A fixed asset used in operations is sold at a substantial profit. D. Negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter.

Answer 90

A. New convertible bonds are issued to expand the company's product line This does not relate to year under audit, therefore, no adjustment is needed

Question 91

Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit? A. The entity recorded the amount of an asset impaired as of the balance sheet date. B. Before the issuance of the audit report, the entity estimated the amount of a claim that had a probable adverse outcome related to a product sold during the year under audit. C. Legal counsel communicated that an unfavorable judgment from current litigation was reasonably possible. D. A reasonable estimate was determined for a liability incurred after the balance sheet date.

Answer 91

B. Before the issuance of the audit report, the entity estimated the amount of a claim that had a probable adverse outcome related to a product sold during the year under audit Look for Key words, probable outcome that can be estimated = accrue the loss Reasonably possible ONLY requires Disclosure

Question 92

Which of the following events requires adjustment to the financial statements for the year ended December 31, Year 1? A. Loss of inventory due to an earthquake in January, Year 2. B. Sale of a major bond issue in January, Year 2. C. Loss on an accounts receivable as the result of a customer suffering a deteriorating financial condition that led to bankruptcy filing in January, Year 2. D. Loss on an accounts receivable as the result of a customer suffering a major loss from a flood in January, Year 2.

Answer 92

C. Loss on an accounts receivable as the result of a customer suffering a deteriorating financial condition that led to bankruptcy filing in January, Year 2 Because this condition is from an AR stemming from Y1, making it a recognized subsequent event, their inability to pay carried through to Y2, requiring an adjustment for credit loss

Question 93

After the balance sheet date, an auditor's client suffers a material loss from a decline in value of marketable securities. Which of the following actions should the auditor advise the client to take? A. Restate the financial statements as if the material loss occurred at the balance sheet date, including disclosure in the notes. B. Disclose the material loss in the financial statements to assure that the financial statements are not misleading. C. Adjust the financial statements to include the material loss. D. Expand audit procedures to test current prices of marketable securities the client holds.

Answer 93

B. Disclose the material loss in the financial statements to assure that the financial statements are not misleading Since this material loss occurred AFTER THE BALANCE SHEET DATE, this is a NON RECOGNIZED SUBSEQUENT EVENT. Therefore, disclose the loss so the FS is not misleading

Question 94

On February 17, Year 2, a company had a fire that destroyed a plant. The building and equipment had a net carrying amount of $550,000 as of December 31, Year 1. The company anticipates that insurance proceeds of $300,000 will be received. The audit of the financial statements dated December 31, Year 1, was completed February 25, Year 2. How should the fire be reported in the financial statements for the year ended December 31, Year 1? A. The loss of $250,000 should be recorded as of December 31, Year 1, and disclosed in the notes to the financial statements. B. The value of the building and equipment should be adjusted to $250,000 as of December 31, Year 1, and the adjustment disclosed. C. The December 31, Year 1, financial statements should disclose the effect of the fire with no financial statement adjustment. D. The December 31, Year 1, financial statements should be adjusted without disclosure.

Answer 94

C. The December 31, Year 1, financial statements should disclose the effect of the fire with no financial statement adjustment Fire occurred after year end, making this non-recognized subsequent event. This should be disclosed, without adjustments to FS numbers

Question 95

In order to address an auditor's responsibilities regarding subsequent events during an audit of a nonissuer, the auditor should: A. Perform audit testing of significant transactions occurring from the date of the auditor's report to the release date of the auditor's report. B. Read the minutes of all of the nonissuer's board of directors' meetings that occurred from the start of the fiscal year through the date of the financial statements. C. Modify the auditor's opinion when subsequent events are identified by the auditor and confirmed by discussions with management. D. Determine that all subsequent events that require adjustment of, or disclosure in, the financial statements have been identified.

Answer 95

D. Determine that all subsequent events that require adjustment of, or disclosure in, the financial statements have been identified. This includes reviewing items that are recognized and non recognized subsequent events

Question 96

An auditor completed an audit of a nonissuer's December 31, Year 3, financial statements and dated the audit report as of March 13, Year 4. On March 14, Year 4, prior to the release of the audit report, an event occurred that required management to revise the Year 3 financial statements and describe the event in a note. The auditor's report on the revised Year 3 financial statements was newly dated as of April 11, Year 4, and released on April 12, Year 4. In this situation, the auditor has taken responsibility for all subsequent events that occurred from January 1, Year 4, until: A. March 13, Year 4. B. March 14, Year 4. C. April 12, Year 4. D. April 11, Year 4

Answer 96

D. April 11, Year 4 Auditor is responsible for subsequent events from Balance sheet date up to Auditors report date!

Question 97

An auditor completed an audit of a nonissuer's December 31, Year 3, financial statements and dated the audit report as of March 13, Year 4. On March 14, Year 4, prior to the release of the audit report, an event occurred that required management to revise the Year 3 financial statements and describe the event in a note. The auditor's report on the revised Year 3 financial statements was newly dated as of April 11, Year 4, and released on April 12, Year 4. In this situation, management/client has taken responsibility for all subsequent events that occurred from January 1, Year 4, until: A. March 13, Year 4. B. March 14, Year 4. C. April 12, Year 4. D. April 11, Year 4

Answer 97

C. April 12, Year 4 Management/client is responsible for subsequent events from Balance sheet date up to issue/release date!

Question 98

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? A. Inquire about payroll checks that were recorded before year-end but cashed after year-end. B. Investigate changes in long-term debt occurring after year-end. C. Send confirmations for a material A/R balance from a customer originating after year-end. D. Determine that changes in employee pay rates after year-end were properly authorized.

Answer 98

B. Investigate changes in long-term debt occurring after year-end This is reviewed to ensure debt is appropriately classified on the balance sheet

Question 99

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? A. Inquire about payroll checks that were recorded before the year-end but cashed after the year-end. B. Compare the latest available interim financial information with the financial statements being reported upon. C. Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates. D. Examine changes in the quoted market prices of investments purchased since the year-end

Answer 99

B. Compare the latest available interim financial information with the financial statements being reported upon. Comparing the interim financial statements with audited financial statements would provide the best evidence for new disclosures not picked up at the audit period

Question 100

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? A. Review tax returns prepared by management after year end. B. Inquire about payroll checks that were recorded before year end but cashed after year end. C. Determine whether inventory ordered before the year end was included in the physical count. D. Investigate changes in capital stock recorded after year end.

Answer 100

D. Investigate changes in capital stock recorded after year end Event such as this would require disclosure to footnotes

Question 101

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? A. Trace information from shipping documents to sales invoices and sales journal transactions. B. Inquire about the current status of transactions that were recorded on the basis of preliminary data. C. Compare the financial statements being reported on with those of the prior year. D. Verify inventory pledged under loan agreements by confirming the details with financial institutions

Answer 101

B. Inquire about the current status of transactions that were recorded on the basis of preliminary data

Question 102

Which of the following procedures would an auditor generally perform regarding subsequent events? A. Inspect inventory items that were ordered before the year-end but arrived after the year-end. B. Test internal control activities that were previously reported to management as inadequate. C. Review the client's cutoff bank statements for several months after the year-end. D. Compare the latest available interim financial statements with the statements being audited.

Answer 102

D. Compare the latest available interim financial statements with the statements being audited

Question 103

Which of the following procedures would most likely help an auditor identify events after the date of the financial statements that should be disclosed? A. Evaluate depreciation schedules for additional depreciation expense. B. Review changes in the interest rate for cash accounts. C. Follow up on accounts receivable confirmations that were not returned for additional loss accruals. D. Inquire about changes in capital stock that was issued or repurchased.

Answer 103

D. Inquire about changes in capital stock that was issued or repurchased Example of non-recognized event that requires disclosure

Question 104

Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next: A. Give public notice that the auditor is no longer associated with financial statements. B. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. C. Issue revised pro forma financial statements taking into consideration the newly discovered information. D. Request that management disclose the newly discovered information by issuing revised financial statements.

Answer 104

B. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

Question 105

If a subsequently discovered fact becomes known to the auditor after the report release date, the auditor should first: A. Discuss the matter with management. B. Notify each member of the board of directors that the auditor will seek to prevent future reliance on the auditor’s report. C. Notify regulatory agencies having jurisdiction over the client that the auditor’s report should no longer be relied upon. D. Determine the effects and issue revised financial statements.

Answer 105

A. Discuss the matter with management

Question 106

Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements? A. New information is discovered concerning undisclosed lease transactions of the audited period. B. A contingency is resolved that had been disclosed in the audited financial statements. C. An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern. D. A subsidiary is sold that accounts for 25% of the entity's consolidated net income.

Answer 106

A. New information is discovered concerning undisclosed lease transactions of the audited period. Check to see if this undisclosed information is reliable

Question 107

Which of the following events occurring after the issuance of the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements? A. Litigation that had been disclosed in the financial statements is resolved. B. A subsidiary that accounts for 30% of the entity's consolidated net revenue is sold. C. The auditor discovers that the entity intends to present comparative financial statements in subsequent years. D. New information regarding significant unrecorded transactions from the year under audit is discovered.

Answer 107

D. New information regarding significant unrecorded transactions from the year under audit is discovered Subsequent discovery of facts that existed at the balance sheet requires further inquiry

Question 108

An auditor withdrew from further association with a nonissuer entity after issuing an audit report on it. Subsequently, the auditor discovered facts that, if known to the auditor at the date of the auditor's report, could have caused the auditor to revise the report. Which of the following statements about this circumstance is correct? A. Because the auditor is no longer associated with the entity, the auditor has no further responsibilities with regard to the financial statements. B. The auditor should talk with the successor auditor about the circumstances of the subsequently discovered information and advise whether the financial statements should be revised. C. The auditor should extend audit procedures with regard to management's revised financial statements with the objective of expressing a dual-dated qualified opinion. D. The auditor should discuss the matter with management and, if it is determined that the financial statements need revision, ask how management intends to address the matter in the financial statements.

Answer 108

D. The auditor should discuss the matter with management and, if it is determined that the financial statements need revision, ask how management intends to address the matter in the financial statements

Question 109

An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor's report but before issuance of the related financial statements. The auditor's responsibility for events occurring subsequent to the original report date was: A. Extended to include all events occurring since the original report date. B. Limited to include only events occurring up to the date of the last subsequent event referenced. C. Limited to the specific event referenced. D. Extended to subsequent events occurring through the later date.

Answer 109

C. Limited to the specific event referenced When a report is dual dated, the original date is retained on the auditors report, and then the second date would extend responsibility up to that specific subsequent event, only

Question 110

On February 25, a CPA issued an auditor's report expressing an unmodified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating financial condition of the entity's principal customer that led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA's next course of action most likely would be to: A. Notify the entity's creditors that the financial statements and the related auditor's report should no longer be relied on. B. Issue a revised auditor's report and distribute it to each creditor known to be relying on the financial statements. C. Notify each member of the entity's board of directors about management's refusal to adjust the financial statements. D. Issue revised financial statements and distribute them to each creditor known to be relying on the financial statements.

Answer 110

C. Notify each member of the entity's board of directors about management's refusal to adjust the financial statements Auditor should contact board of directors to encourage a change on the FS. Auditor will NOT REISSUE FINANCIAL STATEMENTS

Question 111

Wilson, CPA, obtained sufficient appropriate audit evidence to render an opinion on Abco's December 31, Year 1, financial statements on March 6, Year 2. A subsequent event requiring adjustment to the Year 1 financial statements occurred on April 10, Year 2. Wilson decides not to dual date the report and completes the extended audit procedures for subsequent events on April 24, Year 2. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated: A. April 10, Year 2. B. Using dual dating. C. March 6, Year 2. D. April 24, Year 2.

Answer 111

D. April 24, Year 2 Since CPA did not dual date, report should be dated on 4/24, when all sufficient appropriate audit evidence was obtained by the auditor. This is the date where audit report is now extended out to, since not dual dating.

Question 112

Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements? A. New convertible bonds are issued to expand the company's product line. B. Negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter. C. A loss is reported on uncollectible accounts of an acknowledged distressed customer. D. A fixed asset used in operations is sold at a substantial profit.

Answer 112

A. New convertible bonds are issued to expand the company's product line This is a non-recognized subsequent event (no relation to the year under audit) but it does require subsequent events footnote for its significance

Question 113

If the audited financial statements require revision for material inconsistency, and management refuses to make revision, what opinion should be expressed? A) unmodified opinion B) modified opinion C) disclaimer of opinion D) adverse opinion

Answer 113

B) modified opinion TAKEN DIRECTLY FROM THE TEXTBOOK! NEED TO KNOW WHAT OTHER OPINION CAN BE EXPRESSED, POSSIBLY ADVERSE???

Question 114

If other information requires revision for material inconsistency and management refuses to make the revision, the auditor first should A) ignore and move on B) express unmodified opinion C) revise the other information section D) communicate matter with those charged with governance

Answer 114

D) communicate matter with those charged with governance - consider implications for auditor report - withhold use of report - withdraw from engagement and consult legal counsel

Question 115

For non-issuers, where in the audit report will an auditor include “other information?” A) other information paragraph B) opinion paragraph C) basis for opinion paragraph D) critical issues paragraph

Answer 115

A) other information paragraph This will be a separate section within auditors report with heading “Other information” or other “Appropriate heading.” Section of audit report should contain reference to other information.

Question 116

If auditor concludes that supplementary information is materially misstated in relation to FS as a whole, and management refuses to revise the information, what opinion should the auditor express: A) unqualified B) disclaimer C) withdraw from engagement D) qualified / adverse

Answer 116

D) qualified / adverse Auditor will describe the misstatement in auditors report. If separate report is being issued, Auditor would withhold the report

Question 117

If auditors report for audited FS contains either adverse opinion or disclaimer of opinion, and auditor has been engaged to report on supplementary information, how should an auditor approach this engagement? A) express the same opinion from the report B) express unmodified opinion C) talk to management and those charged with governance D) nothing, auditor is prohibited from expressing an opinion

Answer 117

D) nothing, auditor is prohibited from expressing an opinion

Question 118

For issuers, where in the audit report will an auditor include “supplementary information?” A) other information paragraph B) opinion paragraph C) basis for opinion paragraph D) explanatory paragraph

Answer 118

D) explanatory paragraph This will be found in auditors report, Or this may be issued in a separate report on supplemental information

Question 119

If auditor is unable to obtain sufficient appropriate audit evidence to support an opinion on supplemental information, what opinion should the auditor express: A) unqualified B) disclaimer C) withdraw from engagement D) qualified / adverse

Answer 119

B) disclaimer The auditors report on supplemental information would describe the reason for the disclaimer and state that the auditor is unable to express an opinion

Question 120

In the audit of a non-issuer and issuer, what is an auditor's responsibility for supplementary information, such as the disclosure of pension information, which is outside the basic financial statements but required by the GASB? A. The auditor should apply substantive tests of transactions to the supplementary information and verify its conformity with the GASB requirement. B. The auditor has no responsibility for such supplementary information as long as it is outside the basic financial statements. C. The auditor's only responsibility for the supplementary information is to determine that such information has not been omitted. D. The auditor should apply certain limited procedures to the supplementary information and add a separate section to the auditor's report

Answer 120

D. The auditor should apply certain limited procedures to the supplementary information and add a separate section to the auditor's report Limited procedures include -inquiry with management -determine if supplementary information is consistent -obtain written management representations

Question 121

When audited financial statements are presented in a client's document containing other information, the auditor should: A. Perform the appropriate substantive auditing procedures to corroborate the other information. B. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable. C. Add an other-matter paragraph to the auditor' s report without changing the opinion on the financial statements. D. Read the other information to determine that it is consistent with the audited financial statements.

Answer 121

D. Read the other information to determine that it is consistent with the audited financial statements

Question 122

An auditor reads the letter of transmittal accompanying a county's comprehensive annual financial report and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take? A. Request that the client revise the letter of transmittal. B. Include an other-matter paragraph in the auditor's report. C. Consider withdrawing from the engagement. D. Request a client representation letter acknowledging the inconsistency.

Answer 122

A. Request that the client revise the letter of transmittal If there is a material inconsistency with the FS, but the FS does not require revision, the letter of transmittal is incorrect, therefore that needs revision. The client is the one to do this

Question 123

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 next? A. Consider the situation closed because the other information is not in the audited financial statements. B. Communicate this matter with those charged with governance. C. Disclaim an opinion on the financial statements after explaining the material inconsistency in an other-matter paragraph. D. Issue an "except for" qualified opinion after discussing the matter with the client's audit committee

Answer 123

B. Communicate this matter with those charged with governance Choice B is the first next step. Next step: -revise audit report to include “Other information” mentioning material inconsistency -withhold the use of audit report -withdraw from engagement

Question 124

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: A. State that the presentation is prepared in accordance with a special purpose framework. B. Restrict the use of the report to those specified users within the entity. C. Be limited to data derived from the entity's audited financial statements. D. Indicate that the data are subject to prospective results that may not be achieved.

Answer 124

C. Be limited to data derived from the entity's audited financial statements

Question 125

For a nonissuer, which of the following procedures would an auditor most appropriately perform to provide an opinion on whether supplementary information presented with financial statements is fairly stated in relation to the financial statements? A. Obtain verbal representations from management stating that it acknowledges its responsibility for the presentation of the supplementary information. B. Inquire of management about the purpose of the supplementary information and the criteria used by management to prepare the information. C. Evaluate the appropriateness, but not the completeness, of the supplementary information. D. Obtain verbal representations from management about any significant assumptions or interpretations underlying the measurement of the supplementary information.

Answer 125

B. Inquire of management about the purpose of the supplementary information and the criteria used by management to prepare the information This is done in addition to the procedures performed during the audit of the FS. Auditor would also evaluate both the appropriateness and completeness of the supplementary information

Question 126

When opining on whether supplementary information presented with audited financial statements is fairly stated in all material respects and in relation to the financial statements as a whole, an auditor of a nonissuer must ensure that: A. The supplementary information is measurable. B. Neither an adverse opinion nor a disclaimer of opinion was issued on the financial statements. C. The supplementary information complies with applicable federal and state laws. D. The board of directors has reviewed the supplementary information.

Answer 126

B. Neither an adverse opinion nor a disclaimer of opinion was issued on the financial statements

Question 127

An auditor is engaged to report on supplemental information that accompanies audited financial statements. The auditor’s report on supplemental information should include: A. A statement that the supplemental information is the responsibility of the auditor. B. A separate paragraph at the end of the report restricting its use to specified parties. C. A statement that the supplemental information has been subjected to audit procedures performed in conjunction with the audit of the financial statements. D. A statement that any difference in the facts, circumstances, or assumptions may change the report.

Answer 127

C. A statement that the supplemental information has been subjected to audit procedures performed in conjunction with the audit of the financial statements

Question 128

If information accompanying the basic financial statements has been subjected to auditing procedures, the auditor may include in the auditor's report on the financial statements an opinion that the accompanying information is fairly stated in: A. Accordance with attestation standards expressing a conclusion about management's assertions. B. Conformity with generally accepted accounting principles. C. All material respects in relation to the financial statements as a whole. D. Accordance with generally accepted auditing standards

Answer 128

C. All material respects in relation to the financial statements as a whole Information accompanying the FS is supplementary information. The opinion section would state: “Information is fairly stated in all material respects in relation to the FS as a whole.”

Question 129

An auditor is engaged to perform audit procedures and report on supplemental information that accompanies the financial statements pursuant to PCAOB standards. If the auditor is unable to obtain sufficient appropriate audit evidence to support an opinion on the supplemental information, the auditor should issue an opinion on the supplementary information that is a(n): A. Adverse opinion. B. Disclaimer of opinion. C. Adverse or disclaimer of opinion. D. Qualified opinion.

Answer 129

B. Disclaimer of opinion

Question 130

An annual shareholders' report includes audited financial statements and contains supplementary information required by GAAP. Is it permissible for the auditor to report on such information? A. Yes, provided the report provides negative assurance only. B. Yes, provided the auditor performs sufficient audit procedures to determine whether the information is fairly stated, in all material respects, in relation to the financial statements. C. No, because the auditor has no responsibility to read the other information in a document containing audited financial statements. D. No, because such reporting may lead to the belief that the auditor is responsible for the information.

Answer 130

B. Yes, provided the auditor performs sufficient audit procedures to determine whether the information is fairly stated, in all material respects, in relation to the financial statements. Supplementary information is responsibility of management, not the auditor!

Question 131

Which of the following should the auditor of a nonissuer do when reporting on supplementary information that is required by a designated accounting standard setter, presented with the basic financial statements? A. Make no reference to the required supplementary information in the report. B. Include a reference to the required supplementary information in the opinion paragraph. C. Include a separate report section that references the required supplementary information. D. Include an emphasis-of-matter paragraph that references the required supplementary information.

Answer 131

C. Include a separate report section that references the required supplementary information Separate section would be named “Required Supplementary information”

Question 132

When financial statements include supplementary information which is outside the basic financial statements, but required by GAAP, the auditor may choose any of the following options, except: A. Express an opinion on the information, if he or she has been engaged to examine such information. B. Disclaim an opinion on the information. C. Report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate procedures have been applied. D. Express negative assurance on the information, if review procedures have been appropriately performed.

Answer 132

D. Express negative assurance on the information, if review procedures have been appropriately performed Instead, position assurance would be expressed by issuing opinion on supplementary information if auditor is engaged to examine it

Question 133

The quarterly data required by SEC Regulation S-K have been omitted. Which of the following statements must be included in the auditor's report? A. The auditor was unable to review the data. B. The company has not presented the selected quarterly financial data. C. The auditor will review the selected data during the review of the subsequent quarterly financial data. D. The company's internal control provides an adequate basis to complete the review.

Answer 133

B. The company has not presented the selected quarterly financial data

Question 134

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: A. State that the presentation is prepared in accordance with a special purpose framework. B. Indicate that the data are subject to prospective results that may not be achieved. C. Be limited to data derived from the entity's audited financial statements. D. Restrict the use of the report to those specified users within the entity.

Answer 134

C. Be limited to data derived from the entity's audited financial statements

Question 135

What is the financial statement title for Statement of Financial Position for Cash basis?

Answer 135

Balance sheet or Statement of Assets and liabilities, arising from cash transactions

Question 136

What is the financial statement title for Statement of Financial Position for income tax basis?

Answer 136

Statement of assets, liabilities and stockholders equity

Question 137

What is the financial statement title for Statement of Activities for cash basis?

Answer 137

Statement of Revenue collected and expenses paid

Question 138

What is the financial statement title for Statement of Activities for income tax basis?

Answer 138

Statement of revenue and expenses

Question 139

What is the financial statement title for Statement of Activities for regulatory basis?

Answer 139

Statement of income

Question 140

What is the financial statement title for Statement of Cash flow for income tax basis?

Answer 140

Statement of operations

Question 141

What should the auditors report include with special purpose framework? A) supplementary paragraph B) other information paragraph C) emphasis of matter paragraph D) basis for opinion paragraph

Answer 141

C) emphasis of matter paragraph Mention that the special purpose framework is a basis of accounting other than GAAP

Question 142

Which special purpose framework does the auditor not include an emphasis of matter / other matter paragraph? A) contractual basis B) regulatory basis C) income tax basis D) cash basis

Answer 142

B) regulatory basis Instead, auditor expresses opinion if FS are fairly presented in accordance with GAAP and special purpose framework

Question 143

If required, auditors report should include an _________________ paragraph that restricts the use of the auditors report to those within the entity, the parties to the contract or agreement, or the regulatory agencies to which the entity is subject A) supplementary paragraph B) other information paragraph C) emphasis of matter paragraph D) other matter paragraph

Answer 143

D) other matter paragraph

Question 144

An auditor's report on financial statements prepared on the cash receipts and disbursements basis of accounting should include all of the following, except: A. A reference to the note to the financial statements that describes the cash receipts and disbursements basis of accounting. B. A statement that the auditor is responsible for determining that the cash receipts and disbursements basis of accounting is an acceptable basis for the preparation of the financial statements. C. An opinion as to whether the financial statements are presented fairly in conformity with the cash receipts and disbursements basis of accounting. D. A statement that the audit was conducted in accordance with auditing standards generally accepted in the United States of America.

Answer 144

B. A statement that the auditor is responsible for determining that the cash receipts and disbursements basis of accounting is an acceptable basis for the preparation of the financial statements Not the auditor, but management is responsible for determining this

Question 145

Which of the following is not considered a special purpose framework? A. Tax basis B. Cash basis C. Contractual basis D. International Financial Reporting Standards

Answer 145

D. International Financial Reporting Standards IFRS is a general purpose framework, not a special one

Question 146

Reports on special purpose frameworks are issued in conjunction with: A. Pro forma financial presentations designed to demonstrate the effects of hypothetical transactions. B. Compliance with reporting requirements to be filed with a specific regulatory agency. C. Interim financial information reviewed to determine whether material modifications should be made to conform with GAAP. D. Feasibility studies presented to illustrate an entity's results of operations.

Answer 146

B. Compliance with reporting requirements to be filed with a specific regulatory agency This choice fits best with regulatory basis

Question 147

When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should: A. Refer to the note in the financial statements that describes management's responsibility for the financial statements. B. Explain why this basis of accounting is more useful for the readers of this entity's financial statements than GAAP. C. State that the basis of presentation is a comprehensive basis of accounting (OCBOA) other than GAAP. D. Include a separate emphasis-of-matter paragraph that discusses the justification for, and the CPA's concurrence with, the departure from GAAP.

Answer 147

C. State that the basis of presentation is a comprehensive basis of accounting (OCBOA) other than GAAP This language would be stated in the emphasis of matter paragraph as a non-GAAP basis

Question 148

An auditor's report on financial statements prepared in accordance with an other comprehensive basis of accounting should include all of the following, except: A. A statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles. B. Reference to the note to the financial statements that describes the basis of presentation. C. An opinion as to whether the financial statements are presented fairly in conformity with the other comprehensive basis of accounting. D. An opinion as to whether the basis of accounting used is appropriate under the circumstances.

Answer 148

D. An opinion as to whether the basis of accounting used is appropriate under the circumstances

Question 149

An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include an emphasis-of-matter paragraph that: A. Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles. B. Refers to the note to the financial statements that describes the basis of accounting. C. Justifies the reasons for departing from generally accepted accounting principles. D. States whether the financial statements are fairly presented in conformity with another comprehensive basis of accounting.

Answer 149

B. Refers to the note to the financial statements that describes the basis of accounting

Question 150

Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should: A. Apply to the state insurance commission for an advisory opinion. B. Disclose any reservations in a basis for modification paragraph and qualify the opinion. C. Issue a special statutory basis report that clearly disclaims any opinion. D. Explain in the notes to the financial statements the terminology used

Answer 150

B. Disclose any reservations in a basis for modification paragraph and qualify the opinion

Question 151

Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should: A. Apply to the state insurance commission for an advisory opinion. B. Disclose any reservations in a basis for modification paragraph and qualify the opinion. C. Issue a special statutory basis report that clearly disclaims any opinion. D. Explain in the notes to the financial statements the terminology used

Answer 151

B. Disclose any reservations in a basis for modification paragraph and qualify the opinion

Question 152

Which of the following titles would be considered suitable for financial statements that are prepared on a cash basis? A. Income statement. B. Statement of cash flows. C. Statement of operations. D. Statement of revenues collected and expenses paid.

Answer 152

D. Statement of revenues collected and expenses paid

Question 153

Which of the following would be an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting (OCBOA)? A. Statement of activities. B. Income statement. C. Statement of operations. D. Statement of income-regulatory basis.

Answer 153

D. Statement of income-regulatory basis

Question 154

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should: A. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. B. Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used. C. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting. D. State that the basis of presentation is a basis of accounting other than GAAP.

Answer 154

D. State that the basis of presentation is a basis of accounting other than GAAP

Question 155

An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the: A. Management representation letter. B. Notes to the financial statements. C. Auditor's engagement letter. D. Emphasis-of-matter paragraph of the auditor's report.

Answer 155

B. Notes to the financial statements

Question 156

When there has been a change in accounting principle that materially affects the comparability of the nonissuer's comparative financial statements presented and the auditor concurs with the change, the auditor should: Concur explicitly with the change - YES / NO Issue an "except for" qualified opinion - YES / NO Refer to the change in an emphasis-of-matter paragraph - YES / NO

Answer 156

Concur explicitly with the change - NO (Auditor would concur with change in GAAP implicitly by issuance of unmodified opinion. Them expressing the opinion says that they agree with the FS report) Issue an "except for" qualified opinion - NO (This would be an unmodified opinion expressed, not a qualified opinion) Refer to the change in an emphasis-of-matter paragraph - YES (this accounting principle change would be referred to in EOM paragraph)

Question 157

An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified opinion on the current year's: A. Statement of shareholders' equity only. B. Statement of cash flows only. C. Income statement only. D. Balance sheet only.

Answer 157

D. Balance sheet only Balance sheet, because BS reports on ending balances, and auditor would not need beginning inventory information to form an opinion. Balance sheet accounts is a snapshot at a point in time. Income statement is a snapshot at a period of time

Question 158

If a subsequent event occurs after the report date but prior to the release date of an audit report, resulting in management's revision of the financial statements of a nonissuer, then the auditor may do any of the following, except: A. Include an additional date in the audit report that is limited to the revision to the financial statements. B. Perform audit procedures necessary to obtain assurance about the revised financial statements. C. Revise the date of the audit report to reflect the necessity of additional audit procedures. D. Maintain the original date of the report and state that the opinion is limited to the financial statements as they existed prior to the subsequent event.

Answer 158

D. Maintain the original date of the report and state that the opinion is limited to the financial statements as they existed prior to the subsequent event Since management revised the FS, management must disclose the dates that correspond to where subsequent dates were evaluated for the revised FS. As for the auditor, they must perform additional procedures and change the date of their audit report

Question 159

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: A. Treated as a subsequent event. B. Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year. C. Disclosed in the notes to the financial statements of the current year. D. Treated as a consistency modification in the auditor's report for the current year.

Answer 159

C. Disclosed in the notes to the financial statements of the current year Key word: Accounting change means change in accounting principle. Since there’s no material effect on FS in current year, but it will have material effect in later years, change should be disclosed in CY

Question 160

For a particular entity's financial statements to be presented fairly in conformity with the applicable financial reporting framework, it is NOT REQUIRED that the principles selected: A. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits. B. Be appropriate in the circumstances for the particular entity. C. Present information in the financial statements that is classified and summarized in a reasonable manner. D. Be applied on a basis consistent with those followed in the prior year.

Answer 160

D. Be applied on a basis consistent with those followed in the prior year

Question 161

A CPA firm has decided to rely on the audit work performed by another audit firm in the audit of a nonissuer. Which of the following procedures should the CPA firm perform when taking responsibility for the other firm's audit work? A. Obtain and attach a copy of the other firm's representation letter and audit report to the opinion that the CPA firm issues. B. Reference the reliance on the other firm's work in the first paragraph of the opinion in the audit report. C. Reference the reliance on the other firm's work in a footnote disclosure to the financial statements. D. Review the other firm's audit workpapers and reperform a subset of audit testing to validate the firm's conclusions.

Answer 161

D. Review the other firm's audit workpapers and reperform a subset of audit testing to validate the firm's conclusions

Question 162

Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next: A. Request that management disclose the newly discovered information by issuing revised financial statements. B. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. C. Issue revised pro forma financial statements taking into consideration the newly discovered information. D. Give public notice that the auditor is no longer associated with financial statements.

Answer 162

B. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information

Question 163

In the audit of a nonissuer, reference in a group engagement partner's report to the fact that part of the audit was performed by another auditor most likely would be an indication of the: A. Lack of materiality of the portion of the financial statements audited by the other auditor. B. Group engagement partner's recognition of the component auditor's competence, reputation, and professional certification. C. Different opinions the auditors are expressing on the components of the financial statements that each audited. D. Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.

Answer 163

D. Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements

Question 164

In the audit of a nonissuer, reference in a group engagement partner's report to the fact that part of the audit was performed by another auditor most likely would be an indication of the: A. Different opinions the auditors are expressing on the components of the financial statements that each audited. B. Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements. C. Group engagement partner's recognition of the component auditor's competence, reputation, and professional certification. D. Lack of materiality of the portion of the financial statements audited by the other auditor.

Answer 164

B. Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements

Question 165

Which best describes the auditor’s responsibility for other information that is outside the basic financial statements, but is included in documents containing audited financial statements? A. Read the other information and consider whether it is materially consistent with the audited financial statements. B. Apply certain limited procedures to the required supplementary information and add an other-matter paragraph to the financial statement audit report. C. The auditor has no responsibility to read the other information in a document containing audited financial statements. D. Issue an opinion on the supplementary information and include a statement restricting the use of the report.

Answer 165

A. Read the other information and consider whether it is materially consistent with the audited financial statements.

Question 166

If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an): A. Disclaimer of opinion. B. Qualified opinion. C. Review report. D. Unmodified opinion with an emphasis-of-matter paragraph.

Answer 166

B. Qualified opinion This is an example of inadequate disclosure, on the financial side for an opinion to either be QUALIFIED OR ADVERSE, depending on pervasiveness

Question 167

Under which of the following circumstances would a disclaimer of opinion not be appropriate? A. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances. B. The auditor is unable to determine the amounts associated with illegal acts committed by the client's management. C. The financial statements fail to contain adequate disclosure of related party transactions. D. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.

Answer 167

C. The financial statements fail to contain adequate disclosure of related party transactions Adequate disclosure would trigger either Qualified or Adverse opinion

Question 168

An auditor of a nonissuer must conduct the audit in accordance with: I.ASB standards. II.PCAOB standards. A. I. B. Both I and II. C. Either I or II, but not both. D. II.

Answer 168

A. I. ASB or Auditing Standards Board for no public nonissuer companies

Question 169

The inclusion of an emphasis-of-matter paragraph in the auditor's report: A. May be used as a substitute for the auditor expressing a qualified opinion. B. Does not affect the auditor’s opinion. C. May be used as a substitute for financial statement disclosures excluded by management. D. Affects the auditor’s opinion.

Answer 169

B. Does not affect the auditor’s opinion EOM paragraph would state: “Our opinion is not modified with respect to this matter”

Question 170

An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified opinion on the current year's: A. Statement of shareholders' equity only. B. Statement of cash flows only. C. Balance sheet only. D. Income statement only.

Answer 170

C. Balance sheet only Balance sheet can get unmodified opinion because the BS reports on Ending balances and auditor would not need beginning inventory information to form an opinion Choice A, C and D impact in Net Income and COGS. This is a scope limitation that would result in either Qualified or Disclaimer

Question 171

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

Answer 171

B. Is appropriate and would not negate the unmodified opinion

Question 172

An annual shareholders’ report includes audited financial statements and contains a report by management on operations. The audited financial statements are fairly stated. The auditor is not engaged to report on the other information included in the annual report, but the auditor notices that there is a material inconsistency between the amount of revenue reported by management in the report on operations and the amount of revenue reported in the audited financial statements. If management refuses to make the revision to the revenue included in management’s report on operations, the auditor least likely would: A. Withdraw from the engagement. B. Include in the auditor’s report a separate section with the heading "Other Information" describing the inconsistency. C. Withhold the use of the auditor’s report. D. Modify the opinion on the audited financial statements to a qualified or adverse opinion.

Answer 172

D. Modify the opinion on the audited financial statements to a qualified or adverse opinion Least likely because the audited FS is already fairly stated, therefore, the opinion related to the FS and footnotes should NOT be modified

Question 173

Which of the following best describes what is meant by the term generally accepted auditing standards? A. Measures of the quality of the auditor's performance. B. Procedures to be used to gather evidence to support financial statements. C. Pronouncements issued by the Auditing Standards Board. D. Rules acknowledged by the accounting profession because of their universal application.

Answer 173

A. Measures of the quality of the auditor's performance

Question 174

In which of the following sections of an auditor's report for a nonissuer does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit? A. Opinion B. Emphasis-of-matter C. Basis for Opinion D. Scope

Answer 174

A. Opinion Indicates nature of the engagement [audit] FS covered in engagement, name of entity whose FS have been audited, and dates covered by each FS

Question 175

Zag Co. issues financial statements that present financial position and results of operations but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would: A. Prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion. B. Explain to Zag that the omission requires a qualification of the auditor's opinion. C. Add an emphasis-of-matter paragraph to the auditor's report that justifies the reason for the omission. D. Refuse to accept the engagement as proposed because of the client-imposed scope limitation.

Answer 175

B. Explain to Zag that the omission requires a qualification of the auditor's opinion In order for the FS to be in conformity with GAAP, there must be adequate disclosures of all material matters including all FS and supporting footnotes. Omitting the cash flows would result in either qualified or adverse opinion

Question 176

Under U.S. GAAS, in which of the following situations would a group engagement partner least likely make reference to component auditor who audited a subsidiary of the entity in the audit of a nonissuer? A. The financial statements audited by the component auditor are material to the consolidated financial statements covered by the group engagement partner's opinion. B. The group engagement partner is unable to be satisfied as to the independence and professional reputation of the component auditor. C. The component auditor was retained by the group engagement partner and the work was performed under the group engagement partner's guidance and control. D. The group engagement partner finds it impractical to review the component auditor's work or otherwise be satisfied as to the component auditor's work.

Answer 176

C. The component auditor was retained by the group engagement partner and the work was performed under the group engagement partner's guidance and control Under U.S. GAAS, when the group engagement partner assumes responsibility for the component auditor's work in the audit of a nonissuer, the group engagement partner would NOT mention the component auditor in the audit report (opinion).

Question 177

Jules, CPA, is reporting on comparative financial statements, but Shah, CPA conducted the previous year's audit. Which of the following is not true in this situation? A. If Shah's report is not presented, an other-matter paragraph should be included to describe this situation. B. If Shah's report was qualified due to a scope limitation, Jules may still issue an unmodified opinion on the current year's financial statements. C. If Shah's report will be presented, management will need to provide a representation letter to Shah. D. Dual dating may be used to indicate the appropriate dates for each audit.

Answer 177

D. Dual dating may be used to indicate the appropriate dates for each audit This is an innappropriate use of dual dating. Instead, dual dating is used when there is a subsequent event occurring after the original date of the auditors report, and the auditor wishes to extend responsibility only for the one event. With this said, dual dating would NOT be used to comparative FS in this case

Question 178

Which of the following should the auditor of a nonissuer do when reporting on supplementary information that is required by a designated accounting standard setter, presented with the basic financial statements? A. Include a reference to the required supplementary information in the opinion paragraph. B. Make no reference to the required supplementary information in the report. C. Include an emphasis-of-matter paragraph that references the required supplementary information. D. Include a separate report section that references the required supplementary information.

Answer 178

D. Include a separate report section that references the required supplementary information Heading “Required Supplementary Information”

Question 179

Which of the following is not an example of the application of professional skepticism? A. Inquiring of prior year engagement personnel regarding their assessment of management's honesty and integrity. B. Designing additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion. C. Obtaining corroboration of management's explanations through consultation with a specialist. D. Using third-party confirmations to provide support for management's representations.

Answer 179

A. Inquiring of prior year engagement personnel regarding their assessment of management's honesty and integrity Inquiry from prior year would NOT be relevant for current year;s audit

Question 180

If a component auditor does not meet the independence requirements that are relevant to a group audit of a nonissuer's financial statements, then the group engagement team should first: A. Withdraw from the engagement when permissible under law or regulation. B. Communicate the lack of independence to the appropriate regulatory authority. C. Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor. D. Disclose the lack of independence to the nonissuer's management and consider revising the audit report

Answer 180

C. Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor Another alternative is to re-assign the engagement to another component auditor who is independent

Question 181

As of August 13, a CPA had obtained sufficient appropriate audit evidence with respect to fieldwork on an engagement to audit financial statements for the year ended June 30. On August 27, an event came to the CPA's attention that should be disclosed in the notes to the financial statements. The event was properly disclosed by the entity, but the CPA decided not to dual date the auditor's report and dated the report August 27. Under these circumstances, the CPA was taking responsibility for: A. Only the subsequent events that occurred through August 13. B. All subsequent events that occurred through August 13 and the specific subsequent event disclosed by the entity. C. Only the specific subsequent event disclosed by the entity. D. All subsequent events that occurred through August 27.

Answer 181

D. All subsequent events that occurred through August 27 This is the response because since the auditor DID NOT DUAL DATE the auditors report, auditor would take responsibility for all items between June 30th and August 27th. However, if they were to DUAL DATE, auditor would take responsibility for events through August 13, and the one specific later event on August 27th

Question 182

As of August 13, a CPA had obtained sufficient appropriate audit evidence with respect to fieldwork on an engagement to audit financial statements for the year ended June 30. On August 27, an event came to the CPA's attention that should be disclosed in the notes to the financial statements. The event was properly disclosed by the entity, but the CPA decided to dual date the auditor's report and dated the report August 27. Under these circumstances, the CPA was taking responsibility for: A. Only the subsequent events that occurred through August 13. B. All subsequent events that occurred through August 13 and the specific subsequent event disclosed by the entity. C. Only the specific subsequent event disclosed by the entity. D. All subsequent events that occurred through August 27.

Answer 182

B. All subsequent events that occurred through August 13 and the specific subsequent event disclosed by the entity However, if they were to DUAL DATE, auditor would take responsibility for events through August 13, and the one specific later event on August 27th

Question 183

When financial statements include supplementary information which is outside the basic financial statements, but required by GAAP, the auditor may choose any of the following options, except: A. Express an opinion on the information, if he or she has been engaged to examine such information. B. Disclaim an opinion on the information. C. Report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate procedures have been applied. D. Express negative assurance on the information, if review procedures have been appropriately performed.

Answer 183

D. Express negative assurance on the information, if review procedures have been appropriately performed. With supplementary information, which is required by GAAP, performing a review is NOT ALLOWED. This specific engagement is more suitable for unaudited or less formal reports, but GAAP requires more assurance for supplementary information