1. When a predecessor auditor reissues the report on the prior period’s financial statements at the request of the former client, the predecessor auditor should
a) Indicate in the introductory paragraph of the reissued report that the financial statements of the subsequent period were audited by another CPA.
b) Obtain an updated management representation letter and compare it to that obtained during the prior period audit.
c) Compare the prior period’s financial statements that the predecessor reported on with the financial statements to be presented for comparative purposes.
d) Add an explanatory paragraph to the reissued report stating that the predecessor has not performed additional auditing procedures concerning the prior period’s financial statements.
Answer A is incorrect because the predecessor auditor should not indicate in the introductory paragraph of the reissued report that the financial statements of the subsequent period were audited by another CPA.
Answer B is incorrect because no updated management representation letter need be obtained.
Answer C is correct because the predecessor auditor should (1) read the financial statements of the current period, (2) compare the prior period financial statements with the subsequent financial statements being presented for comparative purposes, and (3) obtain a letter of representations from the successor auditor.
Answer D is incorrect because no explanatory paragraph should be added to the reissued report. See AU 508 for predecessor responsibilities with respect to comparative financial statements.
2. After performing all necessary procedures a predecessor auditor reissues a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditor should
a) Delete the date of the report.
b) Dual date the report.
c) Use the reissue date.
d) Use the date of the previous report.
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 when a predecessor auditor reissues an audit report, without revising the original wording, the auditor should use the date of the previous report. This avoids any implications that the auditor has re-examined any records, transactions, or events after the date of the original report.
3. An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. The prior-period financial statements are restated in the current period to conform with generally accepted accounting principles. The auditor’s updated report on the prior-period financial statements should
a) Express an unqualified opinion concerning the restated financial statements.
b) Be accompanied by the original auditor’s report on the prior period.
c) Bear the same date as the original auditor’s report on the prior period.
d) Qualify the opinion concerning the restated financial statements because of a change in accounting principle.
Answer A is correct because the auditor should indicate that the statements have been restated and should express an unqualified opinion with respect to the restated financial statements. An explanatory paragraph to the report should disclose (1) the date of the auditor's previous report, (2) the type of opinion previously expressed, (3) the circumstances or events that caused the auditor to express a different opinion, and (4) that the updated opinion differs from the previous opinion.
Answer B is incorrect because the original auditor's report has been modified.
Answer C is incorrect because the date of the comparative statement audit report is the last day of fieldwork for the current year audit.
Answer D is incorrect because a change in accounting principle results in an unqualified opinion with an explanatory paragraph, not a qualified opinion.
4. Before reissuing a report which was previously issued on the financial statements of a prior period, a predecessor auditor should
a) Review the successor auditor’s working papers.
b) Examine significant transactions or events since the date of previous issuance.
c) Obtain a signed engagement letter from the client.
d) Obtain a letter of representation from the successor auditor.
Answer A is incorrect since the various Statements on Auditing Standards contain no requirement that the predecessor auditor review the successor auditor's working papers.
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 AU 508 states that a predecessor auditor should obtain a letter of representation from the successor auditor. The predecessor auditor must also read the current financial statements and compare them to the prior-period statements.
5. The predecessor auditor, who is satisfied after properly communicating with the successor auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor’s report should make
a) No reference to the report or the work of the successor auditor.
b) Reference to the work of the successor auditor in the scope and opinion paragraphs.
c) Reference to both the work and the report of the successor auditor only in the opinion paragraph.
d) Reference to the report of the successor auditor only in the scope paragraph.
Answer A is correct because no reference to the work or the report of the successor auditor is to be made in this situation.
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 is considered “unaudited” information when included with historical financial statement?
a) Interim information.
b) Segmental information.
c) Notes to the financial statements.
d) Investment security classifications.
Answer A is correct because that information should be marked "unaudited."
Answer B is incorrect because segment information is required by SFAS 14 to be disclosed.
Answer C is incorrect because the notes are considered audited.
Answer D is incorrect because the auditor must audit investment security classifications to obtain the valuation objective.
7. When a client declines to make essential disclosures in the financial statements or in the notes, the independent auditor should
a) Provide the necessary disclosures in the auditor’s report and appropriately modify the opinion.
b) Explain to the client that an adverse opinion must be issued.
c) Issue an unqualified report and inform the stockholders of the improper disclosure in an “unaudited” note.
d) Issue a disclaimer of opinion.
Answer A is correct because when a client declines to make essential disclosures, the independent auditor should provide the disclosures where practicable, and modify the audit opinion.
Answer B is incorrect because a qualified opinion may be appropriate rather than an adverse opinion. Therefore, an adverse opinion is not always required in this situation.
Answer C is incorrect because improper disclosures result in a qualified or adverse audit opinion. An unaudited note would not be appropriate in view of the audit.
Answer D is incorrect because a disclaimer of opinion is not appropriate when there are departures from GAAP, including inadequate disclosures.
8. If the auditor believes that required disclosures of a significant nature are omitted from the financial statements under examination, the auditor should decide between issuing
a) A qualified opinion or an adverse opinion.
b) A disclaimer of opinion or a qualified opinion.
c) An adverse opinion or a disclaimer of opinion.
d) An unqualified opinion or a qualified opinion.
Answer A is correct because material disclosures required by GAAP, if omitted, cause the financial statements to be in violation of GAAP. When the financial statements are materially affected by a departure from GAAP, the auditor should express a qualified or an adverse opinion.
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.
9. Which of the following narrative disclosures appearing in notes to financial statements would an auditor be most likely to consider inappropriate?
a) The related-party transaction was consummated on terms no less favorable than those that would have been obtained if the transaction had been with an unrelated party.
b) The accounts of subsidiaries in which the corporation has more than 50% ownership are fully consolidated.
c) Legal and other costs associated with the covenant-not-to-compete will be amortized using the straight-line method during the next 3 years.
d) Minor fluctuations in foreign currency exchange rates are reflected in the accompanying financial statements.
Answer A is correct because representations to the effect that a transaction was consummated on terms no less favorable than those that would have been obtained if the transaction had been with an unrelated party are difficult to substantiate and the auditor may be unable to reach a conclusion as to the propriety thereof.
Answer B is incorrect because it represents an acceptable practice under generally accepted accounting principles. Refer to the correct answer explanation.
Answer C is incorrect because it represents an acceptable practice under generally accepted accounting principles. Refer to the correct answer explanation.
Answer D is incorrect because minor fluctuations in foreign currency rates need not be reflected in financial statements. Refer to the correct answer explanation.
10. If information accompanying the basic financial statements in an auditor-submitted document has been subjected to auditing procedures, the auditor may express an opinion which states that the accompanying information is fairly stated in
a) Conformity with generally accepted accounting principles.
b) Terms of negative assurance.
c) All material respects in relation to the basic financial statements taken as a whole.
d) Conformity with principles for presenting accompanying information.
Answer A is incorrect because the financial statements themselves, not the information accompanying the statements, are to follow generally accepted accounting principles.
Answer B is incorrect because AU 551 requires either an opinion or a disclaimer of opinion on the accompanying information; negative assurance is not appropriate.
Answer C is correct. The requirement is to determine an auditor's reporting responsibility for audited information accompanying the basic financial statements in an auditor-submitted document. The report should include either an opinion or disclaimer of opinion on whether the accompanying information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Answer D is also incorrect because, as indicated above, the opinion on whether the accompanying information is fairly stated is with respect to the financial statements, not with respect to principles for the accompanying information.
11. Which of the following best describes the auditor’s responsibility for “other information” included in the annual report to stockholders which contains financial statements and the auditor’s report?
a) The auditor has no obligation to read the “other information”.
b) The auditor has no obligation to corroborate the “other information”, but should read the “other information “ to determine whether it is materially inconsistent with the financial statements.
c) The auditor should extend the examination to the extent necessary to verify the “other information”.
d) The auditor must modify the auditor’s report to state that the “other information is unaudited” or no covered by the auditor’s report”.
Answer A is incorrect because the auditor is required to read the other information.
Answer B is correct because AU 550 requires that an auditor read the "other information" to determine whether it is inconsistent with the financial statements.
Answer C is incorrect because the auditor is not required to extend the examination to verify the "other information."
Answer D is incorrect because the auditor's report is not to be modified in such circumstances.
12. It is not appropriate to refer a reader of an auditor’s report to a financial statement note for details concerning
a) Subsequent events.
b) The pro forma effects of a business combination.
c) Sales of a discontinued operation.
d) The results of confirmation of receivables.
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 results of confirmation of receivables (as well as the results of other audit procedures) are not disclosed in a note to the financial statements.
13. The auditor who wishes to point out that the entity has sufficient transactions with related parties should disclose this fact in
a) An explanatory paragraph to the auditor’s report.
b) An explanatory note to the financial statements.
c) The body of the financial statements.
d) The “summary of significant accounting policies” section of the financial statements.
Answer A is correct because when the auditor wishes to emphasize such a matter, it should be done in an explanatory paragraph to the auditor's report. The report is still considered unqualified.
Answer B is incorrect because notes are portions of the financial statements in which the client reports, not the auditor.
Answer C is incorrect because the client, not the auditor, reports in the body of the financial statements.
Answer D is incorrect because the "Summary of significant accounting policies" section is a portion of the financial statements in which the client reports, not the auditor.
14. An auditor includes an explanatory paragraph in an otherwise unqualified report in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this explanatory paragraph
a) Is appropriate and would not negate to unqualified opinion.
b) Is considered a qualification of the report.
c) Is a violation of generally accepted reporting standards if this information is disclosed in footnotes to the financial statements.
d) Necessitates a revision of the opinion paragraph to include the phrase “with the foregoing explanation”.
Answer A is correct because the report is still considered unqualified.
Answer B is incorrect because the report is still considered unqualified.
Answer C is incorrect because footnote disclosure of such an emphasis of a matter is allowed.
Answer D is incorrect because the words "with the foregoing explanation" should not be added to the opinion paragraph.
15. A company issues audited financial statements under circumstances which require the presentation of a statement of cash flows. If the company refuses to present a statement of cash flows, the independent auditor should
a) Disclaim an opinion.
b) Prepare a statement of cash flows and note in an explanatory paragraph of the report that this statement is auditor-prepared.
c) Prepare a statement of cash flows and disclose in a footnote that this statement is auditor-prepared.
d) Qualify his opinion with an “except for” qualification and a description of the omission in an explanatory paragraph of the report.
Answer A is incorrect. A disclaimer of opinion is not necessary.
Answer B is incorrect. The auditor is not required to prepare a statement of cash flows or any of the basic financial statements.
Answer C is incorrect. The auditor is not required to prepare a statement of cash flows or any of the basic financial statements.
Answer D is correct. Omission of a statement of cash flows results in an "except for" qualified report with a middle paragraph describing the omission.
16. In which of the following circumstances would an auditor be required to issue a qualified report with a separate explanatory paragraph?
a) The auditor satisfactorily performed alternative accounts receivable procedures because scope limitations prevented performance of normal procedures.
b) The financial statements reflect the immaterial effects of a change in accounting principles from one period to the next.
c) A particular note to the financial statements discloses a company accounting method which deviates from generally accepted accounting principles.
d) The financial statements of a significant subsidiary were examined by another auditor, and reference to the other auditor’s report is to be made in the principal auditor’s report.
Answer A is incorrect because a qualified opinion is not required if the auditor conducts the examination per GAAS and applies all procedures necessary in the circumstances. Here the auditor has satisfied himself with alternative procedures.
Answer B is incorrect because no explanatory paragraph is required when the opinion paragraph is modified due to an immaterial change in accounting principle.
Answer C is correct because when the financial statements are affected by a departure from generally accepted accounting principles, the auditor will express a qualified opinion. When the auditor intends to express a qualified report, s/he should disclose all the substantive reasons in a separate explanatory paragraph.
Answer D is incorrect because a reference to another auditor's report does not constitute a qualification of the auditor's report.
17. A CPA engaged to examine financial statements observes that the accounting for a certain material item is not in conformity with generally accepted accounting principles, and that this fact is prominently disclosed in a footnote to the financial statements. The CPA should
a) Express an unqualified opinion and insert an explanatory paragraph emphasizing the matter by reference to the footnote.
b) Disclaim an opinion.
c) Not allow the accounting treatment for this item to affect the type of opinion because the deviation from generally accepted accounting principles was disclosed.
d) Qualify the opinion because of the deviation from generally accepted accounting principles.
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 when financial statements are materially affected by a departure from generally accepted accounting principles an auditor should issue either a qualified or an adverse opinion.
18. Under which of the following circumstances would a disclaimer of opinion not be appropriate?
a) The financial statements fail to contain adequate disclosure of related-party transactions.
b) The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.
c) The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances.
d) The auditor is unable to determine the amounts associated with illegal acts committed by the client’s management.
Answer A is correct. The requirement is to identify the circumstance under which a disclaimer of opinion would not be appropriate. A failure to contain adequate disclosure of related party transactions represents a departure from generally accepted accounting principles and disclaimers are not appropriate in such circumstances.
Answer B is incorrect. Client refusal to permit its attorney to furnish information represents a scope limitation that may lead to a disclaimer of opinion.
Answer C is incorrect. The inability to observe physical inventories or to apply alternative procedures represents scope limitations that may lead to a disclaimer of opinion.
Answer D is incorrect. The inability to determine amounts of illegal acts represents a scope limitation that may lead to a disclaimer of opinion.
19. An auditor’s examination reveals a misstatement in segment information that is material in relation to the financial statements taken as a whole. If the client refuses to make modifications to the presentation of segment information, the auditor should issue a(n)
a) “Except for” opinion.
b) “Subject to” opinion.
c) Unqualified opinion.
d) Disclaimer of opinion.
Answer A is correct because this, like other departures from GAAP, leads to either a qualified "except for" opinion or an "adverse" opinion. Note that an adverse opinion is not listed as a choice.
Answer B is incorrect. "Subject to" opinions are no longer issued.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
20. When reporting on financial statements that are required to include segment information, the auditor’s quantitative measurement of materiality with respect to segment information should be
a) Disclosed.
b) Primarily related to the segment information alone.
c) Primarily related to the financial statements taken as a whole.
d) Disregarded.
Answer A is incorrect because a quantitative measurement of materiality is not disclosed with financial statements.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is correct because AU 435 requires that the materiality of segment information is evaluated primarily by relating the dollar magnitude of the information to the financial statements taken as a whole.
Answer D is incorrect because materiality may not be disregarded.
21. When auditing a public entity’s financial statements that include segment information, the auditor should
a) Make a certain the segment information is labeled unaudited and determine that the information is consistent with audited information.
b) Make a certain the segment information is labeled unaudited and perform only analytical procedures on the segment information.
c) Audit the segment information, and, if the information is adequate and in conformity with GAAP, do not make reference to the segment information in the auditor’s report.
d) Audit the segment information and, if the information is adequate and in conformity with GAAP, refer to the segment information in the auditor’s report.
Answer A is incorrect because segment information is audited, not unaudited. Refer to the correct answer explanation.
Answer B is incorrect because segment information is audited, not unaudited. Refer to the correct answer explanation.
Answer C is correct because no reference need be made to the segment information when the information has been audited and is found to be adequate and in conformity with GAAP.
Answer D is incorrect. Refer to the correct answer explanation.
22. An auditor’s report included an additional paragraph disclosing that there is a difference of opinion between the auditor and the client for which the auditor believed an adjustment to the financial statements should be made. The opinion paragraph of the auditor’s report most likely expressed a(n)
a) Unqualified opinion.
b) “Except for” opinion.
c) “Subject to” opinion.
d) Disclaimer of opinion.
Answer A is incorrect because, if a difference of opinion is important enough to note, an unqualified opinion would not be appropriate.
Answer B is correct because a difference of opinion between the auditor and the client will generally originate from a departure from GAAP. Therefore, a qualified "except for" opinion or an adverse opinion would be appropriate.
Answer C is incorrect because "subject to" opinions are no longer permissible.
Answer D is incorrect because a disclaimer of opinion is not appropriate when a difference of opinion exists between the auditor and client.
23. When management refuses to disclose illegal activities which were identified by the independent auditor, the independent auditor may be charged with violating the CPA Code of Professional Conduct for
a) Withdrawing from the engagement.
b) Issuing a disclaimer of opinion.
c) Failure to uncover the illegal activities during prior audits.
d) Reporting these activities to the audit committee.
Answer A is incorrect because withdrawing from the engagement is appropriate in certain instances such as when the client refuses to accept the issued audit report and when the client continues the illegal act.
Answer B is correct because in such situations in which the auditor knows of the illegal act, a simple disclaimer will not suffice, since the lack of disclosure represents a departure from GAAP. This departure from GAAP will result in a qualified opinion or an adverse opinion.
Answer C is incorrect because an audit cannot be expected to provide assurance that illegal acts will be detected.
Answer D is incorrect because the board of directors and/or its audit committee may need to be notified of such situations by the auditor.
24. Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has
a) Identified and disclosed all laws and regulations that have a direct material effect on its financial statements.
b) Implemented internal control policies and procedures designed to detect all illegal acts.
c) Expressed both positive and negative assurance to the auditor that the entity complied with all laws and regulations.
d) Employed internal auditor who can report their findings, opinion, and conclusions objectively without fear of political repercussion.
Answer A is correct because, in addition to normal representations, auditors should consider obtaining additional representations from management acknowledging that (1) management is responsible for the entity's compliance with laws and regulations and (2) management has identified and disclosed to the auditor all laws and regulations that have a direct and material effect on the financial statements.
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.
25. When the financial statements contain a departure from generally accepted accounting principles, the effect of which is material, the auditor should
a) Qualify the opinion and explain the effect of the departure from generally accepted accounting principles in a separate paragraph.
b) Qualify the opinion and describe the departure from generally accepted accounting principles within the opinion paragraph.
c) Disclaim an opinion and explain the effect of the departure from generally accepted accounting principles in a separate paragraph.
d) Disclaim an opinion and describe the departure from generally accepted accounting principles within the opinion paragraph.
Answer A is correct because per AU 508 an auditor must qualify the opinion paragraph and explain the effect of the departure from GAAP in a separate paragraph (or issue an adverse opinion).
Answer B is incorrect because the description of the departure from GAAP is in a separate paragraph, not in the opinion paragraph.
Answer C is incorrect because an auditor issues a disclaimer when the auditor has not performed an examination sufficient in scope to enable him to form an opinion. A disclaimer should not be expressed because the auditor believes, based on his examination, that there are material departures from GAAP.
Answer D is incorrect both because the auditor cannot disclaim an opinion for a material departure from GAAP and because a separate paragraph is used in the audit report.
26. An auditor’s report that refers to the use of an accounting principle at variance with generally accepted accounting principles contains the words, “In our opinion, with the foregoing explanation, the financial statements referred to above present fairly...” This is considered an
a) Adverse opinion.
b) “Except for” qualified opinion.
c) Unqualified opinion with an explanatory paragraph.
d) Example of inappropriate reporting.
Answer A is incorrect. The statement is not considered adequate.
Answer B is incorrect. The statement is not considered adequate.
Answer C is incorrect because an unqualified opinion with a separate explanatory paragraph includes no modification of the opinion paragraph.
Answer D is correct. The requirement is to determine the correct response with respect to an audit report which describes a departure from generally accepted accounting principles with "In our opinion, with the foregoing explanation, the financial statements referred to above present fairly..." AU 508 states that such a statement is not clear or forceful enough and therefore should not be used.
27. Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35% of all assets. Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should issue a(n)
a) “Except for” qualified opinion.
b) Disclaimer of opinion.
c) Unqualified opinion with a separate explanatory paragraph.
d) Unqualified opinion with an explanation in the scope paragraph.
Answer A is incorrect. A qualified opinion states that, except for the effects of the matter(s) to which the qualification relates, the financial statements are fairly presented in conformity with GAAP. Due to the significant nature of this limitation, a qualified report is not appropriate in this situation.
Answer B is correct. AU 508 states that when restrictions that significantly limit the scope of the audit are imposed by the client, ordinarily the auditor should disclaim an opinion on the financial statements.
Answer C is incorrect. An unqualified opinion is expressed by an auditor when his audit has provided a reasonable basis for the opinion that the financial statements are fairly presented in accordance with GAAP. Such an opinion cannot be expressed (with or without an explanatory paragraph) because of the magnitude of the scope limitation described in this question. The auditor could not provide the necessary reasonable basis for an unqualified opinion.
Answer D is incorrect. An unqualified opinion is expressed by an auditor when his audit has provided a reasonable basis for the opinion that the financial statements are fairly presented in accordance with GAAP. Such an opinion cannot be expressed (with or without modification of the scope paragraph) because of the magnitude of the scope limitation described in this question. The auditor could not provide the necessary reasonable basis for an unqualified opinion.
28. Which of the following will not result in modification of the auditor’s report due to a scope limitation?
a) Restrictions imposed by the client.
b) Reliance placed on the report of another auditor.
c) Inability to obtain sufficient competent evidential matter.
d) Inadequacy in the accounting records.
Answer A is incorrect because restrictions imposed by the client are considered scope limitations.
Answer B is correct because reliance on the report of another auditor does not constitute a qualification of the auditor's opinion.
Answer C is incorrect because the inability to obtain sufficient competent evidential matter is the basis for a scope limitation.
Answer D is incorrect because inadequate accounting records are considered a scope limitation imposed by circumstance.
29. Stone was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records. Stone has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance, which is not auditable, is a material factor in the determination of cost of goods sold for the current year. Stone will probably
a) Decline the engagement.
b) Express an unqualified opinion on the balance sheet and income statement except for inventory.
c) Express an unqualified opinion on the balance sheet and disclaim an opinion on the income statement.
d) Disclaim an opinion on the balance sheet and income statement.
Answer A is incorrect because no reason is given for declining the engagement. The inability to verify the opening inventory balance will affect the audit but is not a reason to decline the engagement.
Answer B is incorrect because it describes a form of audit report not permitted under GAAS.
Answer C is correct because for the case described in this question, the auditor will be able to gather evidence on all year-end balances. However, evidence with respect to the beginning inventory is lacking making the verification of cost of goods sold, an income statement element, impossible. If no other problems arise, the auditor will be able to issue an unqualified opinion on the balance sheet and a disclaimer on the income statement.
Answer D is incorrect because the auditor is able to gather sufficient evidence on all year-end balances and, therefore, may render an opinion on the year-end balance sheet.
30. A limitation on the scope of the auditor’s examination sufficient to preclude an unqualified opinion will always result when management
a) Engages an auditor after the year-end physical inventory count.
b) Refuses to furnish a representation letter.
c) Knows that direct confirmation of accounts receivable with debtors is not feasible.
d) Engages an auditor to examine only the balance sheet.
Answer A is incorrect because AU 310 indicates that a CPA may accept an audit engagement after year-end and still issue an unqualified opinion. In this situation, another physical inventory could be taken which the auditor can observe, or the audit limitation could be remedied in some other manner.
Answer B is correct because when management refuses to furnish a representation letter, the scope of the auditor's examination has been limited sufficiently to preclude an unqualified opinion.
Answer C is incorrect because if direct confirmation of accounts receivable is not feasible, alternative procedures should be employed to obtain adequate evidence necessary to satisfy the auditor as to the receivables. The availability of alternative procedures to obtain adequate evidence determines whether a limitation of scope exists. Therefore, the inability to directly confirm receivables may or may not result in a scope limitation which precludes an unqualified opinion.
Answer D is incorrect because an engagement where the auditor reports only on the balance sheet is a limitation of reporting objectives rather than a limitation of scope, as long as there is no restriction on the auditor's access to information.
31. The auditor is unable to reach a conclusion as to the propriety of management’s representations. The auditor will have to consider issuing a(n)
a) Opinion qualified because of uncertainty.
b) Opinion qualified because of inadequate disclosure.
c) Adverse opinion or qualified opinion.
d) Qualified opinion or a disclaimer of opinion.
Answer A is incorrect. While partially correct, it is less complete because uncertainty, as used in the standards, only relates to estimates of events' outcomes and not to other management representations which the auditor may question.
Answer B is incorrect because the auditor is unlikely to know whether adequate disclosure exists in such circumstances due to his/her overall uncertainty.
Answer C is incorrect because an adverse opinion is not appropriate when the auditor has been unable to resolve his/her uncertainty.
Answer D is correct. The requirement is to determine the effect on an audit report of an auditor's inability to reach conclusions as to the propriety of management's representations. The auditor's uncertainty will result in either a qualified opinion or a disclaimer of opinion based on the importance of the representations.
32. When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(n)
a) “Subject to” qualified opinion.
b) Disclaimer of opinion.
c) Adverse opinion.
d) Unqualified opinion with a separate explanatory paragraph.
Answer A is incorrect because a "subject to" qualification relates to future uncertainty facing the firm and is therefore not appropriate.
Answer B is correct because in such circumstances, the auditor is to either qualify ("except for") or disclaim an opinion, and in this question the qualify ("except for") type opinion is not one of the answer choices.
Answer C is incorrect because an adverse opinion is only appropriate when the auditor knows that a departure from generally accepted accounting principles exists.
Answer D is incorrect because the inability to determine amounts makes an unqualified opinion inappropriate.
33. Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide’s legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme. Under these circumstances, Morris should
a) Express an unqualified opinion with separate explanatory paragraph.
b) Disclaim an opinion on the financial statements.
c) Express an adverse opinion on the financial statements.
d) Issue a special report regarding the illegal bribes.
Answer A is incorrect because the auditor is uncertain as to whether misstatements are involved, and therefore an unqualified opinion may not be appropriate.
Answer B is correct because the inability to obtain sufficient competent evidential matter will lead to a situation in which the auditor generally should disclaim an opinion on the financial statements.
Answer C is incorrect since the misstatements may not be material and therefore, an adverse opinion may be inappropriate.
Answer D is incorrect because special reports do not relate to illegal bribes.
34. When a client will not make essential corporate minutes available to the auditor, the audit report will probably contain a(n)
a) Unqualified opinion.
b) Adverse opinion.
c) Qualified opinion.
d) Disclaimer of opinion.
Answer A is incorrect because it is clearly indicated that the minutes are essential. An auditor would not issue an unqualified opinion when the client does not permit essential information to be reviewed.
Answer B is incorrect because the auditor issues an adverse opinion when the financial statements are not presented fairly in conformity with generally accepted accounting principles. In this case, the auditor does not know whether there is a departure from generally accepted accounting principles.
Answer C is incorrect because significant client-imposed scope restrictions will not lead to a qualified opinion.
Answer D is correct because when restrictions that significantly limit the scope of the audit are imposed by the client, the auditor generally should disclaim an opinion on the financial statements.
35. The auditor would most likely issue a disclaimer of opinion because of
a) The client’s failure to present supplementary information require by the PAS.
b) Inadequate disclosure of material information.
c) Client-impose scope limitation.
d) The qualification of an opinion by the other auditor of a subsidiary where there is a division of responsibility.
Answer A is incorrect because failure to present supplementary information does not affect the auditor's opinion, but does result in inclusion of an explanatory paragraph to the report.
Answer B is incorrect because inadequate disclosure of material information will result in qualified opinion or an adverse opinion.
Answer C is correct because auditors are generally required to disclaim an opinion for client imposed scope limitations.
Answer D is incorrect because, depending upon the circumstances involved, a qualification in the other auditor's report may or may not lead to overall report modification.
36. Which of the following circumstances would not be considered a departure from the auditor’s standard report?
a) The auditor wishes to emphasize a particular matter regarding the financial statements.
b) The auditor’s opinion is based in part on the report of another auditor.
c) The financial statements are affected by a departure from a generally accepted accounting principle.
d) The auditor is asked to report only on the balance sheet but has unlimited access to information underlying all the basic financial statements.
Answer A is incorrect because emphasis of a matter in the audit report constitutes a departure from the standard report.
Answer B is incorrect because basing (in part) the auditor's opinion on the report of another auditor constitutes a departure from the standard report.
Answer C is incorrect because the effect of a departure from GAAP which materially affects the financial statements results in a departure from the standard report.
Answer D is correct because reporting on only the balance sheet is not considered a scope limitation (requiring departure from the standard report), but rather involves limited reporting objectives. The auditor has ready access to all information underlying the financial statements and may apply all procedures deemed necessary.
37. When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n)
a) Disclaimer of opinion.
b) “Except for” qualified opinion.
c) “Subject to” qualified opinion.
d) Unqualified opinion with a separate explanatory paragraph.
Answer A is correct because this constitutes a client imposed scope limitation which ordinarily results in a disclaimer of opinion.
Answer B is incorrect because a disclaimer of opinion, not a qualified opinion, is generally required.
Answer C is incorrect because "subject to" qualified opinions are not considered appropriate under any circumstances.
Answer D is incorrect because a client's refusal to allow inquiry of outside legal counsel is considered to be a scope limitation which requires a disclaimer of opinion.
38. When an independent CPA is associated with the financial statements of a publicly held entity, but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(n)
a) Negative assurance.
b) Compilation opinion.
c) Disclaimer of opinion.
d) Explanatory paragraph.
Answer A is incorrect because negative assurance requires that the auditor has performed limited procedures in regards to the financial information. Refer to the correct answer explanation.
Answer B is incorrect because compilations are limited to nonpublic firms. Refer to the correct answer explanation.
Answer C is correct because when an independent CPA is associated with the financial statements of a public entity that s/he has not audited or reviewed, a disclaimer of opinion should be issued. The accountant who issues this disclaimer has no responsibility to apply any procedures beyond reading the financial statements for obvious material errors.
Answer D is incorrect because no explanatory paragraph will be added. Refer to the correct answer explanation.
39. When an adverse opinion is expressed, the opinion paragraph should include a direct reference to
a) A footnote to the financial statements which discusses the basis for the opinion.
b) The scope paragraph which discusses the basic for the opinion rendered.
c) A separate paragraph which discusses the basis for the opinion rendered.
d) The consistency or lack of consistency in the application of generally accepted accounting principles.
Answer A is incorrect because the auditor (not the client) should disclose all substantive reasons for the adverse opinion and the principal effects on the financial position and results of operations.
Answer B is incorrect because no mention of the nonconformity with GAAP is made in the scope paragraph.
Answer C is correct because the opinion paragraph of an adverse opinion should refer to a separate paragraph which discusses the basis for the opinion rendered.
Answer D is incorrect because adverse opinions are issued only when the financial statements taken as a whole are not presented fairly per GAAP. Generally there is no need for reference to consistency, unless the auditor has specific exceptions as to consistency.
40. An auditor would issue an adverse opinion if
a) The audit was begun by other independent auditors who withdrew from the engagement.
b) A qualified opinion cannot be given because the auditor lacks independence.
c) The restriction on the scope of the audit was significant.
d) The statements taken as a whole do not fairly present the financial condition and results of operations of the company.
Answer A is incorrect because an auditor's report is not affected by the fact that the engagement was begun by other auditors who withdrew.
Answer B is incorrect because a disclaimer of opinion is issued when an auditor lacks independence.
Answer C is incorrect because a scope restriction will lead to either a qualified opinion or a disclaimer of opinion.
Answer D is correct because AU 508 states that such an opinion is expressed when the financial statements taken as a whole are not presented fairly in conformity with generally accepted accounting principles.
41. An auditor should disclose the substantive reasons for expressing an adverse opinion in an explanatory paragraph
a) Preceding the scope paragraph.
b) Preceding the opinion paragraph.
c) Following the opinion paragraph.
d) Within the notes to the financial statements.
Answer A is incorrect. Placing an explanatory paragraph before the scope paragraph in order to disclose the substantive reasons for expressing an adverse opinion is improper placement of such a paragraph.
Answer B is correct. AU 508 requires that explanatory paragraphs disclosing the substantive reasons for expressing an adverse opinion precede the opinion paragraph of the auditor's report.
Answer C is incorrect. Placing an explanatory paragraph after the opinion paragraph in order to disclose the substantive reasons for expressing an adverse opinion is improper placement of such a paragraph.
Answer D is incorrect. Placing an explanatory paragraph within the notes to the financial statements in order to disclose the substantive reasons for expressing an adverse opinion is improper placement of such a paragraph.
42. An auditor’s report includes the following statement: “The financial statements do not present fairly the financial position, results of operations, or cash flows in conformity with generally accepted accounting principles.” This auditor’s report was most likely issued in connection with financial statements that are
a) Inconsistent.
b) Based on prospective financial information.
c) Misleading.
d) Affected by a material uncertainly.
Answer A is incorrect. Inconsistency is most likely to result in an unqualified report with an additional explanatory paragraph. Such a report would not modify the language of the opinion paragraph.
Answer B is incorrect. If an accountant disagrees with the presentation of financial statements based on prospective financial information, his report includes an adverse opinion that states such financial statements are not presented in conformity with guidelines established by the AICPA.
Answer C is correct. Language such as that quoted in this question is used in an adverse opinion. Such an opinion is appropriate when financial statements are considered to be misleading.
Answer D is incorrect. Material uncertainties result in either an unqualified opinion with an explanatory paragraph or a disclaimer of opinion. Neither of these types of opinions modify the opinion paragraph in the manner described in the question.
43. In which of the following circumstances would an auditor be most likely to express an adverse opinion?
a) The statements are not in conformity with the FASB statements regarding the capitalization of leases.
b) Information comes to the auditor’s attention that raises substantial doubt about the entity’s ability to continue as a going concern.
c) The chief executive officer refuses the auditor access t minutes of board of director’s meetings.
d) Tests of controls show that the entity’s internal control structure is so poor that it cannot be relied upon.
Answer A is correct. Financial statements departing from GAAP, in this case a FASB Statement on the capitalization of leases, result in either a qualified "except for" opinion or an adverse opinion.
Answer B is incorrect. Substantial doubt about an entity's ability to remain a going concern may lead to an explanatory paragraph being added to an unqualified opinion or a disclaimer of an opinion.
Answer C is incorrect. Scope limitations, in this case the restriction of access to board of directors' minutes, result in either a qualified "except for" opinion or a disclaimer of opinion.
Answer D is incorrect. Internal control weaknesses will cause the auditor to perform additional substantive procedures to obtain the required evidential matter. If the substantive procedures cannot provide the required evidential matter, a disclaimer of opinion is required.
44. A CPA who is associated with the financial statements of a public entity, but has not audited or reviewed such statements, should
a) Insist that they be audited or reviewed before publication.
b) Read them to determine whether there are obvious material misstatements.
c) State these facts in the accompanying notes to the financial statements.
d) Issue a compilation report.
Answer A is incorrect because it is not the CPA's role to insist that financial statements be audited or reviewed.
Answer B is correct because AU 504 states that when a CPA is associated with financial statements of a public entity but has not audited or reviewed such statements, the CPA has no responsibility to apply any procedures beyond reading the statements for obvious material misstatements.
Answer C is incorrect because while the financial statements should be conspicuously marked as unaudited, no more detail is required.
Answer D is incorrect because a compilation need not be performed. Also, compilations are primarily for nonpublic firms.
45. The annual report of a publicly held company presents the prior year’s financial statements which are clearly marked “unaudited” in comparative form with current year audited financial statements. The auditor’s report should
a) Expresses an opinion on the audited financial statements and contain a separate paragraph describing the responsibility assumed for the financial statements of the prior period.
b) Disclaim an opinion on the unaudited financial statements, add an explanatory paragraph with respect to consistency, and express an opinion on the current year’s financial statements.
c) State that the unaudited financial statements are presented solely for comparative purposes and express an opinion only on the current year’s financial statements.
d) Express an opinion on the audited financial statements and state whether the audited financial statements were complied or reviewed.
Answer A is correct because AU 504 states that when unaudited financial statements are presented in comparative form with audited statements, the report on the current period should include as a separate paragraph an appropriate description of the responsibility assumed for the financial statements of the prior period.
Answer B is incorrect because there is no indication that the accounting principles have not been consistently applied.
Answer C is incorrect because the auditor may not restrict the use of the financial statements to comparative analysis.
Answer D is incorrect because the statements were not compiled or reviewed; these forms of auditor association are for nonpublic firms.
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