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Flashcards in A1-O Deck (30)
1

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

a.

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

b.

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

c.

Pronouncements issued by the Auditing Standards Board.

d.

Measures of the quality of the auditor's performance.

Choice "d" is correct. Generally accepted auditing standards ("GAAS") are measures of the quality of the auditor's performance, and guide the auditor in the performance of a properly planned and executed audit.

Choice "b" is incorrect. GAAS are not "rules," nor are they universally applicable. GAAS are measures of the quality of an auditor's performance.

Choice "c" is incorrect. The Auditing Standards Board (ASB) issues many types of pronouncements, including (but not limited to) "Statements on Auditing Standards" (SASs). While SASs are considered to be interpretations of GAAS, not all ASB pronouncements relate to audits. Therefore, just because something is issued by the ASB does not make it GAAS.

Choice "a" is incorrect. Auditing standards differ from auditing procedures in that procedures relate to acts to be performed, whereas standards deal with the quality of the performance of those acts.

2

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

a.

Research and development projects are postponed.

b.

Stock dividends replace annual cash dividends.

c.

Significant related party transactions are pervasive.

d.

Cash flows from operating activities are negative.

Choice "d" is correct. Negative cash flows from operating activities most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.

Choices "a" and "b" are incorrect. Plans to reduce or delay cash expenditures are mitigating factors conserving cash (e.g., postponing R&D projects and replacing cash dividends with stock dividends). This would not ordinarily cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.

Choice "c" is incorrect. The existence of significant related party transactions should be disclosed but would not ordinarily cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.

3

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

a.

Both GAAS and government auditing standards (GAGAS)

b.

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

c.

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

d.

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

Choice "a" is correct. While GAAS do not override laws or regulations that govern an audit of financial statements, an audit may be conducted in accordance with two sets of auditing standards in their entirety. In this case, the auditor should add additional language to the Auditor's Responsibility paragraph to state that the audit was conducted in accordance with both sets of auditing standards.

Choice "c" is incorrect. The auditor may conduct the audit in accordance with both GAAS and auditing standards issued by the PCAOB. An additional statement would be added to the Auditor's Responsibility paragraph stating that both sets of standards were applied.

Choice "d" is incorrect. It is acceptable for an auditor to apply both GAAS and auditing standards of another jurisdiction or country.

Choice "b" is incorrect. In certain audit engagements, the auditor may be required to comply with International Standards on Auditing in addition to GAAS even if the audit is conducted in the U.S.A.

4

Which of the following procedures should an auditor generally perform regarding subsequent events?

a.

Send second requests to the client's customers who failed to respond to initial accounts receivable confirmation requests.

b.

Review the cut-off bank statements for several months after the year-end.

c.

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

d.

Communicate material weaknesses in the internal control structure to those charged with governance.

Choice "c" is correct. When performing procedures regarding subsequent events, the auditor generally will compare the latest available interim financial statements with the financial statements being audited to determine if any significant subsequent event occurred that would need to be reflected in the statements being audited.

Choice "a" is incorrect. Sending second requests to the client's customers who failed to respond to initial A/R confirmation requests is a substantive procedure that provides evidence about receivables existing at year end, not about subsequent events.

Choice "d" is incorrect. Internal control weaknesses should be communicated to those charged with governance, but this communication provides no evidence about subsequent events.

Choice "b" is incorrect. Bank cut-off statements generally are reviewed for only a week to ten days subsequent to year-end. Reviewing them for a longer period such as "several months" would provide little additional audit evidence regarding the YE FS and thus would not be a cost beneficial procedure.

5

An auditor's report contains the following sentences:

We did not audit the financial statements of JK Co., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 17 percent and 19 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for JK Co., is based solely on the report of the other auditors.

These sentences:

a.

Divide responsibility.

b.

Are an improper form of reporting.

c.

Qualify the opinion.

d.

Disclaim an opinion.

Choice "a" is correct. The report indicates a division of responsibility. Note that division of responsibility is permitted under U.S. auditing standards, but is generally not permitted under international auditing standards.

Choice "b" is incorrect. Words describing the percentages of revenues and assets audited by other auditors are proper in dividing responsibility.

Choice "d" is incorrect. Dividing responsibility does not affect the unmodified opinion, nor does it require a disclaimer of opinion.

Choice "c" is incorrect. Dividing responsibility does not affect the unmodified opinion, nor does it require a qualified opinion.

6

Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?

~~When read in conjunction with Note X
~~With the foregoing explanation
a.

Yes

No

b.

No

Yes

c.

Yes

Yes

d.

No

No

Choice "d" is correct. No − No.

A qualified opinion phrase is, "in our opinion, except for [explanation of problem] as discussed in the preceding paragraph . . ."

Choice "a" is incorrect, as "when read in conjunction with Note X" is not a phrase included in the opinion paragraph of a qualified opinion.

Choice "b" is incorrect, as "with the foregoing explanation" is not a phrase included in the opinion paragraph of a qualified opinion.

Choice "c" is incorrect. Neither phrase is included in the opinion paragraph of a qualified opinion.

(This is why it's important to memorize the qualifying phrases as well as the unmodified auditor's report.)

7

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

a.

Investigating changes in stockholders' equity occurring after year-end.

b.

Confirming bank accounts established after year-end.

c.

Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year-end.

d.

Recomputing a sample of large-dollar transactions occurring after year-end for arithmetic accuracy.

Choice "c" is correct. The auditor would most likely inquire of the entity's legal counsel concerning litigation, claims and assessments arising after year-end in order to obtain evidence about the occurrence of subsequent events. Claims arising after year-end might well impact the year-end financial statements.

Choice "d" is incorrect. Recomputing a sample of large-dollar transactions occurring after year-end for arithmetic accuracy would not provide evidence about year-end amounts.

Choice "a" is incorrect. The auditor would inquire about changes in stockholders' equity occurring after year-end, but would not generally perform an investigation of such items.

Choice "b" is incorrect. Confirming bank accounts established after year-end is generally not done (only those in existence at year-end are confirmed). Accounts established after year-end generally would not be relevant to year-end amounts.

8

An auditor's responsibility to express an opinion on the financial statements under U.S. auditing standards is:

a.

Explicitly represented in the Introductory paragraph of the auditor's report.

b.

Explicitly represented in an emphasis-of-matter paragraph of the auditor's report.

c.

Explicitly represented in the Auditor's Responsibility paragraph.

d.

Implicitly represented in the auditor's report.

Choice "c" is correct. The auditor's responsibility to express an opinion on the financial statements under U.S. auditing standards is explicitly represented in the first sentence of the Auditor's Responsibility section of the audit report. It says "Our responsibility is to express an opinion on these financial statements based on our audit."

Choice "d" is incorrect. The responsibility to express an opinion is explicitly represented (i.e., clearly stated), not implicitly represented (i.e., assumed).

Choice "a" is incorrect. There are no words in the Introductory paragraph that represent an auditor's responsibility to express an opinion. The Introductory paragraph (titled Report on the Financial Statements) states the name of the entity under audit, as well as the financial statements being audited (e.g., balance sheet, income statements, etc.).

Choice "b" is incorrect. An emphasis-of-matter paragraph does not explicitly represent the auditor's opinion to express an opinion. Emphasis-of-matter and other-matter paragraphs are used in certain circumstances to add additional communications to the auditor's report without modifying the auditor's opinion.

9

When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond:

a.

Documenting that the internal control structure is not being relied on.

b.

Ascertaining whether the financial statements are in conformity with generally accepted accounting principles.

c.

Determining whether management has elected to omit substantially all required disclosures.

d.

Reading the financial statements for obvious material misstatements.

Choice "d" is correct. When an independent CPA assists in preparing the FS of a publicly held entity, but has not "audited" or "reviewed" them, the CPA should issue a disclaimer of opinion and has only the responsibility to read the FS for obvious material misstatements. 

Choice "b" is incorrect. A disclaimer does not require ascertaining whether the FS are in conformity with GAAP.

Choice "c" is incorrect. A disclaimer does not require ascertaining whether management has elected to omit substantially all required disclosures.

Choice "a" is incorrect. A disclaimer of opinion does not require ascertaining whether or not the internal control structure is being relied upon.

10

An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor's report. The auditor's responsibility for events occurring subsequent to the original date was:

a.

Limited to include only events occurring up to the date of the last subsequent event referenced.

b.

Limited to the specific event referenced.

c.

Extended to include all events occurring since the original date of the auditor's report.

d.

Extended to subsequent events occurring through the date of reissuance of the report.

Choice "b" is correct. When an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditor's report, the auditor's responsibility for events occurring subsequent to the original date of the auditor's report is limited to the specific event referenced.

Choices "d", "c", and "a" are incorrect. The auditor takes responsibility for only the specific event noted in the dual dating and for no other event occurring subsequent to the original date of the auditor's report.

11

An auditor most likely would issue a disclaimer of opinion because of:

a.

Inadequate disclosure of material information.

b.

Management's refusal to furnish written representations.

c.

A material departure from generally accepted accounting principles.

d.

The omission of the statement of cash flows.

Choice "b" is correct. Management's refusal to furnish written representations is a significant client imposed restriction on the scope of an audit, ordinarily warranting a disclaimer of opinion.

Choice "a" is incorrect. Inadequate disclosure would result in a qualified or adverse opinion.

Choice "d" is incorrect. A qualified report would be appropriate when a "statement of cash flows" is omitted and the scope of the audit is not restricted.

Choice "c" is incorrect. A departure from GAAP would result in either a qualified or adverse opinion, depending on materiality.

12

When an auditor qualifies an opinion because of the inability to confirm accounts receivable by direct communication with debtors, the wording of the basis of qualified opinion paragraph of the auditor's report should indicate that the qualification pertains to the:

a.

Departure from generally accepted auditing standards.

b.

Possible effects on the financial statements.

c.

Lack of sufficient appropriate audit evidence.

d.

Limitation on the auditor's scope.

Choice "b" is correct. When an auditor qualifies his or her opinion because of a scope limitation, such as the inability to confirm A/R, the wording in the basis for modification of opinion paragraph should indicate that the qualification pertains to the possible effects on the FS and not to the scope limitation itself.

Choices "d", "c", and "a" are incorrect, based on the above explanation.

13

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the:

a.

Feasibility of plans to purchase leased equipment at less than market value.

b.

Committed arrangements to convert preferred stock to long-term debt.

c.

Ability to expand operations into new product lines in the future.

d.

Marketability of assets that management plans to sell.

Choice "d" is correct. The adverse effects of events causing an auditor to believe there is a substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the marketability of assets that management plans to sell. By providing evidence that there is a ready market for assets that could be converted to cash, management has demonstrated that the company could remain in operation for a longer period of time, thereby mitigating the need for an emphasis-of-matter paragraph describing the matter.

Choices "c", "a", and "b" are incorrect. Evidence regarding the ability to expand operations into new product lines in the future, the feasibility of plans to purchase leased equipment at less than market value, or committed arrangements to convert preferred stock to long-term debt would not be sufficient to mitigate doubts about an entity's ability to continue as a going concern, unless it could also be demonstrated that the events would provide adequate cash flow to fund operations for at least the next year.

14

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary. Between which of the following opinions should the entity's auditor choose?

a.

Qualified and disclaimer.

b.

Qualified and adverse.

c.

Disclaimer and unmodified with an emphasis-of-matter paragraph added.

d.

Adverse and unmodified with an emphasis-of-matter paragraph added.

Choice "a" is correct. When an auditor is unable to obtain audited financial statements or other evidence supporting an entity's investment in a subsidiary (foreign or domestic), the auditor should issue a qualified or disclaimer of opinion depending on the materiality of the investment in the subsidiary.

Choices "d", "c", and "b" are incorrect. An adverse opinion is only issued when the financial statements are not presented fairly in conformity with GAAP, and an unmodified opinion with an emphasis-of-matter paragraph is not appropriate for a scope limitation.

15

In order to express an opinion, the auditor obtains a level of assurance about whether the financial statements are free from material misstatement, whether due to error or fraud. Which of the following is required of the auditor in obtaining this level of assurance?

a.

Obtain absolute assurance that the financial statements are not misstated due to fraud on the part of management.

b.

Plan the work and properly supervise any assistants.

c.

Exercise his or her specific legal powers and authority in investigating suspicious activities of the entity's employees, including management.

d.

Determine the applicable financial reporting framework and prepare an adequate description of the framework for inclusion in the financial statements.

Choice "b" is correct. The auditor, in order to express an opinion, must obtain a reasonable level of assurance about whether the financial statements are free from material misstatement, whether due to error or fraud. In order to obtain reasonable assurance, the auditor must (a) plan the work and properly supervise any assistants; (b) determine and apply appropriate materiality levels; (c) identify and assess risks of material misstatement, whether due to error or fraud; and (d) obtain sufficient appropriate audit evidence.

Choice "a" is incorrect. The auditor obtains reasonable assurance, not absolute assurance. Reasonable assurance is a high level of assurance; the auditor is unable to obtain absolute assurance because of the inherent limitations of an audit.

Choice "d" is incorrect. These are responsibilities of management, not of the auditor. Management is responsible for (a) preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; (b) the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement due to error or fraud; and (c) providing the auditor with access to information and persons within the entity needed to complete the audit.

Choice "c" is incorrect. The auditor does not have specific legal powers, and an audit is not an investigation into a wrongdoing. The purpose of an audit is to provide financial statement users with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

16

Six months after issuing an unmodified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances. The auditor should first:

a.

Inquire whether there are persons currently relying, or likely to rely, on the unmodified opinion.

b.

Request the permission of the client to undertake the confirmation of accounts receivable.

c.

Perform alternative procedures to provide a satisfactory basis for the unmodified opinion.

d.

Assess the importance of the omitted procedures to the auditor's ability to support the previously expressed opinion.

Choice "d" is correct. When an auditor discovers the omission of an audit procedure related to a previously issued report, the auditor should first assess the importance of the omitted procedure to the auditor's ability to support the previously expressed opinion.

Choice "b" is incorrect. The auditor would request the permission of the client to undertake the confirmation of accounts receivable only after determining that the procedure was necessary to support the previously expressed opinion and no other alternative procedure had been performed.

Choice "c" is incorrect. Alternative procedures would be performed only after the auditor determined that the procedure was necessary to support the previously expressed opinion.

Choice "a" is incorrect. The auditor needs to be able to support (or revise) the previously issued opinion regardless of whether or not there are persons currently relying on it.

17

Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?

a.

Review the cut-off bank statements for the period after the year-end.

b.

Inquire of the client's legal counsel concerning litigation.

c.

Investigate significant deficiencies in internal control previously communicated to the client.

d.

Analyze related party transactions to discover possible irregularities.

Choice "b" is correct. An auditor would most likely obtain a letter from the entity's legal counsel describing any pending litigation, unasserted claims, or loss contingencies, to obtain evidence that might impact the year-end financial statements.

Choice "a" is incorrect. Reviewing cut-off bank statements for the period after year-end generally is performed to evaluate the year-end cash balance, not to identify subsequent events.

Choice "c" is incorrect. Investigating significant deficiencies in internal control previously communicated to the client would be a procedure performed as part of the planning process and would provide the auditor with information regarding the internal control structure, not subsequent events.

Choice "d" is incorrect. Analyzing related party transactions to discover possible irregularities generally is performed to evaluate financial statement disclosure, not to identify subsequent events.

18

Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion rather than an unmodified opinion most likely would be determined by the:

a.

Inability to estimate the amount of loss.

b.

Entity's lack of experience with such litigation.

c.

Lack of sufficient evidence.

d.

Lack of insurance coverage for possible losses from such litigation.

Choice "c" is correct. Lack of sufficient evidence to support management's assertions would most likely cause an auditor to issue a qualified or disclaimer of opinion.

Choice "a" is incorrect. As long as it is fully disclosed, an inability to estimate the amount of loss from a future event (outcome of pending legislation) would most likely result in an unmodified opinion.

Choices "b" and "d" are incorrect. Neither a lack of experience nor a lack of insurance coverage would impact the auditor's report.

19

It is not appropriate to refer a reader of an auditor's report to a financial statement footnote for details concerning:

a.

The pro forma effects of a business combination.

b.

The results of confirmation of receivables.

c.

Subsequent events.

d.

Sale of a discontinued operation.

Choice "b" is correct. Details concerning the results of audit procedures (such as the results of confirmation of receivables) generally do not appear in the footnotes.

Choice "c" is incorrect. Subsequent events may be discussed in an emphasis-of-matter paragraph of the auditor's report, which would also refer to the related footnote.

Choice "a" is incorrect. The pro forma effects of a business combination may be included in an emphasis-of-matter paragraph of the auditor's report, which would also refer to the related footnote.

Choice "d" is incorrect. Sale of a discontinued operation may be discussed in an emphasis-of-matter paragraph of the auditor's report, which would also refer to the related footnote.

20

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.

Disclaim an opinion on the financial statements.

b.

Express an unmodified opinion with an other-matter paragraph.

c.

Issue a special report regarding the illegal bribes.

d.

Express an adverse opinion on the financial statements.

21

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

a.

Complying with relevant ethical requirements.

b.

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

c.

Appropriate competence and capabilities to perform the audit.

d.

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

Choice "d" is correct. This is not a responsibility of the auditor. The appropriate amount of technical knowledge of the industry can be obtained by the auditor. Experience in the industry is not required.

Choices "c", "a", and "b" are incorrect, as they do represent auditor responsibilities regarding the audit.

22

An auditor's report under U.S. auditing standards 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.

Unmodified opinion with an emphasis-of-matter paragraph.

d.

Example of inappropriate reporting.

Choice "d" is correct. "In our opinion, with the foregoing explanation, the FS referred to above present fairly" is an example of inappropriate reporting. When an auditor's report refers to the use of an accounting principle at variance with GAAP, the words, "in our opinion, except for the effects of the matters discussed in the preceding paragraph, the FS referred to above present fairly,…" should be used.

Choice "a" is incorrect. An adverse opinion would include the phrase, "...do not present fairly..."

Choice "b" is incorrect. A qualified opinion would include the phrase, "In our opinion, except for the [problem] discussed in the preceding paragraph,…"

Choice "c" is incorrect. An unmodified opinion would not include the phrase "with the foregoing explanation" in an emphasis-of-matter paragraph.

23

A former client requests a predecessor auditor to reissue an audit report on a prior period's financial statements. The financial statements are not restated and the report is not revised. What date(s) should the predecessor auditor use in the reissued report?

a.

The dual-dates.

b.

The date of reissue.

c.

The date of the prior-period report.

d.

The date of the client's request.

Choice "c" is correct. The date of the prior-period report should be used as long as the FS arenot restated, the report is not revised, and no significant changes have occurred that would affect the prior FS.

Choices "d" and "b" are incorrect. Using the date of the client's request or the date of reissue would extend the auditor's responsibility to that date.

Choice "a" is incorrect. The auditor may dual date the report if a material subsequent event has occurred, but dual dating is not used for reissuing a report.

24

An auditor may issue a qualified opinion under which of the following circumstances?

~~Lack of sufficient appropriate audit evidence
~~Restrictions of the scope of the audit
a.

Yes

No

b.

No

Yes

c.

Yes

Yes

d.

No

No

Choice "c" is correct. Yes - Yes.

An auditor may issue a qualified opinion (or a disclaimer, depending on materiality) when there is a lack of sufficient appropriate audit evidence, or when there are restrictions on the scope of the audit.

Choices "a", "b", and "d" are incorrect, as explained above.

25

How are management's responsibility and the auditor's responsibility represented in the auditor's report?

~~Management's responsibility
~~Auditor's responsibility
a.

Explicitly

Explicitly

b.

Explicitly

Implicitly

c.

Implicitly

Explicitly

d.

Implicitly

Implicitly

Choice "a" is correct. The responsibility of the auditor and the responsibility of management are stated explicitly in the auditor's report. There is a Management's Responsibility paragraph and an Auditor's Responsibility paragraph.

Choices "d", "c", and "b" are incorrect, as explained above.

26

When there is a significant change in accounting principle, an auditor's report should refer to the lack of consistency in:

a.

The Introductory paragraph.

b.

In the Management's Responsibility paragraph.

c.

The Opinion paragraph.

d.

An emphasis-of-matter paragraph following the Opinion paragraph.

Choice "d" is correct. When there is a significant change in accounting principle, the auditor's report should refer to the lack of consistency in an emphasis-of-matter paragraph following the Opinion paragraph. The emphasis-of-matter paragraph should identify the change and refer to the note in the FS that discusses the change in detail. The auditor's concurrence with the change in GAAP is implicit, unless he or she takes exception.

Choice "a" is incorrect. Lack of consistency is not described in the Introductory paragraph.

Choice "b" is incorrect. Changes in GAAP are not reported in the Management's Responsibility paragraph.

Choice "c" is incorrect. The lack of consistency would not be disclosed in an Opinion paragraph unless the auditor does not concur and wishes to qualify the opinion. In such case an additional paragraph would precede the Opinion paragraph (Basis for Qualified Opinion) and the Opinion paragraph would be qualified.

27

When a group engagement partner decides to make reference to a component auditor's examination under U.S. GAAS, the group engagement partner's report should state "We did not audit the financial statements of X Company..." in which paragraph of the audit report?

a.

An emphasis-of-matter paragraph preceding the Auditor's Responsibility paragraph. The emphasis-of-matter paragraph should be titled "Other Auditor's Responsibility."

b.

An emphasis-of-matter paragraph following the Management's Responsibility paragraph.

c.

Not in the auditor's report, but in a separate report prepared by the component auditor and appended to the auditor's report.

d.

Auditor's Responsibility paragraph.


Explanation

Choice "d" is correct. Such a statement is included in the Auditor's Responsibility report. The statement includes the following language: "Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for X Company, is based solely on the report of the other auditors."

Choices "a", "c" and "b" are incorrect based on the above explanation.

28

For a particular entity's financial statements to be presented fairly in conformity with the applicable financial reporting framework, it is not required that the principles selected:

a.

Present information in the financial statements that is classified and summarized in a reasonable manner.

b.

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

c.

Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.

d.

Be appropriate in the circumstances for the particular entity.

Choice "b" is correct. For a particular entity's financial statements to be presented fairly in accordance with the applicable financial reporting framework, it is not required that the principles selected be applied on a basis consistent with those followed in the prior year, merely that any changes in accounting principle be properly accounted for and disclosed.

Choice "d" is incorrect. The principles selected must be appropriate in the circumstances for the particular entity.

Choice "c" is incorrect. The principles selected must reflect transactions in a manner that present the FS within a range of acceptable limits.

Choice "a" is incorrect. The principles selected must present information in the FS that is classified and summarized in a reasonable manner.

29

If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be:

a.

Disclosed in the notes to the financial statements of the current year.

b.

Treated as a subsequent event.

c.

Treated as a consistency modification in the auditor's report for the current year.

d.

Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year.

Choice "a" is correct. If an accounting change does not have a material effect on the FS of the current year, it will be disclosed in the notes to the FS for the current year, but no modification of the auditor's report is necessary.

Choices "c" and "d" are incorrect. If the change in accounting principle were material for the current year, it would be treated as a consistency modification in the auditor's report for the current year. Since there is no material effect in the current year, no modification to the auditor's report is required.

Choice "b" is incorrect. A change in accounting principle is not a "subsequent event."

30

To obtain reasonable assurance, an auditor should:

a.

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

b.

Design the audit to detect all instances of illegal acts.

c.

Examine all available corroborating evidence supporting management's assertions.

d.

Plan the work and properly supervise any assistants.

Choice "d" is correct. To obtain reasonable assurance, an auditor must plan the work and properly supervise assistants, as well as determine and apply appropriate materiality levels, identify and assess risks of material misstatement whether due to fraud or error, and obtain sufficient appropriate audit evidence.

Choice "c" is incorrect. An auditor examines some (but not all) available corroborating evidence supporting management's assertions. Examination of all evidence would not be feasible.

Choice "b" is incorrect. An auditor has a reasonable responsibility to design the audit to detect material instances of illegal acts, errors, and irregularities. It would not be feasible to design an audit to detect all instances of illegal acts.

Choice "a" is incorrect. It would not be possible for the auditor to ensure that management does not conceal any fraudulent activities of employees.