1. Assurance services performed for decision makers may address the
| | Quality of information | Context of information |
| A | Yes | Yes |
| B | Yes | No |
| C | No | Yes |
| D | No | No |
Answer A is correct because assurance services are independent professional services that improve the quality of information or its context for decision makers
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
2. Ordinarily in an attest examination report a CPA may report on
| | Management’s written assertion | Subject matter |
| A | Yes | Yes |
| B | Yes | No |
| C | No | Yes |
| D | No | No |
Answer A is correct because in most circumstances, a CPA may report upon either the written assertion or on the subject matter to which the written assertion relates.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
3. Which of the following is correct concerning an agreed-upon procedure engagement performed under the attestation standards?
a) The minimum procedures to be performed include a consideration of internal control.
b) The use of the report is ordinarily restricted to management.
c) Mere reading of an assertion ordinarily restricted to management.
d) Mere reading of an assertion ordinarily constitutes a minimum sufficient procedure to issue a report.
Answer A is incorrect because no consideration of internal control is required unless that is what is agreed upon.
Answer B is in correct because the use of the report is restricted to management and the specified parties involved.
Answer C is incorrect because mere reading of the assertion is insufficient.
Answer D is correct because agreed-upon procedures engagements ordinarily do not require a written assertion.
4. Suitable criteria for use in an attestation engagement must be objective, measurable, complete, and
| | Relevant | Reductive |
| A | Yes | Yes |
| B | Yes | No |
| C | No | Yes |
| D | No | No |
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is correct because the attestation standards require that suitable criteria be objective, measurable, complete, and relevant—not "reductive."
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
5. In which of the following ways may suitable criteria appropriately be made available?
| | Publicly available | Included with subject matter | Included in CPA’s report |
| A | Yes | Yes | Yes |
| B | Yes | Yes | No |
| C | Yes | No | No |
| D | No | Yes | Yes |
Answer A is correct because suitable criteria should be available in one or more of the following ways: (1) publicly, (2) included with the subject matter or in the assertion, (3) included in the CPA's report, (4) well understood by most users (e.g., the distance between A and B is twenty feet) or (5) available only to specified parties.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
6. Which of the following are required on all attestation engagement?
| | Suitable criteria | Written assertion |
| A | Yes | Yes |
| B | Yes | No |
| C | No | Yes |
| D | No | No |
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is correct because while an attestation engagement will always have subject matter, it sometimes will not have a written assertion. For example, consider a situation in which the CPA's client is not responsible for the subject matter, in such a circumstance it may not be possible to obtain a written assertion from the individual who is the responsible party.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
7. Which of the following is least likely to include a reference to the use of a specialist?
a) Unqualified opinion.
b) Adverse opinion.
c) “Except for” qualified opinion.
d) “Subject to” qualified opinion.
Answer A is correct because when issuing an unqualified opinion, the auditor should not refer to the work or findings of the specialist. When an auditor decides to modify the audit opinion as a result of the report or findings of the specialist, reference to and identification of the specialist may be made in the auditor's report if the auditor believes such reference will facilitate understanding.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
8. Miller Co. uses the first-in, first-out method of costing for its international subsidiary’s inventory and the last-in, first-out method of costing for its domestic inventory. Under these circumstances, Miller should issue an auditor’s report with an
a) “Except for” qualified opinion.
b) Unqualified opinion.
c) Explanatory paragraph as to consistency.
d) Opinion modified as to consistency.
Answer A is incorrect because a qualified opinion is not necessary.
Answer B is correct because the use of such differing methods may be appropriate due to the circumstances and therefore an unqualified opinion may be issued.
Answer C is incorrect an explanatory paragraph as to consistency is only necessary when a change in principles has occurred.
Answer D is incorrect because the opinion need not be modified. See AU 420 for information on the consistency of application of accounting principles.
9. For an entity’s financial statements to be presented fairly in conformity with generally accepted accounting principles, the principles selected should
a) Be applied on a basis consistent with those followed in the prior year.
b) Be approved by the Auditing Standard Board or the appropriate industry subcommittee.
c) Reflect transactions in a manner that presents the financial statements within a range of acceptance limits.
d) Match the principles used by most other entities within the entity’s particular industry.
Answer A is incorrect because a change in accounting principle may be acceptable and appropriate.
Answer B is incorrect because the Auditing Standards Board generally does not issue accounting principles.
Answer C is correct. The requirement is to determine an implication of financial statements being presented fairly in conformity with generally accepted accounting principles. The principles selected should reflect transactions in a manner that presents the financial statements within a range of acceptable limits.
Answer D is incorrect because the exact principles followed need not be used by most other entities within the entity's particular industry.
10. Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion?
| | Conformity with GAAP | Adequacy of disclosure |
| A | Explicitly | Explicitly |
| B | Implicitly | Implicitly |
| C | Implicitly | Explicitly |
| D | Explicitly | Implicitly |
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is correct. The requirement is to determine whether representations on "conformity with GAAP" and on "adequacy of disclosure" are made explicitly or implicitly in an unqualified audit report. The first standard of reporting requires an explicit statement on conformance with GAAP. However, the third reporting standard results in implicit representations on disclosure since it states that informative disclosures are to be considered adequate, unless otherwise stated.
11. Does an auditor make the following representation explicitly or implicitly when issuing the standard auditor’s report on comparative financial statements?
| | Consistent application of accounting principles | Examination of evidence on a test basis |
| A | Explicitly | Explicitly |
| B | Implicitly | Implicitly |
| C | Implicitly | Explicitly |
| D | Explicitly | Implicitly |
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is correct. The standard audit report implicitly assumes that accounting principles have been consistently applied and explicitly states that examination of evidence was performed on a test basis.
Answer D is incorrect. Refer to the correct answer explanation.
12. How are management’s responsibility and the auditor’s responsibility represented in the standard auditor’s report?
| | Management’s responsibility | Auditor’s responsibility |
| A | Explicitly | Explicitly |
| B | Implicitly | Implicitly |
| C | Implicitly | Explicitly |
| D | Explicitly | Implicitly |
Answer A is correct. The auditor's standard report explicitly states that the financial statements are the responsibility of the company's management and that the auditor's responsibility is to express an opinion on the financial statements based on his/her audit.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
13. Jojo, an independent auditor, was engaged to perform an examination of the financial statements of Three-R Incorporated 1 month after its fiscal year had ended. Although the inventory count was not observed by Jojo, and accounts receivable were not confirmed by direct communication with creditors, Jojo was able to gain satisfaction by applying alternative auditing procedures. Jojos’ auditor’s report will probably contain
a) An “except for” qualification.
b) An unqualified opinion and an explanatory paragraph.
c) Either qualified opinion or a disclaimer of opinion.
d) A standard unqualified opinion.
Answer A is incorrect because a qualified opinion is not needed since the auditor was able to gain satisfaction by applying alternative auditing procedures.
Answer B is incorrect because an explanatory paragraph would not be required since the auditor was able to gain satisfaction by applying alternative auditing procedures.
Answer C is incorrect because the auditor was able to gain satisfaction by applying alternative auditing procedures. No qualification or disclaimer of opinion is required when the alternative procedures allow the auditor to acquire sufficient evidence regarding the inventory and accounts receivable accounts.
Answer D is correct because, although the auditor was not able to observe the inventory count or confirm accounts receivable, the auditor was able to gain satisfaction through the use of alternative procedures. In these circumstances, an unqualified opinion may be issued.
14. A lawyer limits a response concerning a litigated claim because the lawyer is unable to determine the likelihood of an unfavorable outcome. Which type of opinion should the auditor express if the litigation is adequately disclosed and the range of potential loss is material in relation to the client’s financial statements considered as a whole?
a) Adverse.
b) Unaudited.
c) Qualified.
d) Unqualified.
Answer A is incorrect because adverse opinions are used when an auditor knows that the statements are misleading.
Answer B is incorrect because "unaudited" is not a type of audit opinion.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is correct because if the contingency has been adequately disclosed by the client, the auditor would issue an unqualified opinion.
15. When an auditor submits a document containing audited financial statements to a client, the auditor has a responsibility to report on
a) Only the basic financial statements included in the document.
b) The basic financial statements and only the additional information required to be presented in accordance with provision of Financial Accounting Standards Board.
c) All of the information included in the document.
d) Only the portion of the document which was audited.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is correct because the professional standards require that when an auditor submits a document containing audited financial statements to his/her client or to others, s/he has a responsibility to report on all the information included in the document. Note that while all information is to be reported on, it need not all be audited (some of it may be "unaudited").
Answer D is incorrect. Refer to the correct answer explanation.
16. The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and statement of cash flows is applied within the framework of
a) Quality control.
b) Generally accepted auditing standards which include the concept of materiality.
c) The auditor’s consideration of the auditor company’s internal control.
d) Generally accepted accounting principles.
Answer A is incorrect because quality control relates to the policies and procedures established by a CPA firm to provide reasonable assurance that GAAS are being complied with on all audit engagements.
Answer B is incorrect because GAAS relate to the conduct of audit engagements rather than the framework within which the fairness of financial statement presentation is measured (GAAP).
Answer C is incorrect because the auditor's consideration of internal control, while important, is not as directly related to the overall fairness of financial statement presentation as is the framework of GAAP.
Answer D is correct because the auditor's judgment concerning the fairness of financial statements should be applied within the framework of generally accepted accounting principles.
17. The first standard of reporting requires that, “the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.” This should be construed to require
a) A statement of fact by the auditor.
b) An opinion by the auditor.
c) An implied measure of fairness.
d) An objective measure of compliance.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is correct because the first standard of reporting is construed to require an opinion as to whether the financial statements are presented in conformity with GAAP.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
18. The fourth reporting standard requires the auditor’s report to either contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent
a) The CPA from reporting on one basic financial statement and not the others.
b) The CPA from expressing different opinions on each of the basic financial statements.
c) Misinterpretations regarding the degree of responsibility the auditor is assuming.
d) Management from reducing its final responsibility for the basic financial statements.
Answer A is incorrect because the auditor may report on one basic statement and not the other statements (which is not a scope limitation) as long as the auditor has access to information underlying all the statements.
Answer B is incorrect because the auditor may express an unqualified opinion on one of the statements and express a qualified, adverse, or disclaimer on another if circumstances call for this treatment.
Answer C is correct because the objective of the fourth standard of reporting (requiring an expression of opinion on the financial statements as a whole) is to prevent misinterpretation of the degree of responsibility the auditor is assuming when the auditor is associated with financial statements.
Answer D is incorrect because the fourth standard is not directly related to management's responsibility for the financial statements.
19. An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor’s unqualified report. From this the investor may conclude that
a) Any disputes over significant accounting issues have been settled to the auditor’s satisfaction.
b) The auditor is satisfied that Stankey is financially sound.
c) The auditor has ascertained that Stankey’s financial statements have been prepared accurately.
d) Informative disclosures in the financial statements but not necessarily in Stankey’s footnotes are to be regarded as reasonably adequate.
Answer A is correct because an unqualified audit report indicates that disputes over significant accounting issues have been settled to the auditor's satisfaction. If any such disputes have not been settled, the auditor must render an opinion other than unqualified.
Answer B is incorrect because the objective of an audit is not to conclude that the client is financially sound. Rather, the auditor renders an opinion on the fairness of the financial statement presentation in accordance with GAAP.
Answer C is incorrect because there is no assertion as to accuracy by the independent auditor. Rather, the auditor renders an opinion on the fairness of the financial statement presentation in accordance with GAAP.
Answer D is incorrect because the footnotes are regarded as an integral part of the financial statements and must contain adequate informative disclosures.
20. Negative assurance is not permissible in
a) Letters required by security underwriters for data pertinent to SEC registration statements.
b) Reports relating to the results of agreed upon procedures to one or more specified elements, accounts, or items of a financial statement.
c) Reports based upon a review engagement.
d) Reports based upon an audit of the interim financial statements of a closely held business entity.
Answer A is incorrect because letters required by security underwriters may include negative assurance.
Answer B is incorrect because negative assurance is allowed for specified elements.
Answer C is incorrect because the review report issued includes negative assurance with respect to the financial statements.
Answer D is correct because, when an audit is performed, negative assurance is not to be provided, regardless of whether the financial statements are for a fiscal or interim period.
21. An auditor’s decision concerning whether or not to “dual date” the audit report is based upon the auditor’s willingness to
a) Extend auditing procedures.
b) Accept responsibility for subsequent events.
c) Permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor’s report.
d) Assume responsibility for events subsequent to the issuance of the auditor’s report.
Answer A is correct. If the auditor becomes aware of a subsequent event that has occurred after the completion of fieldwork, but before the issuance of the report (which should be disclosed), the auditor may dual date the report. Additionally, the auditor may date the report as of the date of the subsequent event and extend the procedures for review of subsequent events to that date. Thus, the decision whether or not to dual date the report is based upon the auditor's willingness to extend audit procedures.
Answer B is incorrect since the auditor must accept responsibility for the known subsequent event regardless of whether dual dating is used.
Answer C is incorrect because such known subsequent events are to be audited.
Answer D is incorrect because the auditor, with or without dual dating, need not assume responsibility for events subsequent to the issuance of the auditor's report.
22. The auditor’s report should be dated as of the date on which the
a) Report is delivered to the client.
b) Fieldwork is completed.
c) Fiscal period under audit ends.
d) Review of the working papers is completed.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is correct because, generally, the date of completion of the fieldwork should be used as the date of the independent auditor's report. This date is used because the auditor will be responsible for events that occurred up to the date of completion of fieldwork.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
23. Jovy, CPA, examined the 2005 financial statements of PPSI. and issued an unqualified opinion on March 10, 2006. On April 2, 2006, Jovy became aware of a 2005 transaction that may materially affect the 2005 financial statements. This transaction would have been investigated had it come to Jovys’ attention during the course of the examination. Jovy should
a) Take no action because an auditor is not responsible for events subsequent to the issuance of the auditor’s report.
b) Contact PPSI’s management and request their cooperation in investigating the matter.
c) Request that PPSI’s management disclose the possible effects of the newly discovered transaction by adding an unaudited footnote to the 2005 financial statements.
d) Contact all parties who might relies upon the financial statements and advise them that the financial statements are misleading.
Answer A is incorrect because the auditor must take action and is responsible for the subsequent discovery of facts existing at the date of the auditor's report.
Answer B is correct. The requirement is to determine an accountant's responsibility when s/he has become aware of a material transaction which may materially affect financial statements on which s/he has already reported. The first step is to contact the firm's management and request cooperation in investigation of the matter.
Answer C is incorrect because the "possible effects" of this newly discovered transaction should be investigated further to determine whether the financials may need revision in lieu of footnote disclosure.
Answer D is impractical because it is impossible to contact all parties who might rely upon the financial statements.
24. With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditor’s report, the auditor’s responsibility for events occurring subsequent to the completion of fieldwork is
a) Extended to include all events occurring until the date of the last subsequent event referred to.
b) Limited to the specific event referred to.
c) Limited to events occurring through the date of issuance of the report.
d) Extended to include all events occurring through the date of submission of the report to the client.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is correct because when an audit report is dual dated for a subsequent event occurring after completion of fieldwork, the auditor's responsibility for events occurring subsequent to the completion of the fieldwork is limited to the specific event for which the report is dual dated. If the auditor dates the report as of the subsequent event occurring after the completion of fieldwork, the auditor's responsibility is extended to all events occurring to the date of the last subsequent event.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
25. “Subsequent events” for reporting purposes are defined as events which occur subsequent to the
a) Balance sheet date.
b) Date of the auditor’s report.
c) Balance sheet date but prior to the date of the auditor’s report.
d) Date of the auditor’s report and concern contingencies which are not reflected in the financial statements.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is correct because subsequent events are those events or transactions which occur subsequent to the balance-sheet date, but prior to the issuance of the financial statements and the auditor's report, that have a material effect on the financial statements and, therefore, require adjustment or disclosure in the statements.
Answer D is incorrect. Refer to the correct answer explanation.
26. A major customer of an audit client suffers a fire just prior to completion of year-end fieldwork. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should
a) Advise management to disclose the event in notes to the financial statements.
b) Disclose the event in the auditor’s report.
c) Withhold submission of the auditor’s report until the extent of the direct effect on the financial statements is known.
d) Advise management to adjust the financial statements.
Answer A is correct because conditions which come into existence after year-end which may have a significant direct effect on the financial statements should be disclosed in the notes to the financial statements.
Answer B is incorrect because the auditor may or may not decide to disclose the event in the auditor's report. If the subsequent event has a material impact on the entity, the auditor may wish to include in the report an explanatory paragraph which directs the reader's attention to the event. However, this type of subsequent event is only occasionally disclosed in the auditor's report.
Answer C is incorrect because the exact total effect on the financial statements need not always be known. The auditor cannot wait until the effect is known because this would delay the issuance of the report.
Answer D is incorrect because only conditions coming into existence prior to year-end result in financial statement adjustments.
27. When a contingency is resolved immediately subsequent to the issuance of a report which was qualified with respect to the contingency, the auditor should
a) Insist that the client revised financial statements.
b) Inform the audit committee that the report cannot be relied upon.
c) Take no action regarding the event.
d) Inform the appropriate authorities that the report cannot be relied upon.
Answer A is incorrect because resolution of a contingency after the issuance of the report is not subsequent discovery of facts existing at the date of the auditor's report. Since the contingency was disclosed in the financial statements and audit report, the statements were not misleading at the time of issuance and do not have to be revised.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is correct because when a contingency is resolved immediately subsequent to the issuance of a report which was qualified with respect to the contingency, the auditor is not required to take any action regarding the event. Resolution of the contingency after the issuance of the report is not subsequent discovery of facts existing at the date of the auditor's report. Because the contingency did result in a qualified report, the auditor was aware of the facts existing at the date of the auditor's report. Also, the auditor's responsibility for continuing inquiry is precluded by AU 561.
Answer D is incorrect. Refer to the correct answer explanation.
28. Under which of the following circumstances may audited financial statements contain a note disclosing a subsequent event which is labeled unaudited?
a) When the subsequent event does not require adjustment of the financial statements.
b) When the event occurs after completion of fieldwork and before issuance of the auditor’s report.
c) When audit procedures with respect to the subsequent event were not performed by the auditor.
d) When the event occurs between the date of the auditor’s original report and the date of the reissuance of the report.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect because if the auditor is aware of a subsequent event that has occurred after the completion of fieldwork but before issuance of the report which should be disclosed, the auditor may either dual date the report or date the report as of the date of the subsequent event and extend the procedures for review of subsequent events to that date. The auditor may not label the note unaudited.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is correct because when the subsequent event occurs between the date of the original report and the date of the reissuance of the report, the event may be labeled unaudited.
29. Subsequent events affecting the realization of assets ordinarily will require adjustment of the financial statements under examination because such events typically represent
a) The culmination of conditions that existed at the balance sheet date.
b) The final estimates of losses relating to casualties occurring in the subsequent events period.
c) The discovery of new conditions occurring in the subsequent events period.
d) The preliminary estimate of losses to new events that occurred subsequent to the balance sheet.
Answer A is correct because subsequent events affecting the realization of assets ordinarily will require adjustment of the financial statements because such events typically represent the culmination of conditions that existed at the balance sheet date.
Answer B is incorrect because a loss related to a casualty that occurred in the subsequent events period would not result in adjustment of the financial statements.
Answer C is incorrect because the discovery of new conditions occurring in the subsequent events period would not result in adjustment of the financial statements.
Answer D is incorrect. Refer to the correct answer explanation.
30. Which of the following material events occurring subsequent to the December 31, 2005 balance sheet would not ordinarily result in an adjustment to the financial statements before they are issued on March 2, 2006?
a) Write-off of a receivable from a debtor who had suffered from deteriorating financial condition for the past 6 years. The debtor filed for bankruptcy on January 23, 2006.
b) Acquisition of a subsidiary on January 23, 2006, negotiation had begun in December 2003.
c) Settlement of extended litigation on January 23, 2006, in excess of the recorded year-end liability.
d) A 3-for-5 reserve stock spit consummated on January 23, 2006.
Answer A is incorrect because the debtor's deteriorating financial condition was in existence at year-end. Therefore, an adjustment to the financial statements is appropriate.
Answer B is correct because the condition (acquisition of a subsidiary) did not arise until after year-end. Footnote disclosure of this transaction, however, is necessary.
Answer C is incorrect because the condition giving rise to the litigation existed at the balance sheet date. Therefore, settlement of the litigation would require an adjustment to the financial statements.
Answer D is incorrect because APB 15 requires retroactive adjustment for such stock splits.
31. Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor’s report would not require disclosure in the financial statements?
a) Sale of the bond or capital stock issue.
b) Loss of plant or inventories as result of fire or flood.
c) A major drop in the quoted market price of the stock of the corporation.
d) Settlement of litigation when the event giving rise to the claim took place after the balance sheet date.
Answer A is incorrect because AU 560 indicates that the sale of a bond issue or issuance of capital stock is a subsequent event which should be disclosed.
Answer B is incorrect because AU 560 indicates that a loss of plant or inventories due to a natural catastrophe is a subsequent event which should be disclosed.
Answer C is correct because a major drop in the quoted market price of the corporation's stock would not have financial statement effects and accordingly, need not be disclosed as a subsequent event.
Answer D is incorrect because AU 560 indicates that the settlement of litigation is a subsequent event which should be disclosed.
32. Jones, CPA, is the principal auditor who is auditing the consolidated financial statements of his client. Jones plans to refer to another CPA’s examination of the financial statements of a subsidiary company but does not wish to present the other CPA’s audit report. Both Jones and the other CPA’s audit reports have noted no exceptions to generally accepted accounting principles. Under these circumstances the opinion paragraph of Jones’ consolidated audit report should express
a) An unqualified opinion.
b) A disclaimer of opinion.
c) An “except for” opinion.
d) A principal opinion.
Answer A is correct. When a principal CPA refers to another CPA's examination, the CPA's audit report is considered an unqualified opinion. The report of the other auditor is only required to be presented if the other auditor is named (note that the other auditor does not have to be and is usually not named).
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
33. Thomas, CPA, has examined the consolidated financial statements of Kass Corporation. Jones, CPA, has examined the financial statements of the sole subsidiary which is material in relation to the total examined by Thomas. It would be appropriate for Thomas to serve as the principal auditor, but it is impractical for Thomas to review the work of Jones. Assuming an unqualified opinion is expressed by Jones, one would expect Thomas to
a) Refuse to express an opinion on the consolidated financial statements.
b) Express an unqualified opinion on the consolidated financial statements and not refer to the work of Jones.
c) Express an unqualified opinion on the consolidated financial statements and refer to the work of Jones.
d) Express an “except for” opinion on the consolidated financial statements and refer to the work of Jones.
Answer A is incorrect because if it is appropriate for Thomas to be the principal auditor, and if Jones has issued an unqualified report, there is no reason to refuse to express an opinion.
Answer B is incorrect because additional procedures are required when a decision is made not to make reference to the other auditor.
Answer C is correct because when the principal auditor finds it impractical to review the work of another auditor, the principal auditor will make reference to the examination of the other auditor and issue an unqualified report. This reference will indicate the division of responsibility between that portion of the financial statements covered by the principal auditor's own examination and that covered by the examination of the other auditor.
Answer D is incorrect because the division of responsibility within an audit report is not considered an "except for" qualified opinion.
34. The principal auditor is satisfied with the independence and professional reputation of the other auditor who has audited a subsidiary but wants to indicate the division of responsibility. The principal auditor should
a) Modify the scope paragraph of the report.
b) Modify the introductory, scope, and opinion paragraphs of the report.
c) Not modify the report except for inclusion of an explanatory middle paragraph.
d) Modify the opinion paragraph of the report.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is correct because when a principal auditor wants to indicate division of responsibility with another auditor, the principal auditor should refer to the examination of the other auditor in the introductory, scope, and opinion paragraphs of the auditor report.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
35. When the report of a principal auditor makes reference to the examination made by another auditor, the other auditor may be named if express permission to do so is given and
a) The report of the principal auditor names the other auditor in both the scope and opinion paragraphs.
b) The principal auditor accepts responsibility for the work of the other auditor.
c) The report of the other auditor is presented together with the report of the principal auditor.
d) The other auditor is not an associate or correspondent firm whose work is done at the request of the principal auditor.
Answer A is incorrect because there is no requirement that the other auditor be named in both the scope and opinion paragraphs.
Answer B is incorrect because the principal auditor would have no need to make reference to the other auditor if the principal was willing to accept responsibility for the work of the other auditor.
Answer C is correct because in making reference to the other auditor, they may be expressly named only if permission has been granted and the report of the other auditor is presented along with the principal auditor's report.
Answer D is incorrect because there is no differentiation between other auditors who are associates or correspondent firms and those who are not.
36. Which of the following matters is an auditor required to communicate to an entity’s audit committee?
a) The basis for assessing control risk below the maximum.
b) The process used by management in formulating sensitive accounting estimates.
c) The auditor’s preliminary judgments about materiality levels.
d) The justification for performing substantive procedures at interim dates.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is correct because one of the areas listed is the process used by management in formulating sensitive accounting estimates.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
37. The management of Stanley Corporation has decided not to account for a material transaction in accordance with the provisions of a recent statement of the FASB. They have set forth their reasons in note “B” to the financial statements which clearly demonstrates that due to unusual circumstances the financial statements would otherwise have been misleading. The auditor’s report will probably contain a(n)
a) Consistency language and reference to note “B”.
b) Unqualified opinion and the an explanatory paragraph.
c) Disclaimer and an explanatory paragraph.
d) “Except for” opinion and an explanatory paragraph.
Answer A is incorrect because there is no indication that the financial statements are inconsistent with those of the prior year. Refer to the correct answer explanation.
Answer B is correct because when unusual circumstances are present that would cause financial statements to be misleading if the statement of FASB was followed, an unqualified opinion and an explanatory paragraph are appropriate.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
38. Tech Company has disclosed an uncertainty due to pending litigation. The auditor’s decision to issue a qualified opinion rather than an unqualified opinion with an explanatory paragraph most likely would be determined by the
a) Lack of sufficient evidence.
b) Inability to estimate the amount of loss.
c) Entity’s lack of experience with such litigation.
d) Lack of insurance coverage for possible losses from such litigation.
Answer A is correct because the lack of sufficient evidence is a scope limitation that may result in a qualified opinion.
Answer B is incorrect because inability to estimate the amount of loss is an uncertainty that may result in an unqualified opinion with an explanatory paragraph.
Answer C is incorrect because the entity's lack of experience about such litigation is an uncertainty that may result in an unqualified opinion with an explanatory paragraph.
Answer D is incorrect because the lack of insurance coverage is an aspect of the uncertainty involved that may lead to an unqualified report with an explanatory paragraph.
39. Grant Company’s financial statements adequately disclose uncertainties that concern future events, the outcome of which are not susceptible to reasonable estimation. The auditor’s report should include a(n)
a) Unqualified opinion.
b) “Subject to” qualified opinion.
c) “Except for” qualified opinion.
d) Adverse opinion.
Answer A is correct. Grant Company adequately disclosed the uncertainties that are not susceptible of reasonable estimation as per GAAP. Such matters are to be regarded as uncertainties for the purposes of considering the need for adding an explanatory paragraph to what remains an unqualified opinion.
Answer B is incorrect. "Subject to" qualified opinions are no longer issued.
Answer C is incorrect. The proper treatment of uncertainties within an entity's financial statements will not result in an "except for" qualified opinion.
Answer D is incorrect. The proper treatment of uncertainties within an entity's financial statements will not result in an adverse opinion.
40. When an auditor concludes there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to
a) Prepare prospective financial information to verify whether management’s plans can be effectively implemented.
b) Project future conditions and events for a period of time not to exceed 1 year following the date of the financial statements.
c) Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.
d) Consider the adequacy of disclosure about the entity’s possible inability to continue going concern.
Answer A is incorrect. The auditor is not required to prepare prospective financial information.
Answer B is incorrect. While an auditor must consider management's plans, he or she does not project future conditions and events.
Answer C is incorrect. Neither a qualified or an adverse opinion is necessary when the disclosures are adequate.
Answer D is correct. When, after considering management's plans, the auditor concludes there is substantial doubt, he or she should consider the possible effects on the financial statements, and the adequacy of the related disclosure. In addition, an explanatory paragraph should be added to the audit report.
41. Kane, CPA, concludes that there is substantial doubt about Lima Co.’s ability to continue as a going concern for a reasonable period of time. If Lima’s financial statements adequately disclose its financial difficulties, Kane’s auditor’s report is required to include an explanatory paragraph that specifically uses the phrase(s)
| | Possible discontinuance of operations | Reasonable period of time no to exceed 1 year |
| A | Yes | Yes |
| B | Yes | No |
| C | No | Yes |
| D | No | No |
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is correct because the explanatory paragraph presented in AU 341 includes neither of the terms.
42. An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. If the entity’s disclosures concerning this matter are adequate, the audit report may include a(n)
| | Disclaimer of opinion | Except for qualified opinion |
| A | Yes | Yes |
| B | No | No |
| C | No | Yes |
| D | Yes | No |
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is correct. A disclaimer of opinion may be appropriate but an "except for" qualified opinion is never appropriate when substantial doubt about an entity's ability to continue as a going concern has been adequately disclosed.
43. Which of the following will result in explanatory language as to consistency in the auditor’s report, whether or not the item is fully disclosed in the financial statements?
a) A change in accounting estimate.
b) A change from an unacceptable accounting principle to a generally accepted one.
c) Correction of an error not involving a change in accounting principle.
d) A change in classification.
Answer A is incorrect because a change in accounting estimate requires no consistency modification.
Answer B is correct because a change from an unacceptable accounting principle to an acceptable one results in a consistency modification.
Answer C is incorrect because an error not involving an accounting principle (e.g., a clerical error) is treated as a prior period adjustment with no consistency modification.
Answer D is incorrect because changes in classification do not result in consistency modifications.
44. A material change in an accounting estimate
a) Requires a consistency modification in the auditor’s report and disclosure in the financial statements.
b) Requires a consistency modification in the auditor’s report but does not require disclosure in the financial statements.
c) Affects comparability and may require disclosure in a note to the financial statements but does not require a consistency modification in the auditor’s report.
d) Involves the acceptability of the generally acceptable accounting principles used.
Answer A is incorrect because a consistency modification is not necessary.
Answer B is incorrect because a consistency modification is not necessary.
Answer C is correct. The requirement is to determine the auditing and reporting treatment of a material change in an accounting estimate. While a consistency modification is not necessary, footnote disclosure is required.
Answer D is incorrect because a change in accounting principle has not occurred.
45. Which of the following requires recognition in the auditor’s opinion as to consistency?
a) Changing the salvage value of an asset.
b) Changing the presentation of prepaid insurance from inclusion in “other assets” to disclosing it as a separate item.
c) Division of the consolidated subsidiary into two subsidiaries which are both consolidated.
d) Changing from consolidated a subsidiary to carrying it on the equity basis.
Answer A is incorrect because changing the salvage value of an asset is considered a change in an accounting estimate which does not affect consistency.
Answer B is incorrect because changing the presentation of prepaid insurance from inclusion in other assets to a separate item is a change in classification which does not affect consistency.
Answer C is incorrect because division of a consolidated subsidiary into two consolidated subsidiaries is a change in classification not affecting consistency.
Answer D is correct. Changing from consolidating a subsidiary to carrying on the equity basis is a change in reporting entity. Changes in reporting entities, changes in accounting principles, correction of errors, and changes in principles inseparable from changes in estimates all affect consistency and must be referred to in the auditor's opinion.
46. With respect to consistency, which of the following should be done by an independent auditor, who has not examined a company’s financial statements for the preceding year but is doing so in the current year?
a) Report on the financial statements of the current year without considering consistency with the preceding year.
b) Considering the consistent application of principles within the year under examination but not between the current and preceding year.
c) Adopt procedures that are practicable and reasonable in the circumstances to obtain assurance that the principles employed are consistent between the current and preceding year.
d) Rely on the report of the prior year’s auditors if such a report does not provide explanatory languages as to consistency.
Answer A is incorrect because the only case where the auditor would not consider consistency is when covering the first year of client operations. Consistency must be considered in this situation because the report is not covering the client's initial period.
Answer B is incorrect because the consistency standard refers to the consistent application of GAAP between periods, not within periods.
Answer C is correct because during the first examination, the auditor should adopt procedures that are practicable and reasonable to assure that accounting principles are applied consistently between the current and the preceding year.
Answer D is incorrect because the prior year's audit report does not specify the accounting principles used in the prior year. In addition, explanatory language in the prior year's audit report as to consistency would indicate an inconsistency between the prior year and its previous year, while consistency in the current year would not be addressed.
47. The auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the client refuses to revise or eliminate the material inconsistency, the auditor should
a) Revise the auditor’s report to include a separate explanatory paragraph describing the material inconsistency.
b) Consult with a party whose advice might influence the client, such as the client’s legal counsel.
c) Issue a qualified opinion after discussing the matter with the client’s board of directors.
d) Consider the matter closed since the other information is not in the audited financial statements.
Answer A is correct because if the incorrect information is not revised to eliminate the material inconsistency, the auditor should consider actions such as revising the audit report to include an explanatory paragraph, withholding use of the audit report, and withdrawing from the engagement.
Answer B is incorrect because the CPA need not consult with the client's legal counsel.
Answer C is incorrect because a qualified opinion may or may not be necessary (depending upon whether the financial statements are misstated) and because the board of directors need not be consulted.
Answer D is incorrect because the auditor needs to consider the other information as indicated above.
48. The objective of the consistency standard is to provide assurance that
a) There are no violation in the formal and presentation of financial statements.
b) Substantially different transactions and events are not accounted for on identical basis.
c) The auditor is consulted before material changes are made in the application of accounting principles.
d) The comparability of financial statements between periods is not materially affected by changes in accounting principles without disclosure
Answer A is incorrect since there may be variations in format and presentation of financial statements.
Answer B is incorrect since the consistency standard only requires the communication of the fact that a lack of consistency exists in the handling of items between periods.
Answer C is incorrect because there is no requirement that an auditor be consulted before material changes are made in the application of accounting principles (although this may be done if the client so desires).
Answer D is correct. The requirement is to determine the objective of the consistency standard. The objective is (1) to give assurance that the comparability of financial statements between periods has not been materially affected by changes in accounting principles, or (2) if comparability has been materially affected by such changes, to require appropriate reporting by the independent auditor regarding such changes.
49. The following explanatory paragraph was included in an auditor’s report to indicate a lack of consistency:
“As discussed in note T to the financial statements, the company changed its method of computing depreciation in 200X.”
How should the auditor report on this matter if the auditor concurred with the change?
| | Type of opinion | Location of explanatory paragraph |
| A | Unqualified | Before opinion paragraph |
| B | Unqualified | After opinion paragraph |
| C | Qualified | Before opinion paragraph |
| D | Qualified | After opinion paragraph |
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is correct. Inconsistency in the application of GAAP usually results in an unqualified report with explanatory language. Explanatory paragraphs for inconsistency in unqualified reports follow the opinion paragraph.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
50. The consistency standard does not apply to an accounting change that results from a change in
a) An accounting principle that is not generally accepted.
b) An accounting estimate
c) The reporting entity.
d) An accounting principles inseparable from a change in accounting estimate.
Answer A is incorrect because a change from an accounting principle that is not generally accepted to one that is generally accepted is considered a correction of an error in principle which does not affect the consistency standard.
Answer B is correct because a change in accounting estimate does not affect the consistency standard. Accordingly, this change need not be mentioned in the audit report but may require disclosure in the footnotes to the financial statements.
Answer C is incorrect because a change in reporting entity is a special type of change in accounting principle to which the consistency standard is generally applicable.
Answer D is incorrect because a change in accounting principle inseparable from a change in accounting estimate does affect the consistency standard.
51. When comparative financial statements are presented, the fourth standard of reporting, which refers to financial statements “taken as a whole,” should be considered to apply to the financial statements of the
a) Periods presented plus one preceding period.
b) Current period only.
c) Current period and those of the other periods presented.
d) Current and immediately preceding period only.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is correct. The professional standards state that this term should be considered to apply not only to the financial statements of the current period but also to those of one or more prior periods that are presented on a comparative basis with those of the current period.
Answer D is incorrect. Refer to the correct answer explanation.
52. When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for
a) Expressing dual date opinions.
b) Updating the report on the previous financial statements only if there has not been a change in opinion.
c) Updating the report on the previous financial statements only if the previous report was qualified and the reasons for qualification no longer exist.
d) Updating the report on the previous financial statements regardless of the opinion previously issued.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is correct because a continuing auditor must update his report on the financial statements of the one or more prior periods presented regardless of the opinion previously issued.
53. The prior year’s financial statements of YZ, Inc., which were audited by Pate, CPA, are presented for comparative purposes without Pate’s audit report. Jennings, CPA, the successor auditor, should indicate in the current year audit report that the prior year’s financial statements were examined by another auditor
a) Only if pate’s opinion was other than unqualified.
b) But should not indicate the type of opinion expressed by Pate.
c) Only if the prior year’s financial statements have been restated.
d) But should not name Pate as the predecessor auditor.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is correct because the AU 508 requires that the predecessor auditor not be named, but that the following information be indicated in the scope paragraph of the successor auditor's report: (1) the financial statements of the prior period were examined by other auditors, (2) the date of the other auditor's report, (3) the type of opinion expressed, and (4) the substantive reasons therefore, if it was other than unqualified.
54. When the financial statements of a nonpublic entity for a prior period have not been audited and are presented, for comparative purposes, with current period statements that have been audited,
a) The auditor should request removal of the unaudited statements since it is improper to present them for comparative purposes with audited statements.
b) The auditor should identify the financial statements that were not examine in a separate paragraph in the auditor’s report accompanying the current statements.
c) The unaudited statements do not need to be marked “unaudited” as this may confuse the users of the statements.
d) The auditor’s report accompanying the statements should not mention that the prior period statements are unaudited, but the unaudited statements should be marked “unaudited”.
Answer A is incorrect because the unaudited statements need not be removed.
Answer B is correct. The requirement is to determine the auditor's reporting responsibility when comparative statements for a nonpublic entity are being issued and the prior period has not been audited. In such circumstances the auditor may add a separate paragraph to the audit report and identify the financial statements.
Answer C is incorrect because the unaudited statements must be marked "unaudited."
Answer D is incorrect because the auditor's report should mention that the prior statements are unaudited.
55. Comparative financial statements include the financial statements of a prior period which were examined by a predecessor auditor, whose report is not presented. If the predecessor auditor’s report was qualified, the successor auditor must
a) Express an opinion on the current year statements alone and make no reference to the prior year statements.
b) Issue a standard short-form comparative report indicating the division of responsibility.
c) Obtain written approval from the predecessor auditor to include the prior year’s financial statements.
d) Disclose the reasons for any qualification included in the predecessor auditor’s opinion.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect because division of responsibility in an audit report applies only when a portion of 1 year's examination has been performed by other auditors.
Answer C is incorrect because written approval from the predecessor need not be obtained in order to include the prior year's financial statements.
Answer D is correct because AU 508 specifies when the predecessor auditor's opinion was other than unqualified, the successor must describe the nature of any reasons for the qualification.
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