Teste De Pratica A1 Flashcards
1
Q
Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?
A. The adoption of sound accounting policies is an implicit part of an auditor's responsibilities. B. An auditor may not draft an entity's financial statements based on information from management's accounting system. C. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion. D. Making suggestions that are adopted about an entity's internal control environment impairs an auditor's independence.
A
Explanation
Choice “C” is correct. An auditor’s responsibility is to express an opinion on financial statements based on an audit.
Choice “A” is incorrect. The adoption of sound accounting policies is an implicit part of management’s responsibilities, not the auditor’s responsibilities.
Choice “B” is incorrect. An auditor may draft an entity’s financial statements based on information from management’s financial system. This would be referred to as a compilation engagement.
Choice “D” is incorrect. An auditor often makes suggestions that are adopted about an entity’s internal control environment.
2
Q
Which of the following factors should most influence an auditor’s decision to modify the audit opinion of an issuer’s financial statements?
A. Whether the auditor's opinion is based in part on the report of another auditor. B. Uncertainties related to management's estimates as of the reporting date that are adequately disclosed in the footnotes to the financial statements. C. The effect of a misstatement on the financial statements taken as a whole. D. The types of users expected to rely on the financial statements.
A
Choice “C” is correct. The effect of a misstatement on the financial statements taken as a whole should most likely influence an auditor’s decision to modify the audit opinion.
Choice “A” is incorrect. The auditor considers the total misstatements accumulated from the entire entity (including misstatements identified by the component auditor) when determining the appropriate audit opinion. The actual opinion rendered by another auditor on the component does not directly influence the auditor’s decision. (For example, a misstatement may be material to the component financial statements, but the same misstated amount may not be material to the group financial statements. This is why the auditor considers the aggregated misstatement for the financial statements as a whole rather than just the opinion rendered on a specific component.)
Choice “B” is incorrect. An auditor is unlikely to modify the opinion related to uncertainties related to management’s estimates that are adequately disclosed. If an entity follows GAAP and the auditor obtains sufficient appropriate evidence, there is no need to modify the type of opinion rendered.
Choice “D” is incorrect. The types of users expected to rely on the financial statements would be considered when determining the materiality amount.
3
Q
During an audit, the auditor sent the client’s attorney a letter of inquiry for any pending litigation or unasserted claims. The attorney returned the letter, indicating that the attorney would not respond to the inquiry. Under these circumstances the auditor most likely would:
A. Increase tests of controls concerning the related liability account B. Place increased reliance on information obtained from management C. Consider the impact of a scope limitation D. Obtain information concerning contingency guarantees from bank confirmations
A
Choice “C” is correct. Refusal of the client’s attorney to respond to inquiry is an example of a scope limitation. The auditor must consider the impact of the scope limitation on the audit opinion to be issued.
Choice “A” is incorrect. Testing the liability account does not address the completeness of the reliability account. Responses from the client’s attorney are necessary to determine whether additional liability should potentially be recorded.
Choice “B” is incorrect. The auditor is required to inquire of the client’s legal counsel concerning litigation, claims, and assessments. The auditor cannot replace a response from counsel with information obtained from management.
Choice “D” is incorrect. While bank confirmations may be helpful additional sources of information on contingencies, the auditor still is required to inquire of the client’s legal counsel concerning litigation, claims, and assessments.
4
Q
An auditor of a nonissuer should disclose the substantive reasons for expressing an adverse opinion in a Basis for Adverse Opinion section:
A. Preceding the Opinion section. B. Within the notes to the financial statements. C. Following the Opinion section. D. Preceding the introductory paragraph.
A
Choice “C” is correct. The auditor should disclose the substantive reasons for expressing an adverse opinion in a separate Basis for Adverse Opinion section following the Opinion section.
Choice “A” is incorrect. The Basis for Adverse Opinion section follows, not precedes, the Opinion section.
Choice “B” is incorrect. The auditor cannot include any type of explanatory material in the financial statements, which are the responsibility of management.
Choice “D” is incorrect. There is no introductory paragraph within the auditor’s report.
5
Q
When forming an opinion on the financial statements, the auditor is least likely to evaluate whether:
A. Earnings forecasts by investors are met. B. Financial statements provide adequate disclosures to enable intended users to understand the effect of material events and transactions. C. The terminology used in the financial statements is appropriate. D. Accounting estimates made by management are reasonable.
A
Choice “A” is correct. When forming an opinion on the financial statements, the auditor is least likely to evaluate whether earnings forecasts made by investors are met.
Choice “B” is incorrect. When forming an opinion on the financial statements, the auditor should evaluate whether, based on the financial reporting framework, the financial statements provide adequate disclosures to enable intended users to understand the effect of material events and transactions.
Choice “C” is incorrect. When forming an opinion on the financial statements, the auditor should evaluate whether, based on the financial reporting framework, the terminology used in the financial statements is appropriate.
Choice “D” is incorrect. When forming an opinion on the financial statements, the auditor should evaluate whether, based on the financial reporting framework, the accounting estimates made by management are reasonable.
6
Q
Management refuses to allow an auditor to observe inventory. Inventory accounts for 60% of the entity’s assets. Alternative auditing procedures cannot be applied. Based on this information, the auditor should:
A. Issue an unmodified opinion with an emphasis-of-matter paragraph. B. Issue an unmodified with an other-matter paragraph. C. Issue a qualified or adverse opinion. D. Issue a disclaimer of opinion or withdraw from the engagement.
A
Choice “D” is correct. Due to the significance of the inventory balance, the effects of undetected misstatements could be both material and pervasive. In this situation, U.S. GAAS allows the auditor to consider whether to withdraw or disclaim an opinion on the financial statements.
Choice “A” is incorrect. An unmodified opinion with an emphasis-of-matter paragraph would not be appropriate as the auditor is facing a significant scope limitation.
Choice “B” is incorrect. An unmodified opinion with an other-matter paragraph would not be appropriate as the auditor is facing a significant scope limitation.
Choice “C” is incorrect. A qualified or adverse opinion is not appropriate when an auditor is unable to obtain sufficient appropriate audit evidence. A qualified or adverse opinion is appropriate when the auditor is able to obtain sufficient appropriate audit evidence and concludes that there is a misstatement that is material (qualified) or material and pervasive (adverse.)
7
Q
In an audit of an issuer, which of the following occasions is the earliest an audit report may be dated?
A. When the auditor has obtained sufficient appropriate audit evidence to support an opinion. B. When the financial statements are filed with the Securities and Exchange Commission (SEC). C. When all working papers are compiled and assembled, and all superseded documentation has been deleted. D. When the auditor completes field work and all audit documentation has been reviewed.
A
Choice “A” is correct. The earliest an audit report may be dated is when the auditor has obtained sufficient appropriate evidence to support an opinion.
Choice “B” is incorrect. An audit report may be dated earlier than when the financial statements are filed with the Securities and Exchange Commission (SEC).
Choice “C” is incorrect. The audit report may be dated earlier than when all working papers are compiled and assembled and all superseded documentation has been deleted.
Choice “D” is incorrect. The completion of field work and review of all documentation does not necessarily indicate that the audit report should be dated on that date because additional evidence may be required. The earliest an audit report may be dated is when it is determined that sufficient and appropriate evidence has been obtained.
8
Q
For an auditor of an issuer, critical audit matters should be communicated in the Critical Audit Matters section, which:
A. Immediately precedes the Basis for Opinion section. B. Immediately precedes the Opinion on the Financial Statements section. C. Immediately follows the Opinion on the Financial Statements section. D. Immediately follows the Basis for Opinion section.
A
Choice “D” is correct. The Critical Audit Matters section immediately follows the Basis for Opinion section.
Choice “A” is incorrect. The Opinion on the Financial Statements precedes the Basis for Opinion section.
Choice “B” is incorrect. The Opinion on the Financial Statements is the first section of an issuer report.
Choice “C” is incorrect. The Basis for Opinion section follows the Opinion on the Financial Statements Section.
9
Q
When an auditor of a nonissuer qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate paragraph and modify the:
Auditor’s
Responsibility section
Opinion
section
A. No
No
B. Yes
Yes
C. No
Yes
D. Yes
No
A
Choice “C” is correct. In a nonissuer report qualified for inadequate disclosure, the auditor would modify the auditor’s responsibility if they were issuing a disclaimer of opinion but not when issuing a qualified opinion. The auditor would modify the Opinion section by adding an “except for …” statement. The Auditor’s Responsibility section is not changed when a qualified opinion is issued.
Choice “A” is incorrect. The Opinion section would be modified by adding an “except for…” statement when issuing a qualified opinion. The Auditor’s Responsibility section would remain unchanged.
Choice “B” is incorrect. Only the Opinion section would be modified by adding an “except for…” statement when issuing a qualified opinion.
Choice “D” is incorrect. The opposite is true. The Opinion section would be modified and the Auditor’s Responsibility section would remain unchanged when a qualified opinion is issued.
10
Q
When qualifying an opinion due to an inability to obtain sufficient appropriate audit evidence, an auditor of a nonissuer should include the reasons for that inability to obtain sufficient information in:
Management’s
Responsibility
Section
Basis for
Qualified Opinion
Section
A. No
Yes
B. Yes
No
C. Yes
Yes
D. No
No
A
Choice “A” is correct. When a qualified opinion results from an inability to obtain sufficient appropriate audit evidence, the situation should be described in a Basis for Qualified Opinion section following the Qualified Opinion section and should be referred to in the Qualified Opinion section. The scope limitation is not mentioned in the Management’s Responsibility paragraph.
Choice “B” is incorrect. The opposite is true. The Management’s Responsibility section remains unchanged when a qualified opinion is issued, but the Basis for Qualified Opinion section should describe the reasons for the qualification.
Choice “C” is incorrect. The reasons for the inability to obtain sufficient appropriate audit evidence should only be described in the Basis for Qualified Opinion section of the auditor’s report and the Management’s Responsibility section should remain unchanged.
Choice “D” is incorrect. The reasons for the inability to obtain sufficient appropriate audit evidence should be described in the Basis for Qualified Opinion section of the auditor’s report.
11
Q
Prepared under U.S. auditing standards, an auditor’s report that refers to a material misstatement contains the words, “In our opinion, because of the significance of the matter . . . the accompanying consolidated financial statements do not present fairly the financial position . . . .” This is considered a(n):
A. Adverse opinion B. Qualified opinion C. Example of inappropriate wording D. Disclaimer of opinion
A
Choice “A” is correct. An adverse opinion would include the phrase, “In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying consolidated financial statements do not present fairly the financial position…”
Choice “B” is incorrect. A qualified opinion due to a material misstatement should include the phrase, “In our opinion, except for the omission of information described in the Basis for Qualified Opinion section of our report…”
Choice “C” is incorrect. This wording is appropriate for an adverse opinion.
Choice “D” is incorrect. A disclaimer of opinion should include the phrase, “Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements.”
12
Q
When a qualified opinion results from a limitation on the scope of the audit of a nonissuer, the situation should be described in a Basis for Modification paragraph:
A. Preceding the opinion paragraph and referred to only in the introductory paragraph of the auditor's report. B. Following the opinion paragraph and referred to only in the management's responsibility paragraph of the auditor's report. C. Following the Opinion section, should have the heading "Basis for Qualified Opinion" and should describe the reasons for the inability to obtain sufficient appropriate audit evidence. D. Following the opinion paragraph and referred to in both the introductory and opinion paragraphs of the auditor's report.
A
Choice “C” is correct. When a qualified opinion results from a limitation of scope, it should be described in an Basis for Qualified Opinion section following the Opinion section and it should describe the reasons for the inability to obtain sufficient appropriate audit evidence. Furthermore, the Opinion section should have the heading “Qualified Opinion.”
Choice “A” is incorrect. The Basis for Qualified Opinion section should follow the opinion paragraph, and there is no introductory paragraph in the auditor’s report.
Choice “B” is incorrect. The Management’s Responsibility section remains unchanged from the standard report when a qualified opinion is issued.
Choice “D” is incorrect. There is no introductory paragraph in the auditor’s report. Additionally, the Opinion section should contain “except for…” language.
13
Q
Which of the following would cause an auditor of an entity’s financial statements to issue either a qualified opinion or a disclaimer of opinion?
A. Inadequate disclosure of an uncertainty. B. The use of inappropriate accounting principles. C. Unreasonable accounting estimates. D. Scope limitation involving a recorded uncertainty.
A
Choice “D” is correct. An auditor would issue either a qualified opinion or a disclaimer of opinion when there is a scope limitation (GAAS issue).
Choice “A” is incorrect. An auditor would issue either a qualified or an adverse opinion when there is inadequate disclosure (GAAP issue).
Choice “B” is incorrect. An auditor would issue either a qualified or an adverse opinion when the entity uses inappropriate accounting principles (GAAP issue).
Choice “C” is incorrect. An auditor would issue either a qualified or an adverse opinion when the entity uses unreasonable accounting estimates (GAAP issue).
14
Q
Restrictions imposed by a retail entity that is a new client prevent an auditor from observing any physical inventories. These inventories account for 40% of the entity’s assets, and this issue also impacts the auditor’s ability to audit the cost of goods sold, impacting both the income statement and the statement of stockholder’s equity. Alternative auditing procedures cannot be applied due to the nature of the entity’s records. Under these circumstances, the auditor should express a(an):
A. Unmodified opinion with an emphasis-of-matter paragraph. B. Qualified opinion. C. Disclaimer of opinion. D. Adverse opinion.
A
Choice “C” is correct. Since the auditor is unable to observe inventory or apply alternative audit procedures, a scope limitation exists. Due to the significance of the inventory balance (40% of total assets is material) and the pervasiveness of the issue also impacting net income, a disclaimer of opinion (rather than simply a qualification) is appropriate.
Choice “A” is incorrect. Since the scope limitation relates to a material balance, an unmodified opinion is not appropriate.
Choice “B” is incorrect. Since the inventory balance is so material and the issue impacts multiple financial statement items including inventory and cost of goods sold, a qualified opinion is not sufficient in this case.
Choice “D” is incorrect. An adverse opinion is not an appropriate response to a scope limitation.
15
Q
Which of the following best describes when an auditor most likely would modify the audit opinion?
A. The auditor concludes that the financial statements as a whole are materially misstated. B. The auditor identifies an immaterial misstatement in the financial statements. C. The entity selects IFRS as the applicable financial reporting framework. D. The auditor concludes that the financial statements are presented fairly.
A
Choice “A” is correct. An auditor should modify the opinion when the auditor concludes that the financial statements as a whole are materially misstated.
Choice “B” is incorrect. An auditor’s report should be modified when the financial statements are materially, not immaterially, misstated.
Choice “C” is incorrect. The applicable financial reporting framework is the financial reporting framework that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation. IFRS is an acceptable financial reporting framework.
Choice “D” is incorrect. An auditor should express an unmodified (unqualified) opinion when the auditor concludes that the financial statements are presented fairly.
16
Q
An auditor of a nonissuer should disclose the reasons for an inability to obtain sufficient appropriate audit evidence in a basis-for-modification paragraph:
A. Preceding the auditor’s responsibility paragraph. B. Following the opinion paragraph. C. Preceding the opinion paragraph. D. Within the notes to the financial statements.
A
Choice “B” is correct. An auditor should disclose the reasons for an inability to obtain sufficient appropriate audit evidence in a basis-for-modification paragraph following the opinion paragraph.
Choice “A” is incorrect. The management’s responsibility paragraph, not the basis-for-modification paragraph, should immediately precede the auditor’s responsibility paragraph.
Choice “C” is incorrect. The basis-for-modification section paragraph would come after, and not before, the opinion section of the auditor’s report.
Choice “D” is incorrect. The auditor cannot include explanatory material within the financial statements, which are the responsibility of management.
17
Q
When qualifying an opinion because of an insufficiency of audit evidence in an audit of a nonissuer, an auditor should describe the situation in the:
Basis for
Qualified Opinion
section
Notes to the
financial statements
A. No
Yes
B. No
No
C. Yes
Yes
D. Yes
No
A
Choice “D” is correct. When a qualified opinion results from a limitation on the scope of the audit or an insufficiency of audit evidence, the situation should be described in the Basis for Qualified Opinion section following the Opinion section and referred to in the Opinion section of the auditor’s report. It is not appropriate for the scope of the audit to be explained in a note to the financial statements, since the description of the audit scope is the responsibility of the auditor and not that of the client.
Choice “A” is incorrect. The opposite is true. The reason for issuing a qualified opinion would be described in the Basis of Qualified Opinion section of the auditor’s report and not in the notes to the financial statements.
Choice “B” is incorrect. The reason for issuing a qualified opinion would be described in the Basis of Qualified Opinion section of the auditor’s report.
Choice “C” is incorrect. The auditor does not disclose items in the notes to the financial statements as the notes are management’s responsibility. The reason for issuing a qualified opinion would be described in the Basis of Qualified Opinion section of the auditor’s report.
18
Q
An auditor was unable to obtain sufficient appropriate audit evidence concerning certain transactions due to an inadequacy in the entity’s accounting records. The auditor would choose between issuing a(an):
A. Disclaimer of opinion and a qualified opinion. B. Adverse opinion and a disclaimer of opinion. C. Qualified opinion and an unmodified opinion with an emphasis-of-matter paragraph. D. Unmodified opinion with an emphasis-of-matter paragraph and an adverse opinion.
A
Choice “A” is correct. Client-imposed restrictions of scope such as those caused by inadequate records would cause the auditor to choose between issuing a disclaimer of opinion and a qualified opinion.
Choice “C” is incorrect. An unmodified opinion would only be justified if the transactions in question were not material, but in such situations, no emphasis-of-matter paragraph would be required.
Choices “D” and “B” are incorrect. An adverse opinion pertains to GAAP and would not be used for reporting restrictions of scope.
19
Q
Which of the following situations best describes when an auditor should express an adverse opinion?
A. The auditor obtained sufficient appropriate audit evidence and concludes that misstatements are material but not pervasive to the financial statements. B. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements could be both material and pervasive. C. The auditor obtained sufficient appropriate audit evidence and concludes that misstatements are both material and pervasive to the financial statements. D. The auditor obtains sufficient appropriate audit evidence and concludes that the financial statements are presented fairly.
A
Choice “C” is correct. An auditor should express an adverse opinion when the auditor has obtained sufficient appropriate audit evidence and concludes that misstatements are both material and pervasive to the financial statements.
Choice “A” is incorrect. An auditor should express a qualified opinion when the auditor has obtained sufficient appropriate audit evidence and concludes that misstatements are material but not pervasive to the financial statements.
Choice “B” is incorrect. An auditor should express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements could be both material and pervasive.
Choice “D” is incorrect. An auditor should express an unmodified (unqualified) opinion when the auditor obtains sufficient appropriate audit evidence and concludes that the financial statements are presented fairly.
20
Q
A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?
A. Unmodified opinion. B. Adverse opinion. C. Disclaimer opinion. D. Qualified opinion.
A
Choice “B” is correct. The scenario above indicates a material departure from GAAP that is neither necessary nor justified by the client. When a misstatement is both material and pervasive, the auditor should issue an adverse opinion.
Choice “A” is incorrect. An unmodified opinion cannot be issued because the financial statements are not fairly presented in conformity with GAAP.
Choice “C” is incorrect. A disclaimer opinion would not be used by the auditor for the above scenario as there are no apparent scope limitations to inhibit the auditor from rendering an opinion.
Choice “D” is incorrect. A misstatement that is both material and pervasive is too significant to justify a qualified opinion.
21
Q
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. Adverse and unmodified with an emphasis-of-matter paragraph added. B. Qualified and disclaimer. C. Disclaimer and unmodified with an emphasis-of-matter paragraph added. D. Qualified and adverse.
A
Choice “B” 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.
Choice “A” is 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.
Choice “C” is incorrect. An option would be a disclaimer of opinion (if issue considered both material and pervasive), however, an unmodified opinion with an emphasis-of-matter paragraph is not appropriate for a scope limitation.
Choice “D” is incorrect. An option would be a qualified opinion (if issue considered material but not pervasive), however, an adverse opinion is not appropriate for a scope limitation (financial statement issue only).
22
Q
Under which of the following circumstances would an auditor most likely issue either a qualified or a disclaimer of opinion?
A. The financial statements contain an immaterial departure from generally accepted accounting principles (GAAP). B. There is substantial doubt about the entity's ability to continue as a going concern. C. The auditor performed alternative substantive procedures to provide adequate assurance due to missing documentation. D. The client's attorney refused to respond to the letter of audit inquiry.
A
Choice “D” is correct. The refusal of a client’s attorney to respond to an audit inquiry letter is an example of a scope limitation. The auditor must use professional judgment in determining whether that scope limitation warrants a qualified opinion or a disclaimer of opinion.
Choice “A” is incorrect. If the financial statements contain an immaterial departure from GAAP, an unmodified opinion still may be used. When the issue reaches a material level, the auditor would consider using a different opinion such as qualified, adverse, or a disclaimer.
Choice “B” is incorrect. If there is substantial doubt about the entity’s ability to continue as a going concern, the auditor could issue an unmodified opinion. The report would be updated to include either a separate going concern section or an optional emphasis-of-matter (explanatory) paragraph depending on the circumstances regarding management’s plans to alleviate and the appropriateness of financial statement disclosures.
Choice “C” is incorrect. One of the auditor’s responsibilities is to determine whether sufficient, appropriate audit evidence has been obtained. If the auditor performed alternative or additional substantive procedures to obtain adequate assurance, that is not a basis for modifying the auditor’s report on the entity’s financial statements.
23
Q
How are management’s responsibility and the auditor’s responsibility represented in the auditor’s report of a nonissuer?
Management’s
Responsibility
Auditor’s
Responsibility
A. Implicitly
Explicitly
B. Implicitly
Implicitly
C. Explicitly
Implicitly
D. Explicitly
Explicitly
A
Choice “D” is correct. The responsibility of the auditor and the responsibility of management are stated explicitly in the auditor’s report of a nonissuer. There is a Management’s Responsibility section and an Auditor’s Responsibility section.
Choice “A” is incorrect. Management’s responsibilities related to the audit are explicitly stated in the Management’s Responsibility section of the auditor’s report.
Choice “B” is incorrect. In an auditor’s report, there is a section for explicitly stating both management and the auditor’s responsibilities related to the audit.
Choice “C” is incorrect. The auditor’s responsibilities related to the audit are explicitly stated in the Auditor’s Responsibility section of the auditor’s report.
24
Q
A client’s fixed asset experienced a significant impairment loss but the client refuses to record the impairment loss in the financial statements. Which of the following opinions is an auditor most likely to issue if the amount of loss is material but not pervasive to the financial statements?
A. Unmodified opinion B. Disclaimer opinion C. Qualified opinion D. Adverse opinion
A
Choice “C” is correct. The scenario above indicates a material departure from GAAP that is neither necessary nor justified by the client. When a misstatement is material but not pervasive, the auditor should issue a qualified opinion.
Choice “A” is incorrect. An unmodified opinion cannot be issued because the financial statements are not fairly presented.
Choice “B” is incorrect. A disclaimer of opinion would not be used by the auditor for the above scenario as there are no apparent scope limitations to inhibit the auditor from rendering an opinion.
Choice “D” is incorrect. When a misstatement is material but not pervasive, the auditor should issue a qualified opinion. When a misstatement is both material and pervasive, the auditor should issue an adverse opinion.
25
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 adverse opinion on the financial statements.
B.
Issue a special report regarding the illegal bribes.
C.
Express an unmodified opinion with an other-matter paragraph.
D.
Disclaim an opinion on the financial statements.
Choice "D" is correct. Since the CPA could not determine whether the suspected illegal bribes were material to the financial statements, or whether senior management was involved in the scheme, Morris should disclaim an opinion on the financial statements.
Choice "A" is incorrect. An adverse opinion is inappropriate since the suspected material illegal bribes have not been proven, nor has any material effect on the financial statements been determined.
Choice "B" is incorrect. Special reports are not issued regarding illegal bribes.
Choice "C" is incorrect. An unmodified opinion with an other-matter paragraph is not appropriate if suspected material illegal bribes cannot be disproven.
26
If an auditor is precluded by the issuer from obtaining sufficient appropriate evidence to evaluate whether an illegal act that could be material to the financial statements has occurred, then the auditor generally should:
A.
Disclaim an opinion on the financial statements.
B.
Issue an unqualified opinion on the financial statements with an other-matter paragraph.
C.
Issue a qualified opinion on the financial statements.
D.
Issue an unqualified opinion on the financial statements with an explanatory paragraph.
Choice "A" is correct. A disclaimer of opinion is expressed when the auditor is unable to obtain sufficient appropriate audit evidence to base an opinion on, and the auditor concludes that the possible effects of any undetected misstatements could be both material and pervasive. If the issuer is preventing an auditor from obtaining such evidence, the auditor should disclaim an opinion.
Choice "B" is incorrect. Since the issuer is preventing the auditor from obtaining sufficient appropriate audit evidence and the illegal act could be material and pervasive to the financial statements, the auditor generally should disclaim an opinion. Issuing an unqualified opinion on the financial statements, even with an other-matter paragraph, is not appropriate.
Choice "C" is incorrect. Since the issuer is preventing the auditor from obtaining sufficient appropriate audit evidence and the illegal act could be material and pervasive to the financial statements, the auditor generally should disclaim an opinion. Issuing a qualified opinion on the financial statements is not appropriate.
Choice "D" is incorrect. Since the issuer is preventing the auditor from obtaining sufficient appropriate audit evidence and the illegal act could be material and pervasive to the financial statements, the auditor generally should disclaim an opinion. Issuing an unqualified opinion on the financial statements, even with an explanatory paragraph, is not appropriate.
27
Which of the following phrases would an auditor of a nonissuer most likely include in the auditor's report when expressing a qualified opinion due to inadequate disclosure?
A.
Do not present fairly.
B.
Except for the omission of the information described in the basis for qualified opinion section.
C.
Subject to the departure from generally accepted accounting principles, as described above.
D.
With the foregoing explanation of these omitted disclosures.
Choice "B" is correct. When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor's opinion should state "In our opinion, except for the omission of the information described in the basis for qualified opinion section of our report . . ."
Choice "A" is incorrect. The statement "do not present fairly" would be used in an adverse opinion, not a qualified opinion.
Choice "C" is incorrect. This language is not used. When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor's opinion should state "In our opinion, except for the omission of the information described in the basis for qualified opinion section of our report . . ."
Choice "D" is incorrect. This language is not used. When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor's opinion should state "In our opinion, except for the omission of the information described in the basis for qualified opinion section of our report . . ."
SkillB
28
In order to form an opinion on the financial statements, the auditor should consider whether:
A.
Management has correctly identified the appropriate auditing standards.
B.
The financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework.
C.
Sufficient appropriate evidence was obtained as required by the Financial Accounting Standards Board (FASB).
D.
The financial statements are prepared, in all material respects, in accordance with the requirements of generally accepted auditing standards (GAAS).
Choice "B" is correct. In order to form an opinion on the financial statements, the auditor should consider whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework.
Choice "A" is incorrect. The auditor, not management, must determine the appropriate auditing standards for the engagement.
Choice "C" is incorrect. In order to form an opinion, the auditor should take into account whether sufficient appropriate evidence was obtained as required by generally accepted auditing standards (GAAS). The FASB issues guidance on generally accepted accounting principles (GAAP).
Choice "D" is incorrect. In order to form an opinion, the auditor should consider whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework (i.e., GAAP.) GAAS provides guidance on how to perform the audit.
29
In an audit of an issuer, an auditor is least likely to include which of the following information related to a critical audit matter in the audit report?
A.
A statement that disclaims the auditor's responsibility for critical audit matters.
B.
Description of the principal considerations that led the auditor to determine that the matter was a critical audit matter.
C.
Reference to relevant financial statement accounts that relate to the critical audit matter.
D.
Description of how the critical audit matter was addressed in the audit.
Choice "A" is correct. Language that could be viewed as disclaiming, qualifying, restricting, or minimizing the auditor's responsibility for the critical audit matters is not appropriate and may not be used.
Choice "B" is incorrect. For each critical audit matter identified, the auditor should include a description of the principal considerations that led the auditor to determine that the matter was a critical audit matter.
Choice "C" is incorrect. For each critical audit matter identified, the auditor should reference relevant financial statement accounts that relate to the critical audit matter.
Choice "D" is incorrect. For each critical audit matter identified, the auditor should include a description of how the critical audit matter was addressed in the audit.
30
An auditor of a nonissuer may not issue a qualified opinion when:
A.
The auditor lacks independence with respect to the entity.
B.
Management prevents the auditor from observing the entity's inventory.
C.
The entity omits the statement of cash flows from its financial statements.
D.
The auditor's report refers to the work of an actuary.
Choice "A" is correct. An auditor of a nonissuer may not issue a qualified opinion when the auditor lacks independence with respect to the entity. A disclaimer of opinion should be issued when an auditor lacks independence.
Choice "B" is incorrect. An auditor may issue a qualified opinion if management prevents the auditor from observing the entity's inventory.
Choice "C" is incorrect. An auditor may issue a qualified opinion if the entity omits the statement of cash flows from its financial statements.
Choice "D" is incorrect. An auditor may issue a qualified opinion and refer to the work of the actuary in the opinion if the qualified opinion is a result of the findings of the actuary. In this case, the auditor should indicate that the reference to the specialist does not reduce the auditor's responsibility for the audit opinion.
31
An auditor most likely would issue a disclaimer of opinion due to:
A.
Management's refusal to furnish a client representation letter.
B.
Inadequate disclosure of material information.
C.
A material departure from a generally accepted accounting principle.
D.
An inconsistent application of a generally accepted accounting principle.
Choice "A" is correct. A disclaimer results from scope limitations, such as management's refusal to furnish a client representation letter.
Choice "B" is incorrect. Inadequate disclosure of material information is a departure from GAAP and a financial statement issue. This scenario may lead to a qualified or adverse opinion, but not a disclaimer of opinion.
Choice "C" is incorrect. A material departure from GAAP is a financial statement issue and may lead to a qualified or adverse opinion, but not a disclaimer of opinion.
Choice "D" is incorrect. An inconsistent application of GAAP is a financial statement issue and may lead to a qualified or adverse opinion, but not a disclaimer of opinion.
32
In which of the following circumstances would an auditor be most likely to express an adverse opinion?
A.
The financial statements are not in conformity with the GAAP rules regarding the capitalization of leases.
B.
Tests of controls show that the entity's internal control is so poor that it cannot be relied upon.
C.
The chief executive officer refuses the auditor access to minutes of board of directors' meetings.
D.
Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern.
Choice "A" is correct. An adverse opinion is issued when the financial statements are not presented in accordance with GAAP.
Choice "B" is incorrect. If internal control is so poor that it cannot be relied upon, the auditor must consider the effect on the audit procedures and subsequent report, but would not issue an adverse opinion.
Choice "C" is incorrect. The client's refusal to provide access to the minutes of the Board of Directors' meetings would result in a disclaimer of opinion.
Choice "D" is incorrect. Substantial doubt with regard to the entity's ability to continue as a going concern should be disclosed in either an emphasis-of-matter paragraph (optional when doubt is alleviated) or a separate section of the auditor's report (doubt remains) appended to an otherwise unmodified (unqualified) opinion.
33
Under which of the following circumstances would an auditor's expression of an unmodified opinion be inappropriate?
A.
Analytical procedures indicate that many year-end account balances are not comparable with the prior year's balances.
B.
There are significant deficiencies in the design and operation of the entity's internal control.
C.
The financial statements are prepared on the entity's income tax basis.
D.
The auditor is unable to obtain the audited financial statements of a significant subsidiary.
Choice "D" is correct. If the auditor is unable to obtain the audited financial statements of a significant subsidiary, a scope limitation exists. Assuming the effect is material, the auditor would issue either a qualified opinion or a disclaimer of opinion.
Choice "A" is incorrect. An unmodified opinion may still be expressed when there are significant changes in year-end account balances as compared to prior year balances, as long as the auditor has obtained sufficient appropriate audit evidence about the current balances.
Choice "B" is incorrect. Significant deficiencies in the design and operation of an entity's internal control do not preclude issuance of an unmodified opinion, although they do increase the risk of material misstatement and will likely result in modifications to the nature, timing, and extent of the auditor's testing.
Choice "C" is incorrect. Financial statements prepared on an entity's income tax basis are "special purpose framework financial statements." The auditor may issue a special report, which can include an unmodified opinion, on special purpose framework financial statements.
34
The auditor's report should include reference to the United States as the country of origin of:
I.
The accounting principles used to prepare the financial statements.
II.
The auditing standards the auditor followed in performing the audit.
A.
Both I and II.
B.
Neither I nor II.
C.
I only.
D.
II only.
Choice "A" is correct. The auditor's report should include reference to the United States as the country of origin of both the accounting principles used to prepare the financial statements and the auditing standards the auditor followed in performing the audit.
Choice "B" is incorrect, since the auditor's report should include reference to the country of origin of both the accounting principles used to prepare the financial statements and the auditing standards the auditor followed in performing the audit.
Choice "C" is incorrect, since the auditor's report should include reference to the country of origin of the auditing standards the auditor followed in performing the audit.
Choice "D" is incorrect, since the auditor's report should include reference to the country of origin of the accounting principles used to prepare the financial statements.
35
A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and:
A.
Involves a particularly complex transaction approved by management.
B.
Requires a significantly larger sample size to test.
C.
Relates to accounts or disclosures that are immaterial to the financial statements.
D.
Involves an especially challenging judgment made by the auditor.
Choice "D" is correct. A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves an especially challenging judgment made by the auditor.
Choice "A" is incorrect. A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves a particularly complex judgment made by the auditor (not a complex transaction made by management.)
Choice "B" is incorrect. The sample size generally is not a factor considered when identifying critical audit matters.
Choice "C" is incorrect. A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and relates to accounts or disclosures that are material (not immaterial) to the financial statements.
36
An auditor most likely would issue a disclaimer of opinion because of:
A.
The omission of the statement of cash flows.
B.
Management's refusal to furnish written representations.
C.
A material departure from generally accepted accounting principles.
D.
Inadequate disclosure of material information.
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. 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.
Choice "D" is incorrect. Inadequate disclosure would result in a qualified or adverse opinion.
37
For purposes of generally accepted auditing standards, a modified opinion refers to:
Qualified
Opinion
Unmodified Opinion With an
Emphasis-of-Matter Paragraph
A.
No
No
B.
No
Yes
C.
Yes
No
D.
Yes
Yes
Choice "C" is correct. Modified opinions include a qualified opinion, an adverse opinion, or a disclaimer of opinion. An unmodified opinion with an emphasis-of-matter paragraph is not considered a modified opinion. Further, the emphasis-of-matter paragraph should indicate that the auditor’s opinion is not modified with respect to the matter emphasized.
Choice "A" is incorrect. A qualified opinion is considered to be a modified opinion.
Choices "D" and "B" are incorrect. A qualified opinion is considered to be a modified opinion, but an unmodified opinion with an emphasis-of-matter paragraph is considered to be an unmodified opinion. The purpose of the emphasis-of-matter paragraph is to bring the report user's attention to a specific matter and should specifically clarify that the matter did not lead to a modified opinion.
38
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
A.
Management does not provide reasonable justification for a change in accounting principles.
B.
Management refuses to allow the auditor to have access to the company's canceled checks and bank statements.
C.
The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities.
D.
The auditor is unable to obtain the audited financial statements of a consolidated investee.
Choice "A" is correct. If management does not provide reasonable justification for a change in accounting principles, the auditor would issue a qualified or adverse opinion, depending on materiality.
Choice "B" is incorrect. If management refuses to allow the auditor to have access to the company's canceled checks and bank statements, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality.
Choice "C" is incorrect. If the company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality.
Choice "D" is incorrect. If the auditor is unable to obtain the audited financial statements of a consolidated investee, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality.
39
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
A.
The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.
B.
The auditor is unable to determine the amounts associated with illegal acts committed by the client's management.
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 financial statements fail to contain adequate disclosure of related party transactions.
Choice "D" is correct. The failure of the financial statements to contain adequate disclosure of related party transactions, or other required disclosures, would result in a qualified or adverse opinion, not a disclaimer of opinion.
Choice "A" is incorrect. A client's refusal to permit its attorney to furnish information requested in a letter of audit inquiry would generally result in a disclaimer of opinion.
Choice "B" is incorrect. The auditor's inability to determine the amounts associated with illegal acts committed by the client's management could result in a disclaimer.
Choice "C" is incorrect. The auditor's inability to observe physical inventories or apply alternative procedures to verify their balances could result in a disclaimer.
40
The auditor may not issue a qualified opinion when:
A.
A scope limitation prevents the auditor from completing an important procedure.
B.
The auditor is not independent with respect to the audited entity.
C.
The financial statements contain a material departure from generally accepted accounting principles.
D.
The auditor is unable to observe a physical inventory count.
Choice "B" is correct. When an auditor is not independent with respect to an entity, only a disclaimer of opinion may be issued.
Choice "A" is incorrect. A scope limitation may result in a qualified opinion.
Choice "C" is incorrect. A GAAP departure may result in a qualified opinion.
Choice "D" is incorrect. An inability to observe the physical inventory count is a scope limitation that may result in a qualified opinion, if acceptable alternative procedures cannot be performed.
41
If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an):
A.
Disclaimer of opinion.
B.
Review report.
C.
Qualified opinion.
D.
Unmodified opinion with an emphasis-of-matter paragraph.
Choice "C" is correct. If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires qualification of the opinion.
Choice "A" is incorrect. If the company fails to present its statement of cash flows, this is considered inadequate disclosure. The auditor would not issue a disclaimer of opinion for inadequate disclosure.
Choice "B" is incorrect. The auditor would not issue a review report when performing an audit.
Choice "D" is incorrect. The auditor cannot issue an unmodified report if the client omits a statement of cash flows from the financial statements.
42
Which of the following procedures is an auditor least likely to perform if material disclosures required by GAAP are omitted?
A.
Discuss the omission of such information with those charged with governance.
B.
Discuss the omission of such information with management.
C.
Disclose the omitted information in the notes to the financial statements.
D.
Disclose the omitted information in the basis-for-modification paragraph.
Choice “C” is correct. Management is responsible for the financial statements. The auditor may include information within the auditor’s report, but may not include information within the financial statements and the related notes.
Choice “A” is incorrect. When material disclosures required by GAAP are omitted, the auditor should first discuss the omission of such information with management. If necessary, the auditor should also discuss this with those charged with governance.
Choice “B” is incorrect. When material disclosures required by GAAP are omitted, the auditor should first discuss the omission with management.
Choice “D” is incorrect. When material disclosures required by GAAP are omitted, the auditor should disclose the omitted information in the basis-for-modification paragraph.
43
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
A.
The chief executive officer is unwilling to sign the management representation letter.
B.
The auditor is unable to determine the amounts associated with an employee fraud scheme.
C.
Management does not provide reasonable justification for a change in accounting principle.
D.
The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.
Choice "C" is correct. A disclaimer of opinion means that the auditor was unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion, thus, no opinion is expressed. An unjustified change in accounting principle could result in a material misstatement of the financial statements that would result in a qualified or adverse opinion, not a disclaimer of opinion.
Choice "A" is incorrect. Refusal of management to sign a management representation letter casts doubt on the audit evidence gathered and is a scope limitation that would likely result in a disclaimer of opinion.
Choice "B" is incorrect. An inability to determine amounts associated with an employee fraud scheme is a scope limitation that may result in a disclaimer of opinion.
Choice "D" is incorrect. Refusal by the client to permit the auditor to confirm accounts receivable is a scope limitation that may result in a disclaimer of opinion.
44
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 insurance coverage for possible losses from such litigation.
D.
Lack of sufficient evidence.
Choice "D" 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 "C" are incorrect. Neither a lack of experience nor a lack of insurance coverage would impact the auditor's report.
45
Which of the following best describes the earliest date for an auditor's report?
A.
The date audit documentation was completed.
B.
The date the auditor has obtained sufficient appropriate audit evidence to support the opinion.
C.
The last day of audit fieldwork.
D.
The date all audit procedures have been completed and the audit file has been assembled.
Choice "B" is correct. The auditor's report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion.
Choice "A" is incorrect. Audit documentation may be completed after the date of the audit report. Generally, changes to audit documentation after the date of the audit report are administrative in nature. For example, the auditor may sort and cross-reference workpapers.
Choice "C" is incorrect. The auditor's report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion. The auditor may not have received sufficient appropriate evidence by the last day of fieldwork. For example, the partner's review of the audit evidence may take place after the last day of fieldwork.
Choice "D" is incorrect. The final assembly of the audit file often occurs after the date of the audit report. This assembly may occur up to 45 or 60 days following the report release date for issuers and nonissuers, respectively.
46
Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of fieldwork made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditor's report most likely contained a(an):
A.
Unmodified opinion.
B.
Qualified opinion due to a departure from generally accepted auditing standards.
C.
Qualified opinion due to a scope limitation.
D.
Unmodified opinion with an emphasis-of-matter paragraph.
Choice "A" is correct. There is a presumption that the auditor will request the confirmation of accounts receivable during an audit unless accounts receivable are immaterial, the use of confirmations would be ineffective, or the assessed inherent risk is so low that the evidence expected to be provided by analytical procedures or other substantive tests of details would be sufficient. In this example, the confirmation of accounts receivable by direct communication with the debtors would be ineffective. If Green was able to apply alternative audit procedures and was satisfied as to the reasonableness of the account balances, then an unmodified opinion could be issued.
Choice "B" is incorrect. Since Green was able to perform alternative procedures and was satisfied as far as the reasonableness of the account balances, there is no departure from generally accepted auditing standards.
Choice "C" is incorrect. Since Green was able to perform alternative procedures and was satisfied as far as the reasonableness of the account balances, there is no scope limitation.
Choice "D" is incorrect. Since Green was satisfied as far as the accounts receivable balances, there is no need to add an emphasis-of-matter paragraph.
47
Riley, a CPA firm, is performing an audit in accordance with U.S. generally accepted auditing standards. Riley's client is Michelson Inc., a U.S.-based company that has identified U.S. generally accepted accounting principles as the applicable financial reporting framework. In which sections of the auditor's report should Riley refer to U.S. generally accepted accounting principles (GAAP)?
A.
Opinion and Management's Responsibility
B.
Management's Responsibility and Auditor's Responsibility
C.
Opinion and Basis for Opinion
D.
Basis for Opinion and Auditor's Responsibility
Choice "A" is correct. Under U.S. auditing standards, the auditor expresses an opinion on the financial statements' conformity with GAAP in the Opinion section and the Management's Responsibility section that the management is responsible for the preparation and fair presentation of the financial statements in accordance with GAAP.
Choice "B" is incorrect. The Auditor's Responsibility section would refer to GAAS rather than GAAP, which the Management's Responsibility section would include a reference to GAAP.
Choice "C" is incorrect. The Basis for Opinion section would refer to GAAS rather than GAAP.
Choice "D" is incorrect. The Auditor's Responsibility section of the report would refer to GAAS rather than GAAP.
48
If an auditor is unable to determine whether management's estimate of the effects of future events is reasonable, and the effect of those events is believed to be material, he or she should express:
A.
A qualified opinion or an adverse opinion.
B.
An unmodified opinion with an emphasis-of-matter paragraph following the opinion paragraph.
C.
An unmodified opinion with no additional paragraphs.
D.
A qualified opinion or a disclaimer of opinion.
Choice "D" is correct. This is a scope limitation, which results in either a qualified opinion or a disclaimer of opinion. (Note that the question does not say that management's estimate is unreasonable, just that the auditor is unable to determine whether the estimate is reasonable.)
Choice "A" is incorrect. An adverse opinion is not expressed for scope limitations.
Choices "B" and "C" are incorrect. A scope limitation believed to have a material effect would not result in an unmodified opinion.
49
An auditor's responsibility to express an opinion on the financial statements of a nonissuer under U.S. auditing standards is:
A.
Explicitly represented in the Auditor's Responsibility paragraph.
B.
Explicitly represented in the Basis for Opinion paragraph of the auditor's report.
C.
Explicitly represented in an emphasis-of-matter paragraph of the auditor's report.
D.
Implicitly represented in the auditor's report.
Choice "A" 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 nonissuer audit report. It says "Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion."
Choice "B" is incorrect. The Basis for Opinion paragraph references the Auditor's Responsibility section of the report but does not explicitly state the responsibility to express an opinion within the content.
Choice "C" 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.
Choice "D" is incorrect. The responsibility to express an opinion is explicitly represented (i.e., clearly stated), not implicitly represented (i.e., assumed).
50
Zag Co. issues financial statements that present financial position and results of operations but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would:
A.
Add an emphasis-of-matter paragraph to the auditor's report that justifies the reason for the omission.
B.
Explain to Zag that the omission requires a qualification of the auditor's opinion.
C.
Prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion.
D.
Refuse to accept the engagement as proposed because of the client-imposed scope limitation.
Choice "B" is correct. The auditor would explain to the client that in order for the entity's financial statements to be in conformity with GAAP, there must be adequate disclosures of all material matters including all financial statements and the supporting footnotes. As a result, the auditor would tell Zag that without adequate disclosure of the entity's cash flows, the audit report would have to be issued with a qualified or adverse audit opinion.
Choice "A" is incorrect. Missing the statements of cash flows would not result in an unmodified opinion with an additional emphasis-of-matter paragraph because no statement of cash flows is a material departure from GAAP.
Choice "C" is incorrect. The responsibility to prepare the statement of cash flows is solely the client's.
Choice "D" is incorrect. The auditor is not required to refuse to accept the engagement, but the client should be made aware that the missing statement of cash flows will result in a qualified or adverse opinion.
51
When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):
A.
Disclaimer of opinion.
B.
Compilation report.
C.
Unaudited association report.
D.
Qualified opinion.
Choice "A" is correct. A "disclaimer of opinion" must be issued when a CPA is "associated" with FS of a publicly held entity, but has not audited or (interim) reviewed such FS.
Choice "B" is incorrect. A "compilation report" refers to a report related to a non-public entity.
Choice "C" is incorrect. There is no such thing as an "unaudited association report."
Choice "D" is incorrect. The auditor did not audit the FS, so he/she cannot issue an opinion on them.
52
An auditor may not issue a qualified opinion when:
A.
The auditor lacks independence with respect to the audited entity.
B.
The auditor's report refers to the work of a specialist.
C.
An accounting principle at variance with GAAP is used.
D.
A scope limitation prevents the auditor from completing an important audit procedure.
Choice "A" is correct. If the auditor lacks independence with respect to an audit client, the auditor must disclaim an opinion on the financial statements. A qualified opinion is not an option.
Choice "B" is incorrect. The auditor's report may make reference to the use of a specialist only if the specialist's findings result in a change to the auditor's report, such as a qualified opinion.
Choice "C" is incorrect. A departure from GAAP (which is not sufficiently material to warrant an adverse opinion) may justify a qualification of the auditor's report.
Choice "D" is incorrect. A scope limitation may result in a qualified opinion or a disclaimer of opinion.
53
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
A.
The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows.
B.
The auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme.
C.
Management refuses to produce documentation verifying the ownership of its equipment and production facilities.
D.
The chief financial officer and the chief executive officer are unwilling to sign the management representation letter.
Choice "A" is correct. An expression of a disclaimer of opinion would be inappropriate when the company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows. The statement of cash flows is a requirement of GAAP to be considered a complete set of financial statements. A material misstatement of financial statements, such as the omission of information that is required to be presented, would result in a qualified or adverse opinion.
Choice "B" is incorrect. An auditor may express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion. For example, when an auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme, there is not sufficient appropriate audit evidence, and an expression of disclaimer of opinion may be appropriate.
Choice "C" is incorrect. An auditor may express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion. When management refuses to produce documentation verifying the ownership of its equipment and production facilities, a client-imposed scope limitation exists, and an expression of disclaimer of opinion may be appropriate.
Choice "D" is incorrect. An auditor may express a disclaimer of opinion when, due to a scope limitation, the auditor is unable to perform all the tests necessary to complete an audit. When the CFO and CEO refuse to sign the management representation letter, a client-imposed scope limitation exists, and the auditor would express a disclaimer of opinion.
54
In which of the following circumstances would an auditor not express an unmodified opinion?
A.
The auditor is unable to obtain audited financial statements of a consolidated investee.
B.
Quarterly financial data required by the SEC has been omitted.
C.
There has been a justified material change between periods in accounting principles.
D.
The auditor wishes to emphasize an unusually important subsequent event.
Choice "A" is correct. The inability to obtain audited financial statements of a consolidated investee represents a scope limitation that may result in either a qualified opinion or a disclaimer of opinion.
Choice "B" is incorrect. Omission of selected quarterly data required by SEC regulations is disclosed in an other-matter paragraph added to an otherwise unmodified opinion.
Choice "C" is incorrect. A material change in accounting principles between periods that is justified is disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion.
Choice "D" is incorrect. Emphasis of a matter is disclosed in an additional paragraph added to an otherwise unmodified opinion.
55
When disclaiming an opinion because of an insufficiency of audit evidence in an audit of a nonissuer, an auditor should refer to the situation in the:
Responsibilities
of Management
section
Notes to the
financial statements
A.
No
Yes
B.
Yes
Yes
C.
Yes
No
D.
No
No
Choice "D" is correct. When a disclaimer of opinion is issued due to a lack of sufficient audit evidence, the lack of evidence should be disclosed in the Basis for Disclaimer of Opinion section rather than the Responsibilities of Management section of the auditor's report.
Choices "B" and "A" are incorrect. Management (and not the auditor) prepares the notes to the financial statements. The auditor therefore would not refer to this (or any other) situation in the notes to the financial statements.
Choice "C" is incorrect. The auditor does not refer to the situation in the Responsibilities of Management section of the report.
56
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.
No
No
B.
Yes
Yes
C.
Yes
No
D.
No
Yes
Choice "B" 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.
Choice "A" is incorrect. A qualified opinion can be issued when material, but not pervasive, audit or financial statement issues are identified.
Choice "C" is incorrect. A qualified opinion can be issued when a scope limitation exists and it is determined to be material, but not pervasive, to the financial statements.
Choice "D" is incorrect. A qualified opinion can be issued when there is a financial statement issue that is determined to be material, but not pervasive, to the financial statements.
57
When disclaiming an opinion due to a client-imposed scope limitation in an audit of a nonissuer, an auditor should indicate in the Basis for Disclaimer of Opinion section why the auditor could not obtain sufficient appropriate audit evidence. The auditor should also omit the:
Auditor's
Responsibility
section
Opinion
section
A.
Yes
Yes
B.
No
Yes
C.
Yes
No
D.
No
No
Choice "D" is correct. When disclaiming an opinion because of scope limitations, the auditor should indicate in a separate paragraph(s) the reasons that the audit did not comply with GAAS (in the Basis for Disclaimer of Opinion section). The Auditor's Responsibility section is revised to mention the disclaimer, but is not omitted. The Opinion section is not omitted; however it indicates that no opinion is expressed.
Choice "A" is incorrect. Neither section would be omitted, but both would require changes from the standard unmodified auditor's report.
Choice "B" is incorrect. The Opinion section would not be omitted, however, it would be changed to state that no opinion is expressed.
Choice "C" is incorrect. The Auditor's Responsibility section would not be omitted, however, it would be amended from the standard unmodified auditor's report.
58
If comparative information is presented in a nonissuer's financial statements and the audit client asks the auditor to express an opinion on all periods presented, then the auditor should first:
A.
Issue a separate audit report on the prior period information with an appropriate expression of opinion.
B.
Request additional written representations from management identifying the substantive reasons that the entity wants to have an opinion, including the prior period information.
C.
Consider whether the information included for the prior period contains sufficient detail to constitute a fair presentation in accordance with the applicable financial reporting framework.
Choice "C" is correct. The auditor's first step would be to consider whether the comparative information for the prior period meets the requirements of the applicable financial reporting framework. If the auditor determines that the information does meet the requirements of the framework, then the auditor may consider the procedures that they must perform to opine on all periods.
Choice "A" is incorrect. The first step is to consider whether the prior period information is in compliance with the financial reporting framework. Additionally, if the auditor is able to express an opinion on all periods, it would not be expected that the reports would be separate.
Choice "B" is incorrect. While it is important to understand why management has requested opinions on all periods presented, written representations would not be the first step to take. The auditor would assess the information's compliance with the financial reporting framework before taking further steps.
Choice "D" is incorrect. The auditor may ultimately consider including an additional paragraph. However, it is not the first step that the auditor would take upon receiving the audit client's request to express an opinion on all periods presented.
59
In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion?
A.
The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures.
B.
The financial statements fail to disclose information that is required by generally accepted accounting principles.
C.
The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.
D.
Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.
Choice "B" is correct. Failure to disclose information that is required by GAAP is a departure from GAAP. Departures from GAAP result in a qualified or an adverse opinion.
Choice "A" is incorrect. If the auditor is unable to observe physical inventory and is unable to become satisfied through alternative means, that is a scope limitation. Scope limitations result in either a qualified opinion or a disclaimer of opinion.
Choice "C" is incorrect. The auditor can report on one financial statement and not the others. This does not preclude issuance of an unmodified opinion.
Choice "D" is incorrect. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include a separate section with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" to reflect that conclusion.
60
When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):
A.
Disclaimer of opinion.
B.
Report on pro forma financial statements.
C.
Unaudited association report.
D.
Regulation S-X exemption.
Choice "A" is correct. When an accountant is associated with the financial statements of a public entity, but has not audited or reviewed such statements, the accountant must issue a report disclaiming any opinion on the statements.
Choice "B" is incorrect. A disclaimer of opinion would be necessary and there would be no requirement to report on pro forma financial statements as a result of the association with the financial statements by the independent CPA.
Choice "C" is incorrect. A disclaimer of opinion would be necessary on the unaudited financial statements. There is no such report called an unaudited association report.
Choice "D" is incorrect. A disclaimer of opinion would be necessary. An exception from Regulation S-X would not be applicable.
61
An auditor of a nonissuer concludes that a client's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the pervasiveness of the effect on the financial statements, the auditor should express either a (an):
A.
Unmodified opinion with an other-matter paragraph or a qualified opinion.
B.
Disclaimer of opinion or an unmodified opinion with an emphasis-of-matter paragraph.
C.
Qualified opinion or an adverse opinion.
D.
Adverse opinion or a disclaimer of opinion.
Choice "C" is correct. If the financial statements, including accompanying notes, fail to disclose information that is required by generally accepted accounting principles, the auditor should express a qualified or adverse opinion, depending on pervasiveness.
Choice "A" is incorrect. An unmodified opinion with an other-matter paragraph is not appropriate for a client with a material undisclosed item or GAAP departure.
Choice "B" is incorrect. Neither a disclaimer of opinion nor an unmodified opinion with an emphasis-of-matter paragraph is appropriate for a client with a material undisclosed item or GAAP departure.
Choice "D" is incorrect. A disclaimer of opinion is not an appropriate report for inadequate disclosure or a GAAP departure.
62
When an auditor of a nonissuer qualifies an opinion because of the inability to confirm accounts receivable by direct communication with debtors, the wording of the qualified opinion paragraph of the auditor's report should indicate that the qualification pertains to the:
A.
Limitation on the auditor's scope.
B.
Departure from generally accepted auditing standards.
C.
Lack of sufficient appropriate audit evidence.
D.
Possible effects on the financial statements.
Choice "D" is correct. When an auditor of a nonissuer qualifies his or her opinion because of a scope limitation, such as the inability to confirm accounts receivable, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
Choice "A" is incorrect. The Qualified Opinion section of the auditor's report would not refer to the scope limitation directly, but would include "except for" language related to the opinion.
Choice "B" is incorrect. A departure from generally accepted auditing standards would not have taken place when the auditor appropriately issued a qualified opinion. Additionally, such language would not be contained in the Qualified Opinion section of the auditor's report.
Choice "C" is incorrect. The lack of sufficient appropriate audit evidence would not be referenced in the Qualified Opinion section of the report.
63
An auditor most likely would issue an adverse opinion due to:
A.
Management’s refusal to provide written representations.
B.
Inadequate disclosure of material information.
C.
The auditor is unable to obtain the audited financial statements of a consolidated investee.
D.
The inability to determine the extent of or the amounts associated with a pervasive employee fraud scheme
Choice “B” is correct. Inadequate disclosure of material information is a departure from GAAP and may result in either a qualified or adverse opinion, depending on materiality.
Choice “A” is incorrect. Management’s refusal to provide written representations (a type of audit evidence) is a significant client-imposed restriction on the audit, which may result in a disclaimer of opinion.
Choice “C” is incorrect. If the auditor is unable to obtain the audited financial statements of a consolidated investee, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality.
Choice “D” is incorrect. An auditor may issue a qualified or disclaimer of opinion when an auditor is unable to obtain sufficient appropriate audit evidence. For example, when an auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme, there is not sufficient appropriate audit evidence, and a qualified or disclaimer of opinion may be appropriate.
64
The opinion paragraph in an auditor's report for a nonissuer should include a statement that:
A.
Indicates that management is responsible for the fair presentation of the financial statements.
B.
Describes the auditor's responsibility for expressing an opinion on the financial statements.
C.
Identifies the applicable financial reporting framework and its origin.
D.
Includes the word independent to clearly indicate that the report is from an independent auditor.
Choice "C" is correct. The opinion paragraph in an auditor's report should include a statement regarding the auditor's opinion and an indication of the applicable financial reporting framework and its origin.
Choice "A" is incorrect. An indication of management's responsibility for the fair presentation of the financial statements should be included in a separate paragraph explaining management's responsibility rather than in the opinion paragraph.
Choice "B" is incorrect. A description of the auditor's responsibility would be included in a separate paragraph stating the auditor's responsibility rather than in the opinion paragraph.
Choice "D" is incorrect. The word independent should be included in the report title, and not the opinion paragraph in an auditor's report.
65
When an auditor of a nonissuer expresses an adverse opinion, the Opinion section should include:
A.
The principal effects of the departure from generally accepted accounting principles.
B.
The substantive reasons for the financial statements being incorrect or misleading.
C.
A direct reference to a separate section disclosing the basis for the opinion.
D.
A description of the uncertainty or scope limitation that prevents an unmodified opinion.
Choice "C" is correct. The opinion paragraph in an adverse opinion should state that, in the auditor's opinion, because of the significance of the matter(s) discussed in the Basis for Adverse Opinion section, the accompanying consolidated financial statements do not present fairly...
Choice "A" is incorrect. The principal effects of the departure from GAAP are not included in the Opinion section.
Choice "B" is incorrect. The substantive reasons for the financial statements being incorrect or misleading are discussed in the Basis for Adverse Opinion section, not the Opinion section.
Choice "D" is incorrect. Scope limitations pertain to disclaimers of opinion, not adverse opinions.
(It is very important to memorize the qualifying phrases in the qualified, adverse, and disclaimer of opinions.)
66
In which of the following situations would a disclaimer of opinion be the most appropriate?
A.
The auditor is unable to obtain the audited financial statements of a significant subsidiary.
B.
There is insufficient disclosure in the notes to the financial statements of reportable segments.
C.
The internal auditor lacks independence.
D.
The financial statements are presented in accordance with the cash basis of accounting.
Choice “A” is correct. If the auditor is unable to obtain the audited financial statements of a significant subsidiary, a scope limitation exists. Assuming that the effect is material and pervasive, the auditor would issue a disclaimer of opinion.
Choice “B” is incorrect. Inadequate disclosure is a GAAP issue and would result in a qualified or adverse opinion, depending on materiality.
Choice “C” is incorrect. The internal auditor is not independent. If the external auditor is not independent, then the auditor must issue a disclaimer of opinion.
Choice “D” is incorrect. Financial statements may be prepared using a special purpose framework, such as the cash basis of accounting.
67
March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to:
A.
Both Monday Corp. and 1st Federal Bank.
B.
Monday Corp., the client that engaged March.
C.
1st Federal Bank.
D.
Wall Corp., the entity audited by March.
Choice "B" is correct. The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday.
Choices "C" and "A" are incorrect. Even though the bank will be relying on the audited financial statements in determining whether to make the loan, the bank did not directly engage the auditing firm and accordingly, the report should not be addressed to them.
Choice "D" is incorrect. Wall Corp. did not engage the auditors and thus the report should not be addressed to them.
68
When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond:
A.
Determining whether management has elected to omit substantially all required disclosures.
B.
Documenting that internal control is not being relied on.
C.
Ascertaining whether the financial statements are in conformity with GAAP.
D.
Reading the financial statements for obvious material misstatements.
Choice "D" is correct. The accountant is only required to read the financial statements for obvious material misstatements.
Choice "A" is incorrect. The accountant is not required to evaluate conformity with GAAP, including determining whether management has elected to omit substantially all required disclosures.
Choice "B" is incorrect. The accountant need not document that internal control is not being relied on.
Choice "C" is incorrect. The accountant is not required to evaluate conformity with GAAP, but any known departures should be described in the disclaimer.
69
An auditor is unable to complete a procedure during an audit. Based on this situation, which opinion is least likely to be rendered?
A.
A disclaimer of opinion.
B.
A qualified opinion.
C.
An adverse opinion.
D.
An unmodified opinion.
Choice "C" is correct. An adverse opinion is rendered when there is a departure from GAAP, which is not the case in this question.
Choice "A" is incorrect. A disclaimer of opinion may be issued due to a highly material scope limitation.
Choice "B" is incorrect. A qualified opinion may be issued due to a material scope limitation.
Choice "D" is incorrect. An unmodified opinion would be rendered if the effect on the financial statements were immaterial, or if acceptable alternative procedures could be performed.
70
A CPA's report on audited financial statements under U.S. auditing standards would be inappropriate if it referred to:
A.
Evaluating the appropriateness of accounting policies used.
B.
The CPA's assessment of sampling risk factors.
C.
Significant estimates made by management.
D.
Management's responsibility for the financial statements.
Choice "B" is correct. The CPA's report on audited financial statements does not include matters related to the auditor's assessment of specific risk factors.
Choices "A" and "C" are incorrect. The CPA's audit includes evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. This is mentioned in the auditor's responsibility paragraph.
Choice "D" is incorrect. The CPA's report on audited financial statements includes an explanation that management is responsible for the preparation and fair presentation of the financial statements.
71
In which of the following sections of an auditor's report for a nonissuer does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit?
A.
Scope
B.
Emphasis-of-matter
C.
Basis for Opinion
D.
Opinion
Choice "D" is correct. The auditor's Opinion section indicates the nature of the engagement (i.e., audit), the financial statements covered in the (audit) engagement, the name of the entity whose financial statements have been audited, and the dates covered by each financial statement.
Choice "A" is incorrect. There is no scope paragraph in a nonissuer audit report.
Choice "B" is incorrect. Emphasis-of-matter paragraphs are used when required by SAS or when the auditor believes they are necessary. They are used when referring to a matter that is appropriately presented or disclosed in the financial statements and is of such importance that it is fundamental to the users' understanding of the financial statements. This paragraph does not affect the auditor's opinion.
Choice "C" is incorrect. The Basis for Opinion section references GAAS, auditor independence, and states whether or not the auditor believes sufficient appropriate evidence was obtained to provide a basis for the auditor's opinion.
72
Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, Year 3. Park obtained sufficient audit evidence for all of Tech's financial statement items except Tech's opening inventory. Due to inadequate financial records, Park could not verify Tech's January 1, Year 3, inventory balances. Park's opinion on Tech's Year 3 financial statements most likely will be:
Balance sheet
Income statement
A.
Disclaimer
Adverse
B.
Disclaimer
Disclaimer
C.
Unmodified
Adverse
D.
Unmodified
Disclaimer
Choice "D" is correct. When the auditor is unable to satisfy himself or herself regarding the amount of beginning inventory, he or she must disclaim an opinion on the income statement because of the inability to verify the cost of goods sold during the year. The auditor may, however, still be able to issue an unmodified opinion on the balance sheet, since inventory can be verified as of the balance sheet date.
Choice "A" is incorrect. An unmodified opinion could be issued on the balance sheet as the balance sheet contains ending balances rather than opening balances. Additionally, the inability to obtain sufficient appropriate evidence on an income statement item (cost of goods sold in this scenario) is considered an audit issue rather than a financial statement issue. Therefore, a qualified or disclaimer of opinion would be appropriate rather than an adverse opinion.
Choice "B" is incorrect. Beginning inventory would impact cost of goods sold, an income statement item. If an auditor was unable to obtain sufficient appropriate evidence regarding the cost of goods sold amount recorded in the financial statements, a disclaimer of opinion would be necessary on the income statement.
Choice "C" is incorrect. The inability to obtain sufficient appropriate evidence on an income statement item (cost of goods sold in this scenario) is considered an audit issue rather than a financial statement issue. Therefore, a qualified or disclaimer of opinion would be appropriate rather than an adverse opinion.
73
An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified opinion on the current year's:
A.
Balance sheet only.
B.
Statement of cash flows only.
C.
Income statement only.
D.
Statement of shareholders' equity only.
Choice "A" is correct. The only statement where the auditor can issue an unmodified opinion in this scenario would be the balance sheet, because the balance sheet reports on ending balances and the auditor would not need beginning inventory information to form an opinion.
Choice "B" is incorrect. The statement of cash flows would be impacted by the inability of the auditor to determine whether net income is correct and, therefore, a scope limitation with respect to the statement of cash flows would be present resulting in either a qualified opinion or disclaimer of opinion.
Choice "C" is incorrect. If the auditor is unable to form an opinion on a new client's opening inventory balances, cost of goods sold cannot be determined and, therefore, the auditor would be unable to determine whether net income is correct. This is a scope limitation, and a qualified or disclaimer of opinion would be necessary.
Choice "D" is incorrect. Net income impacts retained earnings and, therefore, the auditor would not be able to form an opinion on the statement of stockholder's equity. This would be a scope limitation and would result in either a qualified opinion or disclaimer of opinion.
74
Under which of the following circumstances would the expression of an adverse opinion be inappropriate?
A.
Management does not provide reasonable justification for a change in accounting principles.
B.
Management refuses to allow the auditor to contact legal counsel.
C.
The company issues financial statements that purport to present financial position and results of operations, but it refuses to include the related statement of cash flows.
D.
The financial statements do not adequately disclose litigation that is probable to result in a material loss.
Choice “B” is correct. An auditor may express a qualified or disclaimer of opinion when, due to a scope limitation, the auditor is unable to perform all the tests necessary to complete an audit. Management’s refusal to permit inquiry of the attorneys generally will result in a disclaimer of opinion or withdrawal from the audit.
Choice “A” is incorrect. If management does not provide reasonable justification for a change in accounting principles, the auditor would issue a qualified or adverse opinion, depending on materiality.
Choice “C” is incorrect. The statement of cash flows is a requirement of GAAP to be considered a complete set of financial statements. A material misstatement of financial statements, such as the omission of information that is required to be presented, would result in a qualified or adverse opinion.
Choice “D” is incorrect. Litigation that is probable to result in a material loss must be disclosed. (If the litigation loss amount can be estimated, then an amount should also be accrued.) Inadequate disclosure results in a qualified or adverse opinion.
75
Which of the following is true about modifications to the independent auditor's unmodified opinion report for a nonissuer?
A.
A disclaimer of opinion and an adverse opinion both include modification to the introductory paragraph.
B.
An auditor would modify different paragraphs when rendering either a qualified opinion due to a departure from GAAP or an adverse opinion due to a departure from GAAP.
C.
An auditor would modify the same paragraphs when rendering either a qualified opinion due to a departure from GAAP or a qualified opinion due to a scope limitation.
D.
Modifications to the independent auditor's report result in qualified, adverse or negative assurance opinions, or a disclaimer of opinion.
Choice "C" is correct. A qualified opinion due to a scope limitation and a qualified opinion due to a GAAP departure require modifications to both the Opinion section and the Basis for Opinion section of the auditor's report.
Choice "A" is incorrect. The auditor's report does not contain an introductory paragraph.
Choice "B" is incorrect. When there is a departure from GAAP that has a material effect on the financial statements, both the Opinion section and Basis for Opinion section of the auditor's report would require modification. This is true regardless of whether the opinion is qualified or adverse.
Choice "D" is incorrect. A "negative assurance opinion" is not one of the independent auditor's opinions. The possible opinions are unmodified, qualified, adverse or disclaimer.
76
A scope limitation sufficient to preclude an unmodified opinion always will result when management:
A.
Prevents the auditor from reviewing the audit documentation of the predecessor auditor.
B.
Engages the auditor after the year-end physical inventory is completed.
C.
Requests that certain material accounts receivable not be confirmed.
D.
Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.
Choice "D" is correct. The management's responsibility paragraph of the standard unmodified report includes a statement that the financial statements are the responsibility of the company's management. Management's refusal to accept responsibility for the fair presentation of the financial statements therefore precludes issuance of this standard report.
Choice "A" is incorrect. Preventing the review of documentation of the predecessor auditor would be a reason not to accept the engagement.
Choice "B" is incorrect. There would likely be alternative procedures that could be performed by the auditor to obtain sufficient appropriate evidence about the inventory balances.
Choice "C" is incorrect. There would likely be alternative procedures that could be performed by the auditor to obtain sufficient appropriate evidence about the accounts receivable balances that could not be confirmed.
77
During an audit, the auditor notes that the client's financial statements are not in conformity with GAAP regarding the recording of leases. Based on this situation, which opinion is least likely to be rendered?
A.
A disclaimer of opinion.
B.
An adverse opinion.
C.
An unmodified opinion.
D.
A qualified opinion.
Choice "A" is correct. A disclaimer of opinion is issued when there is a significant scope limitation, when the auditor is not independent, or when the financial statements are not audited, which is not the case in this question.
Choice "B" is incorrect. An adverse opinion may be issued when the effect of the GAAP departure is material and pervasive.
Choice "C" is incorrect. An unmodified opinion may be issued when the effect of the GAAP departure is deemed to be immaterial.
Choice "D" is incorrect. A qualified opinion may be issued when the effect of the GAAP departure is material.
78
In which case would an unmodified opinion not be appropriate?
A.
There is a change in accounting principle that has a material effect on the current year financial statements.
B.
A material related party transaction has occurred and has been accounted for appropriately, but it has not been adequately disclosed in the financial statements.
C.
There is an unjustified departure from GAAP, but it does not have a material effect on the financial statements.
D.
There is a justified departure from GAAP.
Choice "B" is correct. Inadequate disclosure of a material related party transaction would result in a qualified or adverse opinion.
Choice "A" is incorrect. A material change in accounting principle would result in the addition of an emphasis-of-matter paragraph to the unmodified opinion.
Choice "C" is incorrect. An immaterial unjustified departure from GAAP would not affect the unmodified opinion. Note that if the effect were material, a qualified or adverse opinion would be appropriate.
Choice "D" is incorrect. A justified departure from GAAP results in the addition of an emphasis-of-matter paragraph to the unmodified opinion.
79
Which of the following is true regarding the audit report for an issuer?
A.
Reference may be made to either PCAOB standards or generally accepted auditing standards.
B.
Reference should be made to both PCAOB standards and generally accepted auditing standards.
C.
PCAOB standards should not be mentioned at all, although their use is implied in the auditor's report.
D.
The report should include references to PCAOB standards and generally accepted accounting principles.
Choice "D" is correct. An auditor reporting on the audit of financial statements of an issuer should indicate in the Basis for Opinion section that the engagement was conducted in accordance with PCAOB standards, and should refer to GAAP in the Opinion on the Financial Statements section.
Choice "A" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the Basis for Opinion Section that the engagement was conducted in accordance with PCAOB standards. Referring to generally accepted auditing standards instead is not an option, as audits of issuers must follow PCAOB standards.
Choice "B" is incorrect. An auditor reporting on the audit of financial statements of an issuer is required to refer to PCAOB standards. There is no requirement to reference GAAS.
Choice "C" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the audit report that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed.
80
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 [reference to matter giving rise to qualification] described in the Basis for Qualification section of our report..."
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 (unqualified) auditor's report.)
81
A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when management:
A.
Does not provide the auditor with an engagement letter specifying the responsibilities of both the entity and the auditor.
B.
Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary.
C.
Fails to correct a significant deficiency in internal control communicated to those charged with governance after the prior year's audit.
D.
Refuses to disclose in the notes to the financial statements related party transactions authorized by the Board of Directors.
Choice "B" is correct. Restrictions on the scope of the audit, such as the timing of the work, the inability to obtain sufficient appropriate audit evidence, or an inadequacy in the accounting records, may require the auditor to qualify or disclaim an opinion. Inability to obtain audited financial statements supporting the entity's investment in a foreign subsidiary is such a restriction on the scope of the audit.
Choice "A" is incorrect. The auditor sends an engagement letter to the client, not vice versa.
Choice "C" is incorrect. Management may choose not to correct a significant deficiency in internal control if the cost of correcting the condition outweighs the benefit.
Choice "D" is incorrect. Client refusal to disclose related party transactions in the notes to the financial statements is a GAAP problem, not a scope problem. For a GAAP problem, the auditor must either issue a qualified or adverse opinion.
82
Which of the following statements is a basic element of the auditor's report under U.S. auditing standards?
A.
The disclosures provide reasonable assurance that the financial statements are free of material misstatement.
B.
The auditor evaluated the overall internal control.
C.
An audit includes evaluating the reasonableness of significant accounting estimates made by management.
D.
The financial statements are consistent with those of the prior period.
Choice "C" is correct. Under U.S. auditing standards, the auditor's audit report includes a statement that: "In performing an audit in accordance with GAAS, we evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management..."
Choice "A" is incorrect. The audit report does not state that disclosures provide reasonable assurance that the financial statements are free of material misstatement. The correct statement is: "Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement..."
Choice "B" is incorrect. The audit report does not state that the auditor evaluated the overall internal control. The correct statement is "In performing an audit in accordance with GAAS, we obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstance..."
Choice "D" is incorrect. The audit report does not state "The financial statements are consistent with those of the prior period." Consistency is implicitly reported; only if there is an inconsistency is an explicit statement included.
83
According to U.S. GAAS, when the auditor is not independent but is required by law or regulation to report on the financial statements, the auditor's report should disclaim an opinion and should:
State That "The Auditor
Is Not Independent"
Provide the Reasons
for Lack of Independence
A.
Yes
No
B.
No
No
C.
No
Yes
D.
Yes
Yes
Choice "A" is correct. When the auditor is not independent but is required by law or regulation to report on the financial statements, the auditor should disclaim an opinion and should specifically state that the auditor is not independent. The auditor is not required to provide the reasons for the lack of independence. However, an auditor may choose to provide the reasons for the lack of independence. If so, the auditor should include all the reasons for the lack of independence.
Choice "B" is incorrect. The auditor is required to state his or her lack of independence.
Choice "C" is incorrect. The auditor is required to state his or her lack of independence but is not required to provide the reasons.
Choice "D" is incorrect. The auditor is not required to provide reasons for the lack of independence. However, an auditor may choose to provide the reasons for the lack of independence and should include all reasons.
84
A client decides not to make an auditor's proposed adjustments that collectively are not material, and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?
A.
The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.
B.
The financial statements do not conform with generally accepted accounting principles (GAAP).
C.
The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
D.
The financial statements contain unadjusted misstatements that should result in a qualified opinion.
Choice "C" is correct. An unmodified opinion states that the financial statements are presented fairly, in all material respects. Since the collective effect of the proposed adjustments is immaterial, an unmodified opinion should be expressed. In addition, footnote disclosure of proposed immaterial adjustments is not required.
Choice "A" is incorrect. The AICPA defines fair presentation as reflecting the underlying transactions of a company in a manner that represents the financial statements within a range of acceptable limits. Since the collective effect of the proposed adjustments is immaterial, the financial statements would be considered to conform to generally accepted accounting principles, and footnote disclosure of the proposed adjustments would not be required.
Choice "B" is incorrect. The AICPA defines fair presentation as reflecting the underlying transactions of a company in a manner that represents the financial statements within a range of acceptable limits. Since the collective effect of the proposed adjustments is immaterial, the financial statements would be considered to conform to generally accepted accounting principles.
Choice "D" is incorrect. An unmodified opinion states that the financial statements are presented fairly, in all material respects. Since the collective effect of the proposed adjustments is immaterial, an unmodified opinion should be expressed.
85
Which of the following items is explicitly included in an audit report expressing an unmodified opinion?
A.
We conducted our audit in accordance with generally accepted accounting principles.
B.
The procedures selected depend on management's approval, including the assessment of the risks of any errors resulting from fraud.
C.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our review of the financial statements.
D.
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks.
Choice "D" is correct. The auditor's responsibility paragraph of the unmodified opinion audit report explicitly states that an audit includes identifying and assessing the risks of material misstatement and designing and performing audit procedures responsive to those risks.
Choice "A" is incorrect. The audit is conducted in accordance with auditing standards generally accepted in the United States of America.
Choice "B" is incorrect. The correct statement reads consistent with choice A and not choice D.
Choice "C" is incorrect. The audit evidence provides a basis for the auditor's opinion, not for a review. This is an audit engagement, not a review.
86
An auditor decides to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to:
A.
A departure from generally accepted auditing standards.
B.
Inadequate disclosure of necessary information.
C.
A client-imposed scope limitation.
D.
The possible effects on the financial statements.
Choice "D" is correct. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
Choice "A" is incorrect. A scope limitation is a departure from generally accepted auditing standards. However, when an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
Choice "B" is incorrect. Inadequate disclosure of necessary information is a departure from GAAP, rather than a scope limitation.
Choice "C" is incorrect. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
87
When financial statements contain a departure from U.S. GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should express an opinion that is:
A.
Adverse.
B.
Qualified or adverse, depending on pervasiveness.
C.
Unmodified.
D.
Qualified.
Choice "C" is correct. When circumstances indicate that a financial presentation in accordance with U.S. GAAP would be misleading, a departure from U.S. GAAP is permissible. In such cases, the auditor should issue an unmodified opinion because the financial statements are not materially misstated.
Choices "D", "A", and "B" are incorrect. The auditor's opinion need not be qualified or adverse because the financial statements are presented fairly.
88
An auditor’s report under U.S. auditing standards that refers to a scope limitation that is material but not pervasive contains the words, “In our opinion, except for the below-mentioned limitation on the scope of our audit . . . ." This is considered a(n):
A.
Qualified opinion
B.
Example of inappropriate wording
C.
Disclaimer of opinion
D.
Adverse opinion
Choice “B” is correct. "In our opinion, except for the below-mentioned limitation on the scope of our audit . . ." is an example of inappropriate wording. When the auditor expresses a qualified opinion due to a scope limitation, the auditor should state in the opinion paragraph that the qualification pertains to the possible effects of the matter on the financial statements and not to the scope limitation itself. The wording used should be, “In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section . . . .”
Choice “A” is incorrect. A qualified opinion due to a scope limitation should include the phrase, “In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section . . . .”
Choice “C” is incorrect. A disclaimer of opinion should include the phrase, "Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements."
Choice “D” is incorrect. An adverse opinion would include the phrase, “. . . do not present fairly . . . .”
89
Block, a CPA firm, is finalizing the audit of a nonissuer. In drafting the audit report containing an unmodified opinion, how should Block make the following representations in the audit opinion on comparative financial statements?
Consistent
application of
accounting principles
Examination
of evidence
on a test basis
A.
Implicitly
Explicitly
B.
Explicitly
Explicitly
C.
Implicitly
Implicitly
D.
Explicitly
Implicitly
Choice "A" is correct. Consistency is implicit in the auditor's report, and will be explicitly mentioned in an emphasis-of-a-matter paragraph only if there are issues with consistency. Within the Auditor's Responsibility section of the report, the following statement is explicitly made: "Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements."
Choice "B" is incorrect. Only the examination of evidence on a test basis is explicitly stated in the auditor's report. The statement is included in the Auditor's Responsibility section.
Choice "C" is incorrect. Only consistency in the application of accounting principles is implicit in the auditor's report.
Choice "D" is incorrect. The consistency of the application of accounting principles is implicit while the examination of evidence on a test basis is explicitly stated in the Auditor's Responsibility section.
90
The responsibilities of an auditor include all of the following except which one?
A.
Maintaining professional skepticism and exercising professional judgment throughout the planning and performance of the audit.
B.
A minimum amount of technical knowledge of and experience in the industry in which the audit client operates.
C.
Complying with relevant ethical requirements.
D.
Appropriate competence and capabilities to perform the audit.
Choice "B" 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.
Choice "A" is incorrect. An auditor is responsible for maintaining professional skepticism and exercising professional judgment throughout an audit.
Choice "C" is incorrect. An auditor is responsible for complying with all relevant ethical requirements.
Choice "D" is incorrect. An auditor is responsible for ensuring the members of the engagement team have the appropriate competence and capabilities to perform the audit.
91
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 "A" is incorrect. It would not be possible for the auditor to ensure that management does not conceal any fraudulent activities of employees.
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 "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.
92
An auditor of a nonissuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately:
A.
Assess the entity's document-retention controls before using documents as audit evidence.
B.
Consider the reliability of information to be used as audit evidence.
C.
Authenticate documents used as audit evidence.
D.
Adopt an attitude of acceptance unless evidence indicates otherwise.
Choice "B" is correct. An auditor exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately consider the reliability of information to be used as audit evidence.
Choice "A" is incorrect. An auditor exercising professional skepticism does not need to assess the entity's document-retention controls before using documents as audit evidence.
Choice "C" is incorrect. An auditor is not required to authenticate audit evidence. The auditor may accept records and documents as genuine unless the auditor has reason to believe the contrary.
Choice "D" is incorrect. An auditor exercising professional skepticism should critically assess audit evidence rather than adopting an initial attitude of acceptance.
93
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.
Either GAAS as issued by the AICPA or PCAOB Standards, but not both.
C.
Only GAAS or PCAOB, but not auditing standards of another jurisdiction or country.
D.
International Standards on Auditing, but only if the audit is being conducted in another country outside the U.S.A.
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 Basis for Opinion paragraph to state that the audit was conducted in accordance with both sets of auditing standards.
Choice "B" 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 Basis for Opinion paragraph stating that both sets of standards were applied.
Choice "C" is incorrect. It is acceptable for an auditor to apply both GAAS and auditing standards of another jurisdiction or country.
Choice "D" 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.
94
Which of the following is not an example of the application of professional skepticism?
A.
Inquiring of prior year engagement personnel regarding their assessment of management's honesty and integrity.
B.
Designing additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion.
C.
Obtaining corroboration of management's explanations through consultation with a specialist.
D.
Using third-party confirmations to provide support for management's representations.
Which of the following is not an example of the application of professional skepticism?
A.
Inquiring of prior year engagement personnel regarding their assessment of management's honesty and integrity.
B.
Designing additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion.
C.
Obtaining corroboration of management's explanations through consultation with a specialist.
D.
Using third-party confirmations to provide support for management's representations.
95
Which of the following terms identifies a requirement for audit evidence?
A.
Appropriate.
B.
Disconfirming.
C.
Reasonable.
D.
Adequate.
Choice "A" is correct. The auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion.
Choice "B" is incorrect. Auditing standards do not use the word disconfirming in describing the requirements for audit evidence.
Choice "C" is incorrect. Auditing standards use the word reasonable to describe the type of assurance gained by the auditor as the basis for the opinion, and not to describe a specific requirement for audit evidence.
Choice "D" is incorrect. Auditing standards do not use the word adequate in describing the requirements for audit evidence; the term is sufficient appropriate audit evidence.
96
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.
Determine the applicable financial reporting framework and prepare an adequate description of the framework for inclusion in the financial statements.
B.
Exercise his or her specific legal powers and authority in investigating suspicious activities of the entity's employees, including management.
C.
Obtain absolute assurance that the financial statements are not misstated due to fraud on the part of management.
D.
Plan the work and properly supervise any assistants.
Choice "D" 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. 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 "B" 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.
Choice "C" 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.
97
An auditor expressed a qualified opinion on the prior year's financial statements because of a lack of adequate disclosure. These financial statements are properly restated in the current year and presented in comparative form with the current year's financial statements. The auditor's updated report on the prior year's financial statements should:
A.
Make no reference to the type of opinion expressed on the prior year's financial statements.
B.
Express an unmodified opinion on the restated financial statements of the prior year.
C.
Continue to express a qualified opinion on the prior year's financial statements.
D.
Be accompanied by the auditor's original report on the prior year's financial statements.
Choice "B" is correct. If an auditor has previously qualified his or her opinion on financial statements of a prior period, and the prior period statements are restated to conform with GAAP, the auditor should express an unmodified opinion on the restated financial statements. In addition, the auditor would state the substantive reasons for the change in opinion in an emphasis-of-matter (or other-matter) paragraph.
Choice "A" is incorrect. The auditor would state the substantive reasons for the change in opinion in an emphasis-of-matter (or other-matter) paragraph.
Choice "C" is incorrect. The auditor would change the opinion on the restated financial statements from that previously issued.
Choice "D" is incorrect. The original report would not be presented.
98
Which of the following is not considered a special purpose framework?
A.
International Financial Reporting Standards
B.
Contractual basis
C.
Cash basis
D.
Tax basis
Choice "A" is correct. International Financial Reporting Standards are not considered a special purpose framework but are considered a general purpose framework because the standards meet the needs of a wide range of users.
Choice "B" is incorrect. A contractual basis is a special purpose framework designed to meet the financial information needs of specific users.
Choice "C" is incorrect. The cash basis is a special purpose framework designed to meet the financial information needs of specific users.
Choice "D" is incorrect. The tax basis is a special purpose framework designed to meet the financial information needs of specific users.
99
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.
Qualify the opinion concerning the restated financial statements because of a change in accounting principle.
B.
Be accompanied by the original auditor's report on the prior period.
C.
Express an unmodified opinion concerning the restated financial statements.
D.
Bear the same date as the original auditor's report on the prior period.
Choice "C" is correct. When prior-period financial statements are restated in the current period to conform with GAAP, the auditor's updated report on the prior-period financial statements should express an unmodified opinion concerning the restated financial statements.
Choice "A" is incorrect. A change in accounting principle that is properly accounted for does not result in a qualified opinion.
Choice "B" is incorrect. The original auditor's report on the prior period should not be presented.
Choice "D" is incorrect. The original report date is used only if the original report is reissued unchanged.
100
Reports on special purpose frameworks are issued in conjunction with:
A.
Feasibility studies presented to illustrate an entity's results of operations.
B.
Pro forma financial presentations designed to demonstrate the effects of hypothetical transactions.
C.
Compliance with reporting requirements to be filed with a specific regulatory agency.
D.
Interim financial information reviewed to determine whether material modifications should be made to conform with GAAP.
Choice "C" is correct. A special purpose framework is a financial basis of accounting other than GAAP that includes cash basis, tax basis, regulatory basis, and contractual basis. Reporting to comply with required regulatory requirements fits a special purpose framework that deviates from traditional GAAP reporting.
Choice "A" is incorrect. Reports related to feasibility studies presented to illustrate an entity's results of operations are not special purpose framework reports.
Choice "B" is incorrect. Reports on pro forma financial presentations designed to demonstrate the effects of hypothetical transactions are attestation reports, not special purpose framework reports.
Choice "D" is incorrect. A report on interim financial information reviewed to determine whether material modifications should be made to conform with GAAP is not included in the definition of a special purpose framework report.
101
Which of the following items should be included in an auditor’s report for financial statements prepared in conformity with the cash basis of accounting?
A.
An other-matter paragraph restricting the use of the auditor’s report.
B.
An emphasis-of-matter paragraph alerting readers about the preparation in accordance with the cash basis of accounting.
C.
Description of the purpose for which the financial statements are prepared included within the management’s responsibility paragraph.
D.
A sentence stating that the audit was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants.
Choice “B” is correct. An auditor’s report for financial statements prepared in conformity with the cash basis of accounting should include an emphasis-of-matter paragraph alerting readers about the preparation in accordance with the cash basis of accounting.
Choice “A” is incorrect. An auditor’s report for financial statements prepared in conformity with the cash basis of accounting is not required to include a restricted use paragraph. This is required in the auditor’s report when the financial statements are prepared using the regulatory basis (single opinion) or contractual basis of accounting.
Choice “C” is incorrect. An auditor’s report for financial statements prepared in conformity with the cash basis of accounting is not required to include a description of the purpose for which the financial statements are prepared. This is required in the auditor’s report when the financial statements are prepared using the regulatory or contractual basis of accounting.
Choice “D” is incorrect. Financial statements prepared using the cash basis of accounting should include a sentence that states that the audit was conducted in accordance with auditing standards generally accepted in the United States of America.
102
103
When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that:
A.
Justifies the use of the income tax basis of accounting.
B.
Emphasizes that the financial statements are not intended to have been audited in accordance with generally accepted auditing standards.
C.
States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.
D.
Refers to the authoritative pronouncements that explain the income tax basis of accounting being used.
Choice "C" is correct. When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that states that the income tax basis of accounting is a basis of accounting other than GAAP. Examples of an appropriate title for this paragraph are "Emphasis of Matter" or "Basis of Accounting."
Choice "A" is incorrect. The special report does not justify the use of the income tax basis of accounting.
Choice "B" is incorrect. The financial statements are audited in accordance with GAAS.
Choice "D" is incorrect. The report does not refer to the authoritative pronouncements that explain the income tax basis of accounting being used.
104
Foley, CPA, is the group engagement partner for a multinational corporation. Pente, CPA, audits a wholly owned subsidiary of this corporation. Which of the following is true about Foley's decision between assumption and division of responsibility under U.S. GAAS?
A.
If Foley chooses to divide responsibility, she need not evaluate Pente's reputation and independence.
B.
If Foley chooses to divide responsibility, no reference to the work done by Pente will be included in the audit report.
C.
If Foley chooses to assume responsibility, the report will mention this assumption in the auditor's responsibility paragraph.
D.
If Foley chooses to assume responsibility, she must not make reference to the component auditor in her report.
Choice "D" is correct. Under U.S. GAAS, if Foley chooses to assume responsibility, no reference to the component auditor should be made in the auditor's report because to do so may cause a reader to misinterpret the degree of responsibility being assumed. Furthermore, the group engagement team should determine the type of work to be performed on the financial information of the components. Note that division of responsibility is generally not permitted under ISAs.
Choice "A" is incorrect. Regardless of Foley's decision, she must always become satisfied regarding Pente's reputation and independence.
Choice "B" is incorrect. If Foley chooses to divide responsibility, the report should clearly indicate that the component was not audited by the auditor of the group financial statements but was audited by the component auditor, and should include the magnitude of the portion of the financial statements audited by the component auditor.
Choice "C" is incorrect. If Foley chooses to assume responsibility, no reference to this assumption or to the work done by Pente will be included in the audit report.
105
An auditor's report on financial statements prepared in accordance with an other comprehensive basis of accounting should include all of the following, except:
A.
A statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.
B.
An opinion as to whether the financial statements are presented fairly in conformity with the other comprehensive basis of accounting.
C.
Reference to the note to the financial statements that describes the basis of presentation.
D.
An opinion as to whether the basis of accounting used is appropriate under the circumstances.
Choice "D" is correct. The auditor would not indicate in his/her report an opinion as to whether the method of accounting used is appropriate.
Choice "A" is incorrect. The auditor would include in his report a statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.
Choice "B" is incorrect. The auditor would include in his report an opinion as to whether the financial statements are presented fairly in conformity with the other comprehensive basis of accounting.
Choice "C" is incorrect. The auditor would include in his report reference to the note to the financial statements that describes the basis of presentation.
106
When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year's financial statements if the:
A.
Prior year's opinion was unmodified and the opinion on the current year's financial statements is modified due to a lack of consistency.
B.
Prior year's financial statements are restated to conform with generally accepted accounting principles.
C.
Prior year's financial statements are restated following a change in reporting entity in the current year.
D.
Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued report.
Choice "B" is correct. If, during the current audit, auditors become aware of circumstances or events that affect the financial statements of a prior period, they should consider such matters when updating the report on the financial statements of the prior period. For example, if auditors have previously qualified their opinion or expressed an adverse opinion on financial statements of a prior period because of a departure from generally accepted accounting principles, and 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 financial statements of the prior period should indicate that the statements have been restated and should express an unmodified opinion with respect to the restated financial statements.
Choice "A" is incorrect. A difference of opinions between periods would not result in the auditor changing the opinion on a previously issued audit report.
Choice "C" is incorrect. Restatement of financial statements following a change in reporting entity affects comparability of the financial statements, but would not result in a change in opinion from the audit report previously issued.
Choice "D" is incorrect. The predecessor auditor generally would not change a previously issued opinion when reissuing the audit report.
107
A group engagement partner decides not to refer to the audit of a component auditor. After making inquiries about the component auditor's professional reputation and independence, the group engagement partner most likely would:
A.
Add an emphasis-of-matter paragraph to the auditor's report indicating that the component's financial statements are not material to the consolidated financial statements.
B.
Contact the component auditor and review the audit programs and working papers pertaining to the component.
C.
Obtain written permission from the component auditor to omit the reference in the group engagement auditor's report.
D.
Document in the engagement letter that the group engagement partner assumes no responsibility for the other CPA's work.
Choice "B" is correct. When the group engagement auditor accepts responsibility for the work performed by a component auditor, the group engagement partner must contact the component auditor and review the audit program and working papers pertaining to the component.
Choice "A" is incorrect. When the group engagement partner assumes responsibility for the work of a component auditor, no reference to the component auditor or to the component's financial statements is made in the auditor's report.
Choice "C" is incorrect. Permission does not need to be obtained to assume responsibility for the work of the other CPA.
Choice "D" is incorrect. When a group engagement partner decides not to reference a component auditor, the group engagement partner has assumed responsibility for the work performed by the component auditor.
108
The group auditor decides not to refer to the component auditor who audited a subsidiary of the group auditor's client. In this situation, the group auditor most likely would:
A.
Determine the type of work to be performed by the group auditor on the financial information of the component.
B.
Obtain written permission from the component auditor to omit the reference in the group auditor's report.
C.
Add an emphasis-of-matter paragraph to the auditor's report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.
D.
Document in the engagement letter that the group auditor assumes no responsibility for the component auditor's work and opinion.
Choice "A" is correct. When the group auditor decides not to make reference to the audit of a component auditor, the group auditor assumes responsibility for the work of the component auditor and should determine the type of work to be performed on the financial information of the component. If the component is significant, the component should be audited by the group engagement team or the component auditor.
Choice "B" is incorrect. The group auditor does not need permission from the component auditor to assume responsibility. Permission is needed only if the group auditor decides to make reference to the component auditor in the auditor's report and would like to refer to the other auditor by name.
Choice "C" is incorrect. The group auditor may decide not to make reference to the component auditor even when the portion of the group financial statements audited by the component auditor is material. When the group auditor assumes responsibility for the work of a component auditor, no reference to the component auditor is made in the auditor's report.
Choice "D" is incorrect. The group auditor's decision not to assume responsibility for the component auditor's work need not be included in the engagement letter.
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109
An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include an emphasis-of-matter paragraph that:
A.
Refers to the note to the financial statements that describes the basis of accounting.
B.
Justifies the reasons for departing from generally accepted accounting principles.
C.
States whether the financial statements are fairly presented in conformity with another comprehensive basis of accounting.
D.
Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.
Choice "A" is correct. An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include an emphasis-of-matter paragraph that refers to the note to the financial statements that describes the basis of accounting.
Choice "B" is incorrect. The auditor should not include a separate paragraph that justifies the reasons for any departure from GAAP.
Choice "C" is incorrect. The opinion paragraph states whether the financial statements are fairly presented in conformity with the other comprehensive basis of accounting.
Choice "D" is incorrect. The auditor's report does not explain the differences between GAAP and the OCBOA, but merely states that they are different.
110
Under U.S. GAAS, in which of the following situations would a group engagement partner least likely make reference to component auditor who audited a subsidiary of the entity?
A.
The component auditor was retained by the group engagement partner and the work was performed under the group engagement partner's guidance and control.
B.
The financial statements audited by the component auditor are material to the consolidated financial statements covered by the group engagement partner's opinion.
C.
The group engagement partner is unable to be satisfied as to the independence and professional reputation of the component auditor.
D.
The group engagement partner finds it impractical to review the component auditor's work or otherwise be satisfied as to the component auditor's work.
Choice "A" is correct. Under U.S. GAAS, when the group engagement partner assumes responsibility for the component auditor's work, the group engagement partner would not mention the component auditor in the audit report (opinion). The group engagement auditor would generally assume responsibility after reviewing the audit documentation of the component auditor and performing supplemental audit tests, or by reputation, e.g., if the component auditor is a correspondent (foreign) firm in which the group engagement partner auditor has developed confidence.
Choice "B" is incorrect. When the financial statements audited by the other auditor are material, it is more likely that the group engagement partner will divide responsibility and make reference to the component auditor.
Choice "C" is incorrect. The group engagement partner should always make inquiries regarding the independence and professional reputation of the component auditor. These inquiries should occur during the planning stage of the audit. If there were concerns about the component auditor’s independence and/or professional reputation the group auditor would likely seek a different component auditor.
Choice "D" is incorrect. When the group engagement partner finds it impractical to review the component auditor's work, it is more likely that the group engagement partner will divide responsibility and make reference to the component auditor.
111
When a group engagement partner decides to make reference to a component auditor's audit under U.S. GAAS, the group engagement partner's report should state "We did not audit the financial statements of X Company..." in which section of the audit report?
A.
An emphasis-of-matter paragraph
B.
Not in the auditor's report, but in a separate report prepared by the component auditor and appended to the auditor's report
C.
Auditor's Responsibilities
D.
Opinion
Choice "D" is correct. Such a statement is included in the Opinion section of the auditor's 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."
Choice "A" is incorrect. An emphasis-of-matter paragraph is not added to an auditor's report when reference is made to a component auditor.
Choice "B" is incorrect. No separate report would be issued when reference is made to a component auditor.
Choice "C" is incorrect. The Auditor's Responsibility section would remain unchanged from the standard unmodified report when reference is made to a component auditor in a report issued by a group engagement partner.
112
Choice "D" is correct. Such a statement is included in the Opinion section of the auditor's 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."
Choice "A" is incorrect. An emphasis-of-matter paragraph is not added to an auditor's report when reference is made to a component auditor.
Choice "B" is incorrect. No separate report would be issued when reference is made to a component auditor.
Choice "C" is incorrect. The Auditor's Responsibility section would remain unchanged from the standard unmodified report when reference is made to a component auditor in a report issued by a group engagement partner.
Choice "B" is correct. When a successor auditor does not present the predecessor auditor's report, the successor should indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's financial statements.
Choice "A" is incorrect. There is no requirement that the successor obtain a letter of representation from the predecessor auditor, although the reverse may be true (the predecessor should obtain a letter of representation from the successor if the previous report is to be reissued).
Choice "C" is incorrect. No assurance is provided regarding the fair presentation of the prior year's financial statements.
Choice "D" is incorrect. The auditor does make reference to the prior year's financial statements, indicating in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's financial statements.
113
Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should:
A.
Issue a special statutory basis report that clearly disclaims any opinion.
B.
Explain in the notes to the financial statements the terminology used.
C.
Disclose any reservations in a basis for modification paragraph and qualify the opinion.
D.
Apply to the state insurance commission for an advisory opinion.
Choice "C" is correct. Financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require a qualified opinion with a basis for modification paragraph.
Choice "A" is incorrect. The auditor would not disclaim an opinion unless there is a scope limitation or independence problem.
Choice "B" is incorrect. The notes to the financial statements are communications from management, not from the auditor.
Choice "D" is incorrect. The financial statements are not suitably titled. The auditor does not need any advice from the insurance commission as to how the statements should be titled or as to how to handle the situation.
114
An entity's comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should:
A.
Express an opinion only on the current year's financial statements and make no reference to the prior year's statements.
B.
Indicate the substantive reasons for the qualification in the predecessor auditor's opinion.
C.
Explain to the client that comparative financial statements may not be presented under these circumstances.
D.
Issue an updated comparative audit report indicating the division of responsibility.
Choice "B" is correct. When a predecessor auditor's report is not presented, the successor auditor should indicate the following items:
That the statements were audited by a predecessor auditor. The predecessor auditors should not be named unless the practice of the predecessors was acquired by or merged with that of the successor.
The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reason for the modification.
The nature of any emphasis-of-matter, other-matter, or explanatory paragraph included in the predecessor auditor's report.
The date of the predecessor auditor's report.
Choice "A" is incorrect. There is nothing preventing the successor auditor from referencing the prior year's statements in this situation.
Choice "C" is incorrect. There is no requirement that the comparative financial statements NOT be issued in such circumstances.
Choice "D" is incorrect. The comparative audit report does not need to be updated for this situation.
115
The phrase "U.S. generally accepted accounting principles" is an accounting term that:
A.
Encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time.
B.
Includes broad guidelines of general application but not detailed practices and procedures.
C.
Is included in the audit report to indicate that the audit has been conducted in accordance with generally accepted auditing standards (GAAS).
D.
Provides a measure of conventions, rules, and procedures governed by the AICPA.
Choice "A" is correct. The literature pertaining to U.S. GAAP changes over time, and therefore U.S. generally accepted accounting principles can be said to encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. U.S. GAAP is one of the financial reporting frameworks acceptable for preparation of financial statements. IFRS is another one.
Choice "B" is incorrect. The literature pertaining to U.S. GAAP does provide detailed practices and procedures.
Choice "C" is incorrect. Inclusion of the phrase "U.S. generally accepted accounting principles" in the audit report indicates whether the financial statements are presented in accordance with the conventions, rules, and procedures that define accepted accounting practice in the United States. Inclusion of this phrase does not indicate whether the audit has been conducted in accordance with generally accepted auditing standards (GAAS).
Choice "D" is incorrect. The phrase "U.S. generally accepted accounting principles" does not provide a measure of conventions, rules, and procedures governed by the AICPA. The AICPA provides Statements on Auditing Standards, which relate to proper performance of a financial statement audit, not to accounting principles.
116
If a component auditor does not meet the independence requirements that are relevant to a group audit of a nonissuer's financial statements, then the group engagement team should first:
A.
Disclose the lack of independence to the nonissuer's management and consider revising the audit report.
B.
Withdraw from the engagement when permissible under law or regulation.
C.
Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor.
D.
Communicate the lack of independence to the appropriate regulatory authority.
Choice “C” is correct. If a component auditor does not meet the independence requirements that are relevant to a group audit of a nonissuer's financial statements, then the group engagement team should first attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor.
Choice “A” is incorrect. Lack of independence for a component auditor should be communicated to the group engagement team. The audit report does not need to be revised (i.e., to a disclaimer due to lack of independence) if the group engagement team is able to obtain sufficient, appropriate, audit evidence about the component by performing the work themselves or by assigning it to another component auditor who is independent.
Choice “B” is incorrect. The group engagement team does not need to withdraw from the engagement. The group engagement team may be able to obtain sufficient, appropriate, audit evidence about the component by performing the work themselves or by assigning it to another component auditor who is independent.
Choice “D” is incorrect. Lack of independence for a component auditor does not need to be communicated to a regulatory authority but should be communicated to the group engagement team.
117
Which of the following best describes what is meant by the term generally accepted auditing standards?
A.
Rules acknowledged by the accounting profession because of their universal application.
B.
Pronouncements issued by the Auditing Standards Board.
C.
Procedures to be used to gather evidence to support financial statements.
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 "A" is incorrect. GAAS are not "rules," nor are they universally applicable. GAAS are measures of the quality of an auditor's performance.
Choice "B" 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 "C" 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.
118
When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should:
A.
Include a separate emphasis-of-matter paragraph that discusses the justification for, and the CPA's concurrence with, the departure from GAAP.
B.
Explain why this basis of accounting is more useful for the readers of this entity's financial statements than GAAP.
C.
State that the basis of presentation is a comprehensive basis of accounting (OCBOA) other than GAAP.
D.
Refer to the note in the financial statements that describes management's responsibility for the financial statements.
Choice "C" is correct. A report on other comprehensive basis of accounting ("OCBOA") financial statements should include an emphasis-of-matter paragraph stating the basis, referring to the footnote that describes it, and indicating that it is a non-GAAP basis.
Choice "A" is incorrect. The separate emphasis-of-matter paragraph states the basis, refers to the footnote describing it, and indicates that it is a non-GAAP basis. It does not discuss the justification for the non-GAAP basis, nor does the CPA indicate concurrence.
Choice "B" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements does not include an evaluation of the usefulness of the basis of accounting.
Choice "D" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements makes reference to the note in the financial statements that describes the accounting basis, not to a note describing management's responsibility.
119
A former client requests a predecessor auditor to reissue the prior-year’s audit report in connection with the issuance of comparative financial statements by the client. What is the predecessor auditor's responsibility?
A.
Review the previous report and make the necessary changes.
B.
Audit the current statements.
C.
Read the current report, compare it to the previous report, and obtain a letter of representation from the successor auditor.
D.
Consult with the client's legal counsel to determine available remedies.
Choice “C” is correct. The predecessor auditor should read the current report, compare it with the previous report, and obtain a letter of representation from the successor auditor when deciding to reissue the prior-year audit report.
Choice “A” is incorrect. Simply reviewing the prior-year audit report is not sufficient to reissue a prior-year audit report. The predecessor auditor needs to read the current report, compare it with the previous report, and obtain a letter of representation from the successor auditor in order to reissue the report.
Choice “B” is incorrect. The predecessor auditor does not need to audit the current financial statements in order to reissue the prior-year audit report.
Choice “D” is incorrect. The predecessor auditor does not need to consult the client's legal counsel in order to reissue the prior-year audit report.
120
Which of the following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other than generally accepted accounting principles?
I.
Basis of accounting used by an entity to file its income tax return.
II.
Cash receipts and disbursements basis of accounting.
A.
II only.
B.
I only.
C.
Both I and II.
D.
Neither I nor II.
Choice "C" is correct. Both the basis of accounting used by an entity to file its income tax return and the cash receipts and disbursements basis of accounting are comprehensive bases of accounting other than GAAP.
OCBOAs also include:
A basis prescribed by a regulatory agency
Contractual basis
Choice "A" is incorrect. The tax basis of accounting is also considered to be a comprehensive basis of accounting other than generally accepted accounting principles or a special purpose framework.
Choice "B" is incorrect. The cash basis of accounting is also considered to be a comprehensive basis of accounting other than generally accepted accounting principles or a special purpose framework.
Choice "D" is incorrect. Both the cash basis and tax basis of accounting are considered to be a comprehensive basis of accounting other than generally accepted accounting principles or a special purpose framework.
121
Grant Company's financial statements adequately disclose uncertainties that concern future events, the outcome of which are not susceptible of reasonable estimation. The auditor's report should include a (an):
A.
"Subject to" qualified opinion.
B.
"Except for" qualified opinion.
C.
Adverse opinion.
D.
Unmodified opinion.
Choice "D" is correct. The auditor should issue an "unmodified opinion" when management adequately discloses future events, the outcome of which are not susceptible of reasonable estimation. Under U.S. auditing standards an emphasis-of-matter paragraph may be added by the auditor if the matter is of such importance that it is fundamental to the users' understanding of the financial statements. International Standards on Auditing recommend the addition of a paragraph describing the significant uncertainty.
Choice "A" is incorrect. "Subject to" qualified opinions are not permitted.
Choice "B" is incorrect. An "except for" qualified opinion would not be used as there is adequate disclosure and there are no scope limitations.
Choice "C" is incorrect. An adverse opinion would not be used because the FS are presented "fairly" in conformity with GAAP.
122
The inclusion of an emphasis-of-matter paragraph in the auditor's report:
A.
Affects the auditor’s opinion.
B.
Does not affect the auditor’s opinion.
C.
May be used as a substitute for the auditor expressing a qualified opinion.
D.
May be used as a substitute for financial statement disclosures excluded by management.
Choice “B” is correct. The inclusion of an emphasis-of-matter paragraph in the auditor’s report does not affect the auditor’s opinion. The emphasis-of-matter paragraph should indicate that "Our opinion is not modified with respect to this matter."
Choice “A” is incorrect. The inclusion of an emphasis-of-matter paragraph in the auditor’s report does not affect the auditor’s opinion. The emphasis-of-matter paragraph should indicate that "Our opinion is not modified with respect to this matter."
Choice “C” is incorrect. The inclusion of an emphasis-of-matter paragraph in the auditor’s report may not be used as a substitute for the auditor expressing a qualified opinion.
Choice “D” is incorrect. The inclusion of an emphasis-of-matter paragraph in the auditor’s report may not be used as a substitute for financial statement disclosures excluded by management.
123
Which of the following should a predecessor auditor perform before reissuing a report on financial statements when those financial statements are to be presented on a comparative basis with financial statements audited by another auditor?
A.
Change the date of the reissued report to match the date on which additional procedures were performed.
B.
Obtain representation letters from management of the former client and the successor auditor.
C.
Request attorney's responses to identify any significant litigation subsequent to the original date of the report.
D.
Review minutes of board meetings held since the original date of the audit report.
Choice "B" is correct. A predecessor auditor should obtain representations from both management and the successor auditor before reissuing a report. The successor auditor representation letter should state whether any audit matters were revealed that may have a material impact on the statements reported on by the predecessor auditor. Management's representation letter should state whether management believes that any of the previous representations made by management need to be modified and whether any subsequent events requiring adjustment or disclosure in the reissued financial statements have occurred.
Choice "A" is incorrect. The date of the report should either be unrevised or dual dated. The date of the report should not be changed to match the date of any additional procedures.
Choice "C" is incorrect. The predecessor auditor is not required to obtain an attorney letter to identify any significant litigation that occurs after the original report date. Management is responsible for providing information on any subsequent events that may require adjustment to the reissued financial statements.
Choice "D" is incorrect. The predecessor auditor is not required to review minutes of board meetings held since the original date of the audit report. Management is responsible for providing information on any subsequent events that may require adjustment to the reissued financial statements.
124
In which of the following circumstances would an auditor most likely add an emphasis-of-matter paragraph to the report while not affecting the auditor's unmodified opinion?
A.
The auditor is asked to report on the balance sheet, but not on the other basic financial statements.
B.
To describe a material but justified change in accounting principle.
C.
Management's estimates of the effects of future events are unreasonable.
D.
Certain transactions cannot be tested because of management's records retention policy.
Choice "B" is correct. An emphasis-of-matter paragraph is required to describe a justified change in accounting principle that is material to the financial statements.
Choice "A" is incorrect. Reporting on just the balance sheet is acceptable provided access to financial information is not limited. Such reporting does not require an emphasis-of-matter paragraph.
Choice "C" is incorrect. If the auditor concludes that management's estimate is unreasonable and that its effect is to cause the financial statements to be materially misstated, the auditor should express a qualified or an adverse opinion.
Choice "D" is incorrect. Restrictions on the scope of the audit, whether imposed by the client or by circumstances, may require the auditor to qualify or to disclaim an opinion.
125
A registration statement filed with the SEC contains the reports of two independent auditors on their audits of financial statements for different periods. The predecessor auditor who audited the prior-period financial statements generally should obtain a letter of representation from the:
A.
Client's audit committee.
B.
Principal underwriter.
C.
Successor independent auditor.
D.
Securities and Exchange Commission.
Choice "C" is correct. Before reissuing the prior year's audit report on the financial statements of a former client, the auditor should 1) read the financial statements of the current period, 2) compare the prior period information that the auditor reported on with the financial statements to be presented for comparative purposes, and 3) obtain letters of representation from management of the former client and from the successor auditor. The representation letter from management should indicate whether any of management's previous representations should be modified and whether there have been any subsequent events that would affect the previous financial statements. The representation letter from the successor auditor should state whether the successor auditor's audit disclosed any issues of a material nature that might affect the previous financial statements.
Choice "A" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the client's audit committee would not provide this confirmation.
Choice "B" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the principal underwriter would not provide this confirmation.
Choice "D" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the SEC would not provide this confirmation.
126
An auditor most likely would add an emphasis-of-matter paragraph when:
A.
The financial statements of the prior period were audited by a predecessor auditor and the predecessor’s audit report is not reissued.
B.
Describing a justified change in accounting principle that has a material effect on the entity’s financial statements.
C.
The auditor chooses to report on supplementary information presented with the financial statements in the auditor’s report, rather than in a separate report.
D.
Restricting the use of the auditor’s report.
Choice “B" is correct. An auditor would add an emphasis-of-matter paragraph when describing a justified change in accounting principle that has a material effect on the entity’s financial statements.
Choice “A” is incorrect. An auditor would add an other-matter paragraph when the financial statements of the prior period were audited by a predecessor auditor and the predecessor’s audit report is not reissued.
Choice “C” is incorrect. An auditor would add a separate section with the heading "Supplementary Information" when the auditor chooses to report on supplementary information presented with the financial statements in the auditor’s report, rather than in a separate report.
Choice “D” is incorrect. An auditor would add an other-matter paragraph when restricting the use of the auditor’s report.
127
Which of the following is true?
A.
If an auditor believes there is substantial doubt about an entity's ability to continue as a going concern remains, and management has properly disclosed the situation, the auditor may not issue an unmodified opinion.
B.
When an auditor includes a paragraph emphasizing a significant related party transaction, the opinion would be considered a qualified opinion.
C.
The auditor may issue an unmodified opinion when a correction of an error in accounting principle occurs.
D.
When a material accounting change has been properly accounted for and disclosed, the auditor may not issue an unmodified opinion.
Choice "C" is correct. When a correction occurs related to a previously incorrect application of an accounting principle, consistency is affected and the auditor may issue an unmodified opinion with an emphasis-of-matter paragraph.
Choice "A" is incorrect. If the auditor concludes that substantial doubt remains but is satisfied that the going concern disclosures by management are adequate, an unmodified (unqualified) opinion with a separate section with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" (nonissuer) or explanatory paragraph (issuer) can be issued.
Choice "B" is incorrect. An auditor may decide to use an emphasis-of-matter paragraph, but this does not constitute a qualified opinion. This is still an unmodified form of the opinion.
Choice "D" is incorrect. A lack of consistency that has a material effect must be disclosed in an emphasis-of-matter paragraph. If all the acceptability criteria for the accounting change are met, the auditor may issue an unmodified opinion. In evaluating the acceptability of the accounting change, the auditor should consider whether the newly adopted accounting principle is in accordance with the applicable financial reporting framework, the method of accounting for the change is acceptable, the disclosures related to the change are appropriate and adequate, and the entity has justified that the alternative accounting principle is preferable.
128
In an audit of an issuer's financial statements, the auditor determined that there was substantial doubt about the issuer's ability to continue as a going concern for a reasonable period of time. If there were no other significant audit findings, which of the following indicates the proper form of the audit report that should be issued?
A.
A qualified opinion with an emphasis-of-matter paragraph.
B.
An unqualified opinion with an explanatory paragraph.
C.
A disclaimer of opinion.
D.
An adverse opinion with an other-matter paragraph.
Choice "B" is correct. For issuers, an explanatory paragraph is required to be included in the auditor's report when there is substantial doubt about the entity's ability to continue as a going concern. In the absence of no other significant audit findings or scope limitations, an unqualified opinion with an explanatory paragraph would be appropriate.
Choice "A" is incorrect. The existence of substantial doubt about an entity's ability to continue as a going concern, if properly disclosed, would not result in a qualified opinion with an emphasis-of-matter paragraph.
Choice "C" is incorrect. Although the auditor would not be precluded from issuing a disclaimer of opinion resulting from substantial doubt about an entity's ability to continue as a going concern, in the absence of any other significant audit findings or scope limitations, an unqualified opinion with an explanatory paragraph would be appropriate.
Choice "D" is incorrect. The existence of substantial doubt about an entity's ability to continue as a going concern, if properly disclosed, would not result in an adverse opinion with an other-matter paragraph.
129
An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph:
A.
Is appropriate and would not negate the unmodified opinion.
B.
Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
C.
Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
D.
Is considered an "except for" qualification of the opinion.
Choice "A" is correct. This is an emphasis-of-matter paragraph and should be added to an otherwise unmodified opinion in this case based on the professional judgment of the auditor.
Choice "B" is incorrect. A phrase such as "with the foregoing explanation" should not be used in an unmodified opinion.
Choice "C" is incorrect. The auditor may emphasize a matter even if it is included in the footnotes.
Choice "D" is incorrect. An "except for" qualification is used for a scope limitation or a departure from GAAP, but not for emphasis of a matter.
130
In which of the following should an auditor's report for a nonissuer refer to the lack of consistency when there is a justified change in accounting principle that is significant?
A.
The Basis for Opinion section.
B.
An emphasis-of-matter paragraph.
C.
The Opinion section.
D.
An other-matter paragraph.
Choice "B" is correct. A justified lack of consistency caused by a material change in GAAP between periods would be reported in an emphasis-of-matter paragraph. Under these circumstances, the auditor issues an unmodified opinion.
Choice "A" is incorrect. The Basis for Opinion section would not contain a reference to a lack of consistency related to a justified change in accounting principle.
Choice "C" is incorrect. The Opinion section would not contain a reference to a lack of consistency related to a justified change in accounting principle.
Choice "D" is incorrect. An other-matter paragraph is appropriate for use to refer to items that the auditor wants to emphasize that are not included in the financial statements. As a justified change in accounting principle would be included in the financial statements, an emphasis-of-matter, rather than an other-matter, paragraph would be appropriate.
131
Reference in a group engagement partner's report to the fact that part of the audit was performed by another auditor most likely would be an indication of the:
A.
Lack of materiality of the portion of the financial statements audited by the other auditor.
B.
Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.
C.
Different opinions the auditors are expressing on the components of the financial statements that each audited.
D.
Group engagement partner's recognition of the component auditor's competence, reputation, and professional certification.
Choice "B" is correct. Reference to a component auditor indicates division of responsibility for the audits of the components of the overall financial statements.
Choice "A" is incorrect. Reference to a component auditor would not generally be made if the component auditor's portion of the financial statements is immaterial.
Choice "C" is incorrect. The reference to the component auditor would be made regardless of what type of opinion is expressed by each auditor.
Choice "D" is incorrect. The reference in the report is not meant to recognize the qualifications of the other auditor, but simply to divide the responsibility between the two auditors.
132
An emphasis-of-matter paragraph is required when:
A.
An entity appropriately changed the accounting for investments from the cost method to the equity method. This change had a material effect on the financial statements.
B.
A major catastrophe has a significant effect on the entity’s financial position.
C.
The entity is engaged in an unusually important lawsuit that may result in a significant loss.
D.
The entity engages in significant related party transactions.
Choice “A” is correct. An emphasis-of-matter paragraph is required when there is a justified change in accounting principle that has a material effect on the entity’s financial statements.
Choice “B” is incorrect. An auditor may include an emphasis-of-matter paragraph when there is a major catastrophe that has a significant effect on the entity’s financial position. The decision to include this paragraph is based on the auditor’s judgment.
Choice “C” is incorrect. An auditor may include an emphasis-of-matter paragraph when the entity is engaged in an unusually important lawsuit that may result in a significant loss. The decision to include this paragraph is based on the auditor’s judgment.
Choice “D” is incorrect. An auditor may include an emphasis-of-matter paragraph when the entity engages in significant related party transactions. The decision to include this paragraph is based on the auditor’s judgment.
133
Management of Edgington Industries plans to disclose an uncertainty as follows:
The Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements.
The auditor is satisfied that sufficient audit evidence supports management's assertions about the nature and disclosure of the uncertainty and the uncertainty is not considered to be unusually important to Edgington. What type of opinion should the auditor express under these circumstances under U.S. auditing standards?
A.
Unmodified with an emphasis-of-matter paragraph.
B.
Disclaimer of opinion.
C.
"Except for" qualified.
D.
Unmodified without an emphasis-of-matter paragraph.
Choice "D" is correct. The note presented describes an uncertainty that is properly disclosed. An emphasis-of-matter paragraph is not required in the unmodified opinion under U.S. auditing standards.
Choice "A" is incorrect. U.S. auditing standards do not require an emphasis-of-matter paragraph when an uncertainty is properly disclosed. The auditor may choose to add an emphasis-of-matter paragraph when circumstances indicate the outcome of the lawsuit is unusually important to the entity.
Choice "B" is incorrect. Since the auditor is satisfied that the assertion and disclosure are supported by the existing evidence, there is no need for the auditor to disclaim an opinion.
Choice "C" is incorrect. Since the auditor is satisfied that the assertion and disclosure are supported by the existing evidence, a qualified opinion is not required.
134
An auditor expressed an adverse opinion on the prior year's financial statements because of a lack of adequate disclosure. These statements are properly stated in the current year and presented in comparative form with the current year's financial statements. The auditor’s updated report on the prior year's financial statements should:
A.
Not change.
B.
Express a qualified opinion with an emphasis-of-matter paragraph added to the report.
C.
Express an unmodified opinion with an emphasis-of-matter paragraph added to the report.
D.
Make no reference to the type of opinion expressed on the prior year's financial statements.
Choice "C" is correct. The emphasis-of-matter paragraph (or an other-matter paragraph) should be added to the auditor's report to explain the situation.
Choice "A" is incorrect. The auditor should update the report for the change in circumstances.
Choice "B" is incorrect. The auditor’s updated report should express an unmodified opinion, rather than a qualified opinion, with an emphasis-of-matter (or other-matter) paragraph added to explain the situation.
Choice "D" is incorrect. The emphasis-of-matter (or other-matter) paragraph should include a discussion of why an adverse opinion was expressed during the previous year.
135
When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should:
A.
Not refer to consistency in the auditor's report.
B.
Refer to the change in the opinion paragraph.
C.
Explicitly concur that the change is preferred.
D.
Refer to the change in an emphasis-of-matter paragraph.
Choice "A" is correct. If an accounting change has no material effect on the comparability of the financial statements, the auditor does not need to recognize the change in the current year's audit report.
Choice "B" is incorrect. Even if the change had a material effect, the opinion paragraph would not be affected, but rather an emphasis-of-matter paragraph would be added to draw attention to the justified change.
Choice "C" is incorrect. The auditor does not explicitly concur with the change in the report.
Choice "D" is incorrect. The change would only be referred to in an emphasis-of-matter paragraph if the effect were material.
136
In May, Year 4, an auditor reissues the auditor's report on the Year 2 financial statements at a continuing client's request. The Year 2 financial statements are not restated and the auditor does not revise the wording of the report. The auditor should:
A.
Use the original report date on the reissued report.
B.
Dual date the reissued report.
C.
Use the release date of the reissued report.
D.
Use the current-period auditor's report date on the reissued report.
Choice "A" is correct. If the auditor reissues the audit report at the client's request, the auditor should use the original report date on the reissued report. Use of a subsequent date implies that the auditor has done additional work.
Choice "B" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date.
Choice "C" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date.
Choice "D" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date.
137
An auditor should restrict the use of the auditor's communication related to the audit of a nonissuer's financial statements by including an alert when the written communication:
A.
Documents a financial risk that the auditor discussed with those charged with governance on previous audit engagements.
B.
Is based on measurement or disclosure criteria that the auditor determined to be suitable only for a limited number of users who can be presumed to have an adequate understanding of the criteria.
C.
Describes a potential change in accounting methods and its potential effect on the results of operations and financial position.
D.
Discloses material weaknesses in internal control that elevate the risk of misstatements in the financial statements.
Choice “B” is correct. An auditor should restrict the use of the auditor's communication related to the audit of a nonissuer's financial statements by including an alert when the written communication is based on measurement or disclosure criteria that the auditor determined to be suitable only for a limited number of users who can be presumed to have an adequate understanding of the criteria.
Choice “A” is incorrect. The auditor often will restrict use to management and those charged with governance when the written communication documents a financial risk that the auditor discussed with those charged with governance on previous audit engagements. However, this is not the best answer choice because this is only one of the many circumstances that the auditor may restrict the use of the communication. The correct answer choice includes the criteria for when a restricted use paragraph should be included.
Choice “C” is incorrect. The auditor often will restrict use to management and those charged with governance when a written communication describes a potential change in accounting methods and its potential effect on the results of operations and financial position. However, this is not the best answer choice because this is only one of the many circumstances that the auditor may restrict the use of the communication. The correct answer choice includes the criteria for when a restricted use paragraph should be included.
Choice “D” is incorrect. An auditor often will restrict use to management and those charged with governance when a written communication discloses material weaknesses in internal control that elevate the risk of misstatements in the financial statements. However, this is not the best answer choice because this is only one of the many circumstances that the auditor may restrict the use of the communication. The correct answer choice includes the criteria for when a restricted use paragraph should be included.
138
In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should:
A.
Not report on the client's income statement.
B.
State that the consistency standard does not apply.
C.
Not refer to consistency in the auditor's report.
D.
State that the accounting principles have been applied consistently.
Choice "C" is correct. The auditor's standard report implies that the auditor is satisfied that the comparability of financial statements between periods has not been materially affected by changes in accounting principles and that such principles have been consistently applied between or among periods. Since the auditor has gathered sufficient evidence about consistency, no reference need be made in the report.
Choice "A" is incorrect. If the auditor is able to obtain sufficient evidence about consistency, the auditor may report on the entity's financial statements.
Choice "B" is incorrect. Consistency deals with the comparability of financial statements from year to year. Unless the auditor's report explicitly states otherwise, it implies that the financial statements are comparable between periods.
Choice "D" is incorrect. If the auditor is able to obtain sufficient evidence about consistency, no mention of consistency need be made. Consistency is implied in the auditor's report.
139
An auditor’s report for financial statements prepared using the special purpose framework of the cash basis of accounting contains the following title and sentences:
Basis of Accounting
We draw attention to Note X of the financial statements, which describes the basis of accounting. The financial statements are prepared on the cash basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.
This title and sentences:
A.
Should appear prior to the opinion paragraph and explain the reason for a modified opinion.
B.
Are an improper form of reporting.
C.
Represent an emphasis-of-matter paragraph.
D.
Represent an other-matter paragraph.
Choice “C” is correct. The title and sentences represent an emphasis-of-matter paragraph. An emphasis-of-matter paragraph is required when the financial statements are prepared in accordance with an applicable special purpose framework, such as the cash basis of accounting. Note that an emphasis of matter paragraph may use the heading of “Emphasis of Matter” or any other appropriate heading.
Choice “A” is incorrect. This is not a “basis for qualified opinion” paragraph. This is an emphasis-of-matter paragraph. In addition, the paragraph specifically states the opinion is not modified with respect to the matter.
Choice “B” is incorrect. This is the proper form of reporting. U.S. GAAS requires an emphasis-of-matter paragraph for financial statements prepared in accordance with an applicable special-purpose framework, such as the cash basis of accounting.
Choice “D” is incorrect. This is not an other-matter paragraph. Other-matter paragraphs refer to matters other than those disclosed in the financial statements. (This paragraph references the footnote disclosure “X.”)
140
When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an emphasis-of-matter paragraph added to the auditor's report. This paragraph should identify the nature of the change and:
A.
Refer to the financial statement note that discusses the change in detail.
B.
Describe the cumulative effect of the change on the audited financial statements.
C.
State the auditor's explicit concurrence with or opposition to the change.
D.
Explain why the change is justified under generally accepted accounting principles.
Choice "A" is correct. The paragraph should refer to the note in the financial statements that discusses the change in detail. Following is an example of an appropriate emphasis-of-matter paragraph: "As discussed in Note X to the financial statements, the company changed its method of accounting for income taxes in X2."
Choice "B" is incorrect. The paragraph should not identify the cumulative effect of the change on the audited financial statements.
Choice "C" is incorrect. The auditor should never explicitly state concurrence with a change. If the auditor opposes the change, a qualified or adverse opinion should be issued.
Choice "D" is incorrect. The auditor need not explain why a change from one generally accepted accounting principle to another is justified.
141
For which of the following events would an auditor issue a report that omits any reference to consistency?
A.
A change from an accounting principle that is not generally accepted to one that is generally accepted that has a material impact on the financial statements.
B.
A material change in the method of accounting for inventories.
C.
A change in the useful life used to calculate the provision for depreciation expense.
D.
Management's lack of reasonable justification for a change in accounting principle.
Choice "C" is correct. A change in accounting estimate (such as a change in the useful life of a depreciable asset) is accounted for prospectively and does not affect the comparability of financial statements between periods. Because the auditor's unmodified opinion implies that consistency exists, no modification to the report is necessary.
Choice "A" is incorrect. This change would be considered a correction of a material misstatement rather than a change in accounting principle because the original accounting principle was not in accordance with the applicable reporting framework. Therefore, an emphasis-of-matter (explanatory) paragraph that would reference consistency would be required.
Choice "B" is incorrect. A material change in accounting principle results in the addition of an emphasis-of-matter (explanatory) paragraph in the auditor's report because this type of change affects consistency (or comparability of the financial statements from year to year).
Choice "D" is incorrect. The lack of reasonable justification for a change in accounting principle may give rise to a report modification based on a material misstatement of the financial statements.
142
A client changes from FIFO to LIFO for accounting for inventory and appropriately discloses the change in the footnotes. This change does not have a material effect on the financial statements in the current year but the change is expected to have a material effect in later years. In the current-year auditor’s report, the auditor should:
A.
Issue a qualified or adverse opinion.
B.
Issue an unmodified opinion with an other-matter paragraph.
C.
Issue an unmodified opinion with an emphasis-of-matter paragraph.
D.
Issue an unmodified opinion.
Choice “D” is correct. If a change in accounting principle, such as a change in accounting for inventory, does not have a material effect on the financial statements in the current year but the change is expected to have a material effect in later years, the auditor is not required to recognize the change in the auditor’s report in the current year. Therefore, the auditor should issue an unmodified opinion and does not need to describe the change in an emphasis-of-matter paragraph.
Choice “A” is incorrect. If the accounting principle change is not appropriate and/or is not appropriately disclosed, then this may result in the issuance of a qualified or adverse opinion.
Choice “B” is incorrect. An other-matter paragraph is added to refer to matters other than those presented or disclosed in the financial statements. A change in accounting principle is disclosed in the financial statement notes. If the change in depreciation had a material effect on the financial statements in the current year, then the auditor would issue an unmodified opinion and describe the change in an emphasis-of-matter paragraph.
Choice “C” is incorrect. If a change in accounting principle, such as a change in accounting for inventory, had a material effect on the financial statements in the current year, then the auditor would issue an unmodified opinion and describe the change in an emphasis-of-matter paragraph.
143
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 the prior-period report.
C.
The date of the client's request.
D.
The date of reissue.
Choice "B" is correct. The date of the prior-period report should be used as long as the FS are not restated, the report is not revised, and no significant changes have occurred that would affect the prior FS.
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.
Choices "C" and "D" are incorrect. Using the date of the client's request or the date of reissue would extend the auditor's responsibility to that date.
144
An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(an):
A.
Consistency modification.
B.
"Except for" qualified opinion.
C.
Emphasis-of-matter paragraph.
D.
Unmodified opinion.
Choice "D" is correct. If an accounting change has no material effect on the financial statements in the current year, but a material future effect, the auditor must ensure that the change is disclosed in the footnotes whenever the financial statements of the change period are presented, but does not have to recognize the change in the current year's audit report.
Choice "A" is incorrect. A consistency modification is not necessary when the effect of a change is immaterial.
Choice "B" is incorrect. Accounting changes that are accounted for properly do not result in qualified opinions.
Choice "C" is incorrect. An emphasis-of-matter paragraph would be appropriate for a justified change in accounting principle that had a material, rather than immaterial, impact on the current year's financial statements.
145
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.
Be applied on a basis consistent with those followed in the prior year.
B.
Be appropriate in the circumstances for the particular entity.
C.
Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.
D.
Present information in the financial statements that is classified and summarized in a reasonable manner.
Choice "A" 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 "B" 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 "D" is incorrect. The principles selected must present information in the FS that is classified and summarized in a reasonable manner.
146
It is not appropriate to refer a reader of an auditor's report to a financial statement footnote for details concerning:
A.
Subsequent events.
B.
The results of confirmation of receivables.
C.
Sale of a discontinued operation.
D.
The pro forma effects of a business combination.
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 "A" 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 "C" 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.
Choice "D" 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.
147
Under U.S. auditing standards, in which of the following situations would an auditor ordinarily issue an unmodified audit opinion without an emphasis-of-matter paragraph?
A.
The auditor wishes to emphasize that the entity had significant related party transactions.
B.
The auditor decides to make reference to the audit of a component auditor as a basis, in part, for the auditor's opinion.
C.
The entity issues financial statements that present financial position and results of operations, but omits the statement of cash flows.
D.
The auditor wants to draw attention to an uncertainty related to the outcome of unusually important litigation.
Choice "B" is correct. An auditor would generally issue an unmodified audit opinion without an emphasis-of-matter paragraph when the auditor decides to make reference to the audit of a component auditor as a basis, in part, for the auditor's opinion. The auditor would modify his/her report, but would not add an emphasis-of-matter paragraph.
Choice "A" is incorrect. An auditor ordinarily would issue an unmodified opinion with an emphasis-of-matter paragraph if he or she wishes to emphasize that the entity had significant related party transactions.
Choice "C" is incorrect. If the entity issues financial statements that present financial position and results of operations but omit the statement of cash flows, the opinion will be qualified.
Choice "D" is incorrect. An auditor would ordinarily issue an unmodified opinion with an emphasis-of-matter paragraph if he or she wishes to emphasize that there is uncertainty related to the outcome of unusually important litigation.
148
Management of a nonissuer believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the auditor should express a (an):
A.
Unmodified opinion with an other-matter paragraph.
B.
Qualified opinion due to a scope limitation.
C.
Unmodified opinion.
D.
Qualified opinion due to a material misstatement of the financial statements.
Choice "C" is correct. If a contingent liability is probable, but not estimable, and it is disclosed in the footnotes, the auditor should issue an unmodified opinion.
Choice "A" is incorrect. If a contingent liability is probable, but not estimable, and it is disclosed in the footnotes, the auditor should issue an unmodified opinion. An other-matter paragraph would not be used in this situation, although the auditor could choose to add a emphasis-of-matter paragraph describing the uncertainty.
Choice "B" is incorrect. When a contingent liability is probable, but not estimable, it should be disclosed in the footnotes. A qualified opinion due to a scope limitation results when the auditor is unable to obtain sufficient appropriate audit evidence and the auditor concludes that the possible effects of any undetected misstatements could be material but not pervasive.
Choice "D" is incorrect. A qualified opinion due to a material misstatement of the financial statements would be issued if the client did not disclose the contingent liability in the footnotes to the financial statements and the resulting misstatement was material but not pervasive.
149
When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should:
A.
Explicitly state whether the change conforms with GAAP.
B.
Not refer to the change in the auditor's report.
C.
Refer to the change in an emphasis-of-matter paragraph.
D.
Refer to the note in the financial statements that discusses the change.
Choice "B" is correct. If the change in accounting principles has an immaterial effect on the comparability of financial statements, no revision to the audit report is necessary.
Choice "A" is incorrect. The auditor does not need to explicitly state whether the change conforms with GAAP because the effect of the change is immaterial. The auditor's standard report implies that the auditor is satisfied that the comparability of financial statements between periods has not been materially affected by changes in accounting principles, and that such principles have been consistently applied between or among periods because either (a) no change in accounting principles has occurred, or (b) there has been a change in accounting principles or in the method of their application, but the effect of the change on the comparability of the financial statements is not material.
Choice "C" is incorrect. A change in accounting principles, which has a material effect on the comparability of financial statements, would refer to the change in an emphasis-of-matter paragraph.
Choice "D" is incorrect. The auditor's report would not need to be modified when the effect of the change on comparability is immaterial, therefore, the auditor does not need to refer to the note in the financial statements that discusses the change.
150
If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be:
A.
Treated as a subsequent event.
B.
Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year.
C.
Disclosed in the notes to the financial statements of the current year.
D.
Treated as a consistency modification in the auditor's report for the current year.
Choice "C" 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.
Choice "A" is incorrect. A change in accounting principle is not a "subsequent event."
Choices "D" and "B" 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.
151
A CPA firm has decided to rely on the audit work performed by another audit firm. Which of the following procedures should the CPA firm perform when taking responsibility for the other firm's audit work?
A.
Review the other firm's audit workpapers and reperform a subset of audit testing to validate the firm's conclusions.
B.
Reference the reliance on the other firm's work in a footnote disclosure to the financial statements.
C.
Reference the reliance on the other firm's work in the first paragraph of the opinion in the audit report.
D.
Obtain and attach a copy of the other firm's representation letter and audit report to the opinion that the CPA firm issues.
Choice "A" is correct. When a CPA firm decides to take responsibility for another firm's audit work, the CPA firm should review the other firm's audit workpapers and reperform a subset of audit testing to validate the firm's conclusions.
Choice "B" is incorrect. The CPA firm would not reference the other's firm's work in a footnote disclosure to the financial statements when a CPA firm decides to take responsibility for another firm's audit work. Furthermore, management is responsible for the financial statements. The auditor may not make their own footnote disclosures in the client's financial statements.
Choice "C" is incorrect. The CPA firm would not reference the other's firm's work in the audit report because the CPA firm decided to take responsibility for another firm's audit work. No reference to the other auditor should be made in the auditor's report because to do so may cause a reader to misinterpret the degree of responsibility assumed.
Choice "D" is incorrect. The CPA firm would not attach a copy of the other firm's representation letter and audit report to the opinion that the CPA firm issues.
152
Management believes, and the auditor is satisfied, that a pending lawsuit is reasonably possible to result in a material loss of $100,000. The lawsuit has been adequately disclosed in the notes to the financial statements; however, no loss amount has been accrued related to the pending lawsuit. If management does not make an accrual in the financial statements, the auditor should express a(n):
A.
Unmodified opinion.
B.
Unmodified opinion with an emphasis-of-matter paragraph.
C.
Qualified or disclaimer.
D.
Qualified or adverse opinion.
Choice “A” is correct. Lawsuits that are “reasonably possible” require disclosure only. Management has adequately disclosed this situation and, therefore, the event is appropriately accounted for under GAAP. The auditor should express an unmodified opinion.
Choice “B” is incorrect. An auditor normally will not add an emphasis-of-matter paragraph for lawsuits that are appropriately accounted for under GAAP. However, if the question indicated that the lawsuit was “unusually important,” then an emphasis-of-matter paragraph “may” be added.
Choice “C” is incorrect. A qualified or disclaimer of opinion would be issued when the auditor is unable to obtain sufficient appropriate audit evidence.
Choice “D” is incorrect. A qualified or adverse opinion would be issued if the client did not disclose the liability in the financial statements.
153
An auditor most likely would express an unmodified opinion and would not add emphasis-of-matter or other-matter paragraphs to the report if the auditor:
A.
Wishes to emphasize that the entity had significant transactions with related parties.
B.
The auditor uncovers material misstatements that require a change in audit opinion.
C.
Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.
D.
Concurs with the entity's change in its method of computing depreciation.
Choice "C" is correct. An auditor most likely would express an unmodified opinion and would not add an additional paragraph to the report if the auditor believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.
Choice "A" is incorrect. Emphasis of a matter, such as the existence of significant transactions with related parties, may result in an additional paragraph added to an otherwise unmodified opinion.
Choice "B" is incorrect. An emphasis-of-matter or other-matter paragraph would be added to the auditor's report if subsequently discovered facts led to a change in audit opinion.
Choice "D" is incorrect. A change in accounting principle does result in an emphasis-of-matter paragraph appended to an otherwise unmodified opinion.
154
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report for:
An unjustified
accounting change
A material weakness
in internal control
A.
No
No
B.
Yes
Yes
C.
Yes
No
D.
No
Yes
Choice "A" is correct. An unjustified accounting change may cause the auditor to issue a qualified or adverse opinion. A material weakness must be reported to management and those charged with governance, but would not be disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion.
Choice "B" is incorrect. An unmodified opinion with an emphasis-of-matter paragraph would not be appropriate when an unjustified accounting change or a material weakness in internal control is identified. These circumstances may require the auditor to modify the opinion.
Choice "C" is incorrect. An unmodified opinion with an emphasis-of-matter paragraph would only be acceptable if the accounting change were justified, not unjustified.
Choice "D" is incorrect. When a material weakness is identified, the auditor must communicate the issue to management and those charged with governance and may need to modify the opinion. It would not be appropriate to discuss the matter in an emphasis-of-matter paragraph added to an unmodified opinion.
155
When there has been a change in accounting principle that materially affects the comparability of the nonissuer's comparative financial statements presented and the auditor concurs with the change, the auditor should:
Concur
explicitly with
the change
Issue an
"except for"
qualified
opinion
Refer to the
change in an
emphasis-of-matter
paragraph
A.
No
No
Yes
B.
Yes
No
Yes
C.
Yes
Yes
No
D.
No
Yes
No
Choice "A" is correct. No - No - Yes.
When a change in accounting principle materially affects the comparability of the comparative FS, the auditor should refer to the change in an emphasis-of-matter paragraph. An unmodified opinion would be appropriate and the auditor's concurrence with the change in GAAP would be implicit through the issuance of the unmodified opinion.
Choice "B" is incorrect. The auditor's concurrence with the change in GAAP would be implicit through the issuance of the unmodified opinion.
Choice "C" is incorrect. When the auditor concurs with the change in GAAP, an unmodified opinion with an emphasis-of-matter paragraph is appropriate rather than a qualified opinion.
Choice "D" is incorrect. An unmodified opinion should be issued, not an "except for" qualified opinion as the auditor concurs with the change in the application of GAAP.
156
A nonissuer changes from an accounting principle not in accordance with the applicable reporting framework to an accounting principle in accordance with the applicable reporting framework. How should the auditor characterize such a change?
A.
As a change in classification.
B.
As a correction of a misstatement.
C.
As a change in accounting principle.
D.
As a change in reporting entity.
Choice "B" is correct. Because the original accounting principle was not in accordance with the applicable reporting framework, the change is considered the correction of a previous misstatement. The auditor would need to evaluate the materiality of the misstatement and consider whether the previous opinion requires modification.
Choice "A" is incorrect. A change in accounting principle would not be considered a change in classification. Changing the classification of financial statement items would either be a misstatement if the original classification was wrong (like in this example) or a justified change in accounting principle if the original accounting was correct, but the entity is able to justify the change is appropriate.
Choice "C" is incorrect. This would not be a change in accounting principle because the original accounting principle was not in accordance with the applicable reporting framework and, therefore, is a misstatement rather than a justified change in accounting principle.
Choice "D" is incorrect. A change in accounting principle would not be considered a change in reporting entity.
157
A nonissuer entity adequately discloses in the footnotes that there is substantial doubt about the entity's ability to continue as a going concern. An auditor decides to issue an unmodified opinion on the financial statements and determines that management's plans do not alleviate the doubt. The auditor’s report should refer to going concern in:
A.
An other-matter paragraph.
B.
The Opinion section.
C.
A separate section of the report.
D.
The Basis for Opinion section.
Choice "C" is correct. When substantial doubt about an entity's ability to continue as a going concern remains, the auditor's report should be modified to include a separate section with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern."
Choice "A" is incorrect. An other-matter paragraph would not be appropriate.
Choice "B" is incorrect. The auditor does not refer to the going concern in the Opinion section.
Choice "D" is incorrect. The auditor does not refer to the going concern in the Basis for Opinion section as the opinion is not being modified.
158
Jules, CPA, is reporting on comparative financial statements, but Shah, CPA conducted the previous year's audit. Which of the following is not true in this situation?
A.
Dual dating may be used to indicate the appropriate dates for each audit.
B.
If Shah's report was qualified due to a scope limitation, Jules may still issue an unmodified opinion on the current year's financial statements.
C.
If Shah's report will be presented, management will need to provide a representation letter to Shah.
D.
If Shah's report is not presented, an other-matter paragraph should be included to describe this situation.
Choice "A" is correct. Dual dating is used when there is a subsequent event occurring after the original date of the auditor's report, and the auditor wishes to extend responsibility only for the one event. It is not used for comparative financial statements (the date appropriate for the most recent audit is used in this case).
Choice "B" is incorrect. Different opinions may be issued for the different years presented.
Choice "C" is incorrect. Shah will be required to obtain a letter of representation from management in this situation.
Choice "D" is incorrect. When the successor auditor does not present the predecessor auditor's report, the successor auditor should express an opinion on the current period financial statements only and indicate in an other-matter paragraph that the financial statements of the prior period were audited by a predecessor auditor, the type of opinion expressed by that predecessor auditor, the nature of any emphasis-of-matter or other-matter paragraphs included, and the date of the predecessor auditor's report.
159
In which of the following circumstances may an auditor include an other-matter paragraph in an audit report of a nonissuer?
A.
A material weakness in internal control exists.
B.
The entity engaged in significant transactions with a related party during the year under audit and subsequent to year-end.
C.
The audited financial statements include a material misstatement.
D.
The auditor has been engaged to report on an entity's financial statements prepared under U.S. GAAP and under IFRS.
Choice "D" is correct. An other-matter paragraph refers to matters other than those presented or disclosed in the financial statements that are relevant to the users' understanding. If the auditor has been engaged to report on more than one set of financial statements that have been prepared in accordance with different report frameworks, the other-matter paragraph may be necessary.
Choice "A" is incorrect. If a material weakness in internal control exists, the auditor would not include this in an other-matter paragraph. This would be reported to those charged with governance.
Choice "B" is incorrect. If the entity engaged in significant transactions with a related party, the auditor may be required to use an emphasis-of-matter paragraph. There is no other-matter paragraph in this circumstance.
Choice "C" is incorrect. If a material misstatement is included in the audited financial statements, the auditor's opinion would be either qualified or adverse depending on the pervasiveness of the misstatement. There is no other-matter paragraph in this circumstance.
160
Subsequently discovered facts that lead to a change in an audit opinion may be presented in:
Emphasis-of-Matter
Paragraph
Other-Matter
Paragraph
A.
Yes
No
B.
Yes
Yes
C.
No
No
D.
No
Yes
Choice "B" is correct. Subsequently discovered facts that lead to a change in an audit opinion may be presented in an emphasis-of-matter paragraph or other-matter paragraph.
Choices "A", "D", and "C" are incorrect, per the above explanation.
161
An auditor most likely would add an other-matter paragraph when:
A.
A change in a reporting entity results in financial statements which, in effect, are those of a different reporting entity.
B.
Current period financial statements are audited and presented in comparative form with reviewed financial statements from the prior period.
C.
The auditor concludes that substantial doubt remains about the entity’s ability to continue as a going concern for a reasonable amount of time.
D.
The entity changes the depreciable life of an asset from eight years to five years.
Choice “B” is correct. An auditor would add an other-matter paragraph when current period financial statements are audited and presented in comparative form with compiled or reviewed financial statements from the prior period or in comparative form with prior period financial statements that were not audited, reviewed, or compiled.
Choice “A” is incorrect. An auditor would add an emphasis-of-matter paragraph when there is an item that affects the consistency of the financial statements, such as a change in a reporting entity that results in financial statements which, in effect, are those of a different reporting entity.
Choice “C” is incorrect. An auditor would include a separate section with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" when the auditor concludes that there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable amount of time.
Choice “D” is incorrect. A change in estimate does not require an other-matter or emphasis-of-matter paragraph.
162
Jewel, CPA, audited Infinite Co.'s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel's auditor's report, which expressed a qualified opinion. In drafting the current year's auditor's report, Crain, CPA, the successor auditor, should:
I.
Not name Jewel as the predecessor auditor.
II.
Indicate the type of report issued by Jewel.
III.
Indicate the substantive reasons for Jewel's qualification.
A.
I only.
B.
I and II only.
C.
II and III only.
D.
I, II, and III.
Choice "D" is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an Other-Matter (Explanatory) paragraph of the report 1) that the financial statements of the prior period were audited by another auditor, 2) the date of the previous report, 3) the type of report issued by the predecessor auditor, and if the report was modified, the substantive reasons therefor and 4) the nature of any emphasis-of-matter, other-matter, or explanatory paragraph included in the previous report. The successor auditor may name the predecessor auditor only if the predecessor auditor's practice was acquired by or merged with that of the successor auditor.
Choices "A", "B", and "C" are incorrect, based on the above explanation.
163
Helpful Co., a not-for-profit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a(n):
A.
Adverse opinion.
B.
Disclaimer of opinion.
C.
Qualified opinion.
D.
Single unmodified opinion on the special purpose financial statements.
Choice "D" is correct. A report using the special purpose framework required by the regulatory agency would be issued and include an opinion paragraph that contains an opinion on the special purpose financial statements and a reference to the special purpose framework used to prepare the financial statements. The report would also contain an other-matter paragraph restricting the use of the auditor's report.
Choice "A" is incorrect. An adverse opinion would not be appropriate as Green concluded that the financial statements were fairly presented on the prescribed basis.
Choice "B" is incorrect. A disclaimer of opinion would not be appropriate as Green concluded that the financial statements were fairly presented on the prescribed basis.
Choice "C" is incorrect. A qualified opinion would not be appropriate as Green concluded that the financial statements were fairly presented on the prescribed basis.
164
When a PCAOB auditing standard indicates that an auditor "could" perform a specific procedure, how should the auditor decide whether and how to perform the procedure?
A.
By soliciting input from the issuer's audit committee.
B.
By evaluating whether the audit is likely to be subject to inspection by the PCAOB.
C.
By exercising professional judgment in the circumstances.
D.
By comparing the PCAOB standard with related AICPA auditing standards.
Choice "C" is correct. The words "may," "might," and "could" describe actions and procedures that auditors have a responsibility to consider. Matters described in this fashion require the auditor's attention and understanding. How and whether the auditor implements these matters in the audit will depend on the exercise of professional judgment in the circumstances consistent with the objectives of the standard.
Choice "A" is incorrect. The auditor should not solicit input from the issuer's audit committee, as audit procedure decisions need to be made by the auditor.
Choice "B" is incorrect. Whether the audit is likely to be subject to inspection by the PCAOB should not be a factor on the auditor's decision to perform a procedure.
Choice "D" is incorrect. "Could" does not mean that the auditor should compare the PCAOB standard with the related AICPA standards.
165
When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should:
A.
Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.
B.
State that the basis of presentation is a basis of accounting other than GAAP.
C.
Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards.
D.
Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used.
Choice "B" is correct. When reporting on financial statements prepared in conformity with a basis of accounting other than GAAP, the auditor should include an emphasis-of-matter paragraph that states that the special purpose framework is a basis of accounting other than GAAP.
Choice "A" is incorrect. The auditor would include a statement indicating that the basis differs from GAAP, but need not quantify the differences among various bases of accounting.
Choice "C" is incorrect. The statements would be examined in accordance with GAAS; however, no opinion (or disclaimer) is given regarding this fact.
Choice "D" is incorrect. The auditor should express an opinion on the financial statements' conformity with the comprehensive basis other than GAAP.
166
Which of the following is not a special purpose framework?
A.
Basis of accounting used by an entity to file its income tax return.
B.
Cash receipts and disbursements basis of accounting.
C.
Basis of accounting promulgated by the International Accounting Standards Board.
D.
Basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency.
Choice "C" is correct. IFRS (the standards promulgated by the International Accounting Standards Board) and GAAP (the standards promulgated by the Financial Accounting Standards Board) are general purpose frameworks. Special purpose frameworks include:
Cash basis and modified cash basis
Tax basis
Regulatory basis
Contractual basis
Other basis
Choice "A" is incorrect. The tax basis of accounting is considered a special purpose framework.
Choice "B" is incorrect. The cash basis of accounting is considered a special purpose framework.
Choice "D" is incorrect. A regulatory basis of accounting is considered a special purpose framework.
167
Before reissuing the prior year's auditor's report on the financial statements of a former client, the predecessor auditor should obtain letters of representation from the:
A.
Former client's management and the board of directors.
B.
Successor auditor and the former client's management.
C.
Former client's board of directors and the successor auditor.
D.
Former client's attorney and management.
Choice "B" is correct. Before reissuing the prior year's auditor's report on the financial statements of a former client, the auditor should 1) read the financial statements of the current period, 2) compare the prior-period information that the auditor reported on with the financial statements to be presented for comparative purposes, 3) obtain a letter of representation from the successor auditor, and 4) obtain a letter of representation from the former client's management. The representation letter from the successor auditor will state whether the successor's audit revealed any issues of a material nature that might affect the previous financial statements. The representation letter from the former client's management will indicate whether its previous representations are still accurate and whether there have been any subsequent events affecting the previous financial statements.
Choice "A" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter must also be obtained from the successor auditor to obtain information about whether any issues were revealed during the audit that may have an impact on the previous financial statements.
Choice "C" is incorrect. The predecessor auditor would not obtain a representation letter from the former client's board of directors, but rather management and the successor auditor.
Choice "D" is incorrect. The predecessor auditor would not obtain a representation letter from the former client's attorney.
168
Which of the following titles would be considered suitable for financial statements that are prepared on a cash basis?
A.
Statement of operations.
B.
Statement of cash flows.
C.
Statement of revenues collected and expenses paid.
D.
Income statement.
Choice "C" is correct. Non-GAAP statements should be suitably titled. For example, instead of an income statement, an appropriate cash basis financial statement title might be "statement of revenues collected and expenses paid."
Choice "A" is incorrect. The title "Statement of Operations" is generally understood to be associated with GAAP financial statements. A non-GAAP financial statement title must be used.
Choice "B" is incorrect. The title "Statement of Cash flows" is generally understood to be associated with GAAP financial statements. A non-GAAP financial statement title must be used.
Choice "D" is incorrect. The title "Income Statement" is generally understood to be associated with GAAP financial statements. A non-GAAP financial statement title must be used.
169
Which of the following accurately depicts the auditor's responsibility with respect to Statements on Auditing Standards?
A.
The auditor is required to follow the guidance provided by the Standards, without exception.
B.
The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures.
C.
The auditor is generally required to follow the guidance provided by the Standards, unless following such guidance would result in an audit that is not cost-effective.
D.
The auditor is generally required to follow the guidance provided by Standards with which he or she is familiar, but will not be held responsible for departing from provisions of which he or she was unaware.
Choice "B" is correct. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures.
Choice "A" is incorrect. On rare occasions, the auditor may depart from the guidance provided by the SASs, but he or she must justify such departures.
Choice "C" is incorrect. The cost associated with following the guidance provided by a SAS is not an acceptable reason for departing from its guidance.
Choice "D" is incorrect. Lack of familiarity with a SAS is not a valid reason for departing from its guidance. The auditor is expected to have sufficient knowledge of the SASs to identify those that are applicable to a given audit engagement.
170
An auditor of a nonissuer must conduct the audit in accordance with:
I.
ASB standards.
II.
PCAOB standards.
A.
Either I or II, but not both.
B.
II.
C.
Both I and II.
D.
I.
Choice "D" is correct. An auditor of a nonissuer must conduct the audit in accordance with ASB standards.
Choice "A" is incorrect. While an auditor is only required to conduct the audit in accordance with ASB standards, the auditor may choose to follow PCAOB standards as well.
Choice "B" is incorrect. An auditor of a nonissuer is not required to conduct the audit in accordance with PCAOB standards.
Choice "C" is incorrect. An auditor of a nonissuer is not required to conduct the audit in accordance with PCAOB standards.
171
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.
Disclaim an opinion.
B.
Qualify the opinion.
C.
Divide responsibility.
D.
Are an improper form of reporting.
Choice "C" is correct. The report indicates a division of responsibility.
Choice "A" is incorrect. Dividing responsibility does not affect the unmodified opinion, nor does it require a disclaimer of opinion.
Choice "B" is incorrect. Dividing responsibility does not affect the unmodified opinion, nor does it require a qualified opinion.
Choice "D" is incorrect. Words describing the percentages of revenues and assets audited by other auditors are proper in dividing responsibility.
172
Which of the following would be an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting (OCBOA)?
A.
Income statement.
B.
Statement of operations.
C.
Statement of income-regulatory basis.
D.
Statement of activities.
Choice "C" is correct. Other comprehensive basis of accounting financial statements include financial statements prepared in accordance with a regulatory basis of accounting. An income statement prepared in accordance with a regulatory basis of accounting could be entitled "Statement of income-regulatory basis."
Choice "A" is incorrect. The income statement title is used under U.S. GAAP and is not an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting.
Choice "B" is incorrect. This is another term for an income statement under U.S. GAAP and is not an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting.
Choice "D" is incorrect. The statement of activities is the title used for a not-for-profit organization's statement of revenues and expenses and is not an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting.
173
In the auditor's report under U.S. GAAS, the group engagement partner decides not to make reference to another CPA who audited a client's subsidiary. The group engagement partner could justify this decision if, among other requirements, the group engagement partner:
A.
Is unable to review the audit programs and audit documentation of the component auditor.
B.
Issues an unmodified opinion on the consolidated financial statements.
C.
Is satisfied as to the independence and professional reputation of the component auditor.
D.
Learns that the component auditor issued an unmodified opinion on the subsidiary's financial statements.
Choice "C" is correct. Under U.S. GAAS, if, among other requirements, the group engagement partner is satisfied as to the independence and the professional reputation of the component auditor, the group engagement partner may express an opinion on the financial statements taken as a whole without making reference to the audit of the component auditor.
Choice "A" is incorrect. If the group engagement partner is unable to review the audit programs and audit documentation of the component auditor, he or she is likely to divide responsibility by making reference to the component auditor in the auditor's report.
Choice "B" is incorrect. Whether or not an unmodified opinion is issued is not the determining factor as to whether the group engagement partner must make reference to the component auditor.
Choice "D" is incorrect. Whether or not an unmodified opinion is issued on the subsidiary's financial statements is not the determining factor as to whether the group engagement partner must make reference to a component auditor.
174
Which of the following terms used within standards indicates a presumptively mandatory requirement?
A.
Should
B.
Must
C.
Might
D.
May
Choice "A" is correct. The term "should" indicates a presumptively mandatory requirement, which must be followed in all cases in which the requirement is relevant, except in rare circumstances when departure from the requirement is permitted if there is appropriate justification, performance of sufficient alternative procedures, and thorough documentation.
Choice "B" is incorrect. The term "must" indicates an unconditional requirement, which must be followed in all cases in which the requirement is relevant.
Choice "C" is incorrect. The term "might" indicates explanatory material that does not impose a professional requirement for performance.
Choice "D" is incorrect. The term "may" indicates explanatory material that does not impose a professional requirement for performance.
175
Before a predecessor auditor reissues the prior year’s audit report on the financial statements of a former client for inclusion with the successor auditor’s report on comparative financial statements, the predecessor does all of the following except:
A.
Compare the current period comparative financial statements with those of the prior year.
B.
Obtain a successor auditor representation letter.
C.
Review the audit documentation of the successor auditor.
D.
Obtain the current comparative financial statements.
Choice "C" is correct. Review of the successor's audit documentation is not required in this situation.
Choice "B" is incorrect. Before reissuing the audit report from the prior year, the predecessor auditor should obtain a representation letter from the successor auditor.
Choices "D" and "A" are incorrect. The predecessor should obtain the current comparative financial statements and compare the current period to the prior period.
176
An auditor's report on financial statements prepared on the cash receipts and disbursements basis of accounting should include all of the following, except:
A.
An opinion as to whether the financial statements are presented fairly in conformity with the cash receipts and disbursements basis of accounting.
B.
A statement that the auditor is responsible for determining that the cash receipts and disbursements basis of accounting is an acceptable basis for the preparation of the financial statements.
C.
A reference to the note to the financial statements that describes the cash receipts and disbursements basis of accounting.
D.
A statement that the audit was conducted in accordance with auditing standards generally accepted in the United States of America.
Choice "B" is correct. The auditor's report on financial statements prepared in conformity with a basis of accounting other than GAAP would include a statement that management, not the auditor, is responsible for determining that the cash receipts and disbursements basis of accounting is appropriate in the circumstances.
Choice "A" is incorrect. The auditor's report should include a section that expresses the auditor's opinion on whether the financial statements are presented fairly, in all material respects, in conformity with the basis described.
Choice "C" is incorrect. The auditor's report should include a section that states the basis and refers to the note to the financial statements that describes the basis.
Choice "D" is incorrect. The auditor's report should state that the audit was conducted in accordance with U.S. GAAS.
177
Which of the following provides the most authoritative guidance for the auditor of a nonissuer?
A.
General guidance provided by a Statement on Auditing Standards.
B.
Specific guidance provided by an interpretation of a Statement on Auditing Standards.
C.
An AICPA audit and accounting guide that provides specific guidance with respect to the accounting practices in the client's industry.
D.
A Journal of Accountancy article discussing implementation of a new standard.
Choice "A" is correct. General guidance provided by a Statement on Auditing Standards is the most authoritative of level of auditing guidance for audits of nonissuers. Auditors are required to comply with SASs, and should be prepared to justify any departures therefrom.
Choices "C" and "B" are incorrect. AICPA audit and accounting guides and SAS interpretations are interpretive publications that provide guidance regarding how SASs should be applied in specific situations. They are not as authoritative as SASs.
Choice "D" is incorrect. Journal of Accountancy articles have no authoritative status, but may be helpful to the auditor.
178
An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the:
A.
Emphasis-of-matter paragraph of the auditor's report.
B.
Management representation letter.
C.
Notes to the financial statements.
D.
Auditor's engagement letter.
Choice "C" is correct. A description of how the income tax basis differs from GAAP should be included in the notes to the financial statements.
Choice "A" is incorrect. The emphasis-of-matter paragraph should reference the note that explains how the basis differs from GAAP, but does not include a description of how the other comprehensive basis of accounting differs from GAAP.
Choice "B" is incorrect. The management representation letter would likely include management's acknowledgement of their responsibility for the fair presentation of the financial statements in accordance with the applicable financial reporting framework. However, it is unlikely that the management representation letter would include a description of how that basis differs from GAAP.
Choice "D" is incorrect. The auditor's engagement letter may discuss that the financial statements are prepared on the income tax basis. However, it is unlikely that the engagement letter would include a description of how that basis differs from GAAP.
179
When auditing a nonissuer, what is an auditor's responsibility for supplementary information, such as disclosure of pension information, which is outside the basic financial statements but required by GAAP?
A.
The auditor should apply certain limited procedures to the supplementary information.
B.
The auditor should perform tests of transactions to the supplementary information to verify that it is reasonably comparable to the prior year's information.
C.
The auditor should engage a specialist, such as an actuary, to verify that management's assertions are reasonable.
D.
The auditor's only responsibility for supplementary information is to determine that such information has not been omitted.
180
When auditing a nonissuer, what is an auditor's responsibility for supplementary information, such as disclosure of pension information, which is outside the basic financial statements but required by GAAP?
A.
The auditor should apply certain limited procedures to the supplementary information.
B.
The auditor should perform tests of transactions to the supplementary information to verify that it is reasonably comparable to the prior year's information.
C.
The auditor should engage a specialist, such as an actuary, to verify that management's assertions are reasonable.
D.
The auditor's only responsibility for supplementary information is to determine that such information has not been omitted.
Choice "A" is correct. The auditor should apply certain limited procedures to the supplementary information and add a separate section with the heading "Required Supplemental Information" to the financial statement audit report.
Choice "B" is incorrect. The auditor is not required to apply audit procedures to the supplementary information, or to verify whether it is comparable to the prior year's information.
Choice "C" is incorrect. The auditor is not required to engage a specialist, nor is the auditor required to verify that management's assertions are reasonable.
Choice "D" is incorrect. The auditor also needs to determine if the required information departs materially from GAAP guidelines. In addition, if the auditor does not disclaim an opinion, then he/she needs to determine whether the information is fairly stated in all material respects in relation to the financial statements taken as a whole.
181
On February 17, Year 2, a company had a fire that destroyed a plant. The building and equipment had a net carrying amount of $550,000 as of December 31, Year 1. The company anticipates that insurance proceeds of $300,000 will be received. The audit of the financial statements dated December 31, Year 1, was completed February 25, Year 2. How should the fire be reported in the financial statements for the year ended December 31, Year 1?
A.
The December 31, Year 1, financial statements should be adjusted without disclosure.
B.
The loss of $250,000 should be recorded as of December 31, Year 1, and disclosed in the notes to the financial statements.
C.
The December 31, Year 1, financial statements should disclose the effect of the fire with no financial statement adjustment.
D.
The value of the building and equipment should be adjusted to $250,000 as of December 31, Year 1, and the adjustment disclosed.
Choice "C" is correct. This is a Type 2 (nonrecognized) subsequent event because the event (fire that destroyed a plant) did not exist at year-end but arose after year-end. Nonrecognized subsequent events should be disclosed in the footnotes and should not include any adjustments to the financial statement amounts.
Choice "A" is incorrect. This is a material event that users of the financial statements would want to know about. This event should be disclosed in the footnotes without any adjustments to the value of the plant.
Choice "B" is incorrect. The plant was undamaged as of December 31, Year 1, and, therefore, should be recorded at the $550,000 on the balance sheet.
Choice "D" is incorrect. The value of the plant should not be adjusted for the Year 1 financial statements.
182
What is an auditor's responsibility for supplementary information which is outside the basic financial statements, but required by the FASB?
A.
The auditor should apply tests of details of transactions and balances to the required supplementary information, and report any material misstatements in such information.
B.
The auditor's only responsibility for required supplementary information is to determine that such information has not been omitted.
C.
The auditor of a nonissuer should apply certain limited procedures to the required supplementary information, and add a separate section to the financial statement audit report.
D.
The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements.
Choice "C" is correct. For additional supplementary information required by the FASB, the auditor of a nonissuer should apply certain limited procedures to the information and add a separate section with the heading "Required Supplementary Information" to the financial statement audit report.
Choice "A" is incorrect. Certain limited procedures should be applied to required supplementary information, but this information need not be audited.
Choice "B" is incorrect. For additional supplementary information required by the FASB, the auditor should apply certain limited procedures to the information and add a separate section with the heading "Required Supplementary Information" to the financial statement audit report.
Choice "D" is incorrect. Required supplementary information is considered an essential part of financial reporting, and therefore certain limited procedures should be applied by the auditor.
183
After the balance sheet date, an auditor's client suffers a material loss from a decline in value of marketable securities. Which of the following actions should the auditor advise the client to take?
A.
Adjust the financial statements to include the material loss.
B.
Restate the financial statements as if the material loss occurred at the balance sheet date, including disclosure in the notes.
C.
Disclose the material loss in the financial statements to assure that the financial statements are not misleading.
D.
Expand audit procedures to test current prices of marketable securities the client holds.
Choice "C" is correct. This is a nonrecognized subsequent event because it provides information about conditions that occurred after the balance sheet date and it did not exist at the balance sheet date. The auditor should advise the client to disclose the material loss in the financial statements to assure that the financial statements are not misleading.
Choice "A" is incorrect. This is a nonrecognized subsequent event. The balance sheet should reflect the fair value of the security as of the balance sheet date and should not be adjusted for a loss in market value that occurred after the balance sheet date.
Choice "B" is incorrect. The auditor does not need to advise the client to restate the financial statements for this event. The balance sheet should reflect the fair value of the security as of the balance sheet date and should not be adjusted for a loss in market value that occurred after the balance sheet date.
Choice "D" is incorrect. The auditor does not need to expand audit procedures to test current prices of marketable securities that the client holds.
184
When audited financial statements are presented in a client's document containing other information, the auditor should:
A.
Read the other information to determine that it is consistent with the audited financial statements.
B.
Perform the appropriate substantive auditing procedures to corroborate the other information.
C.
Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
D.
Add an other-matter paragraph to the auditor' s report without changing the opinion on the financial statements.
Choice "A" is correct. The auditor should read the "other information" in a client's document containing audited financial statements to determine that it is consistent with the audited financial statements.
Choice "B" is incorrect. The auditor has no obligation to perform any procedure to corroborate "other information" contained in a document such as an annual report.
Choice "C" is incorrect. Performing analytical procedures or any other procedure is not necessary.
Choice "D" is incorrect. A separate section with the heading "Other Information" clarifying the auditor's responsibility with respect to the other information would be added to the report rather than an other-matter paragraph.
185
In its annual report to shareholders, Lake Co. included a separate management report that contained additional information. Lake's auditor is expressing an unmodified opinion on Lake's financial statements but has not been engaged to examine and report on this additional information. What is the auditor's responsibility concerning such a report?
A.
The auditor has no obligation to read the management report or to verify the accuracy or appropriateness of its contents.
B.
The auditor should request Lake to place the management report in its annual report where it will not be misinterpreted to be the auditor's assertion.
C.
The auditor should read the management report and consider whether it contains a material misstatement of fact.
D.
The auditor should add an other-matter paragraph to the report on the financial statements disclaiming an opinion on the additional information.
Choice "C" is correct. The auditor should read other information accompanying the basic financial statements and consider whether it contains a material inconsistency or material misstatement of fact.
Choice "A" is incorrect. The auditor should read other information accompanying the basic financial statements and consider whether it contains a material inconsistency or material misstatement of fact.
Choice "B" is incorrect. Even if the management report were included in the annual report, the auditor still has the same responsibility regarding both the management report and the annual report: the auditor should read the information and consider whether it contains a material inconsistency or material misstatement of fact.
Choice "D" is incorrect. A separate section with the heading "Other Information" clarifying the auditor's responsibility with respect to the other information would be added to the report rather than an other-matter paragraph.
186
In order to provide an opinion on supplementary information of a nonissuer, the auditor should perform procedures using a materiality level that is:
A.
The same as the materiality level used in the audit of the financial statements.
B.
Based on the balances reported in the supplemental information.
C.
One-half of the materiality level used in the audit of the financial statements.
D.
Double the materiality level used in the audit of the financial statements.
Choice "A" is correct. If providing an opinion on supplementary information, the auditor should perform audit procedures using the same materiality level used in the financial statement audit.
Choice "B" is incorrect. The auditor should perform procedures using a materiality level that is the same as the one used in the financial statement audit, not a new materiality level based on balances in the supplementary information.
Choice "C" is incorrect. The auditor should perform procedures using a materiality level that is the same as the one used in the financial statement audit rather than half the level used in the financial statement audit.
Choice "D" is incorrect. The auditor should perform procedures using a materiality level that is the same used in the financial statement audit, not double the level.
187
Which of the following should the auditor of a nonissuer do when reporting on supplementary information that is required by a designated accounting standard setter, presented with the basic financial statements?
A.
Include a separate report section that references the required supplementary information.
B.
Make no reference to the required supplementary information in the report.
C.
Include a reference to the required supplementary information in the opinion paragraph.
D.
Include an emphasis-of-matter paragraph that references the required supplementary information.
Choice "A" is correct. The audit report for nonissuers should include a separate section with the heading "Required Supplementary Information" when reporting on required supplementary information that is presented with the basic financial statements.
Choice "B" is incorrect. Auditors of nonissuers should reference required supplementary information in the audit report in a separate section with the heading "Required Supplementary Information."
Choice "C" is incorrect. The opinion paragraph is not modified to include reference to required supplementary information. The reference to required supplementary information is included in a separate section with the heading "Required Supplementary Information."
Choice "D" is incorrect. Reference to the supplementary information should be made in a separate section of the auditor's report rather than in an emphasis-of-matter paragraph.
188
For a nonissuer, which of the following procedures would an auditor most appropriately perform to provide an opinion on whether supplementary information presented with financial statements is fairly stated in relation to the financial statements?
A.
Evaluate the appropriateness, but not the completeness, of the supplementary information.
B.
Obtain verbal representations from management about any significant assumptions or interpretations underlying the measurement of the supplementary information.
C.
Obtain verbal representations from management stating that it acknowledges its responsibility for the presentation of the supplementary information.
Choice "D" is correct. The auditor should inquire of management regarding the purpose of the supplementary information and the criteria used to prepare the information. This is done in addition to the procedures performed during the audit of the financial statements.
Choice "A" is incorrect. The auditor should evaluate both the appropriateness and the completeness of the supplementary information.
Choice "B" is incorrect. The auditor should inquire regarding any significant assumptions underlying the preparation or presentation of the supplementary information.
Choice "C" is incorrect. The auditor should obtain written representations from management regarding the supplementary information.
189
Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit?
A.
A reasonable estimate was determined for a liability incurred after the balance sheet date.
B.
Before the issuance of the audit report, the entity estimated the amount of a claim that had a probable adverse outcome related to a product sold during the year under audit.
C.
Legal counsel communicated that an unfavorable judgment from current litigation was reasonably possible.
D.
The entity recorded the amount of an asset impaired as of the balance sheet date.
Choice “B” is correct. Since the underlying event (product sale) relates to the year under audit and it has a probable adverse outcome, the entity should accrue a loss contingency for the period under audit. This is considered a recognized subsequent event.
Choice “A” is incorrect. A liability that was incurred after the balance sheet date would not require an accrual for the period under audit (nonrecognized subsequent event).
Choice “C” is incorrect. GAAP requires an accrual for a loss contingency for an unfavorable judgment that can be estimated and is probable, not reasonably possible.
Choice “D” is incorrect. An impairment loss, not a contingency loss, would be recorded for an asset that is impaired as of the balance sheet date. (A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss that will be ultimately determined when a future event occurs or fails to occur.)
190
In the audit of a nonissuer, what is an auditor's responsibility for supplementary information, such as the disclosure of pension information, which is outside the basic financial statements but required by the GASB?
A.
The auditor has no responsibility for such supplementary information as long as it is outside the basic financial statements.
B.
The auditor's only responsibility for the supplementary information is to determine that such information has not been omitted.
C.
The auditor should apply substantive tests of transactions to the supplementary information and verify its conformity with the GASB requirement.
D.
The auditor should apply certain limited procedures to the supplementary information and add a separate section to the auditor's report.
Choice "D" is correct. The auditor should perform limited procedures on required supplementary information accompanying the financial statements. In addition, the auditor's report on the financial statements should include a separate section with the heading, "Supplementary Information."
Choice "A" is incorrect. The auditor is responsible for performing certain limited procedures on supplementary information and for adding a separate "Supplementary Information" section to the audit report.
Choice "B" is incorrect. The auditor is required to perform certain limited procedures with respect to supplementary information.
Choice "C" is incorrect. The auditor is not required to audit supplementary information.
191
An auditor reads the letter of transmittal accompanying a county's comprehensive annual financial report and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take?
A.
Consider withdrawing from the engagement.
B.
Request that the client revise the letter of transmittal.
C.
Include an other-matter paragraph in the auditor's report.
D.
Request a client representation letter acknowledging the inconsistency.
Choice "B" is correct. When information accompanies audited financial statements in a client-prepared document, the auditor is required to read the information. If such information is materially inconsistent with the financial statements and the financial statements do not require revision, the auditor should request that the information (in this case the letter of transmittal) be revised.
Choice "A" is incorrect. The auditor would only consider withdrawing from the engagement if the client were unwilling to revise the transmittal letter appropriately.
Choice "C" is incorrect. A separate section with the heading "Other Information" clarifying the auditor's responsibility with respect to the other information would be added to the report rather than an other-matter paragraph.
Choice "D" is incorrect. The auditor would not request a client representation letter acknowledging the inconsistency, as correction (and not simply acknowledgment) of the error is desired.
192
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A.
Inquire about the current status of transactions that were recorded on the basis of preliminary data.
B.
Verify inventory pledged under loan agreements by confirming the details with financial institutions.
C.
Compare the financial statements being reported on with those of the prior year.
D.
Trace information from shipping documents to sales invoices and sales journal transactions.
Choice "A" is correct. The auditor is likely to inquire about the current status of transactions that were recorded on the basis of preliminary data when obtaining evidence about the occurrence of subsequent events. The additional information may affect the amount and/or disclosures in the financial statements that are under audit.
Choice "B" is incorrect. An auditor is likely to verify inventory pledged under loan agreements by confirming the details with financial institutions when the auditor is obtaining evidence about the rights and obligations of inventory. The auditor is unlikely to perform this procedure to obtain evidence about the occurrence of subsequent events.
Choice "C" is incorrect. An auditor is likely to compare the financial statements being reported on with those of the prior year in the planning stage of the audit when the auditor is performing analytical procedures. The auditor is unlikely to perform this procedure to obtain evidence about the occurrence of subsequent events.
Choice "D" is incorrect. An auditor most likely will trace information from shipping documents to sales invoices and sales journal transactions to provide evidence of completeness of sales. The auditor is unlikely to perform this procedure to obtain evidence about the occurrence of subsequent events.
193
An audit report is dated February 1, Year 2. Which of the following events, occurring on February 12, Year 2, is most likely to cause the auditor to request that the financial statements be revised?
A.
The auditor becomes aware that the staff accountant did not properly complete a crucial step in the audit program.
B.
The auditor becomes aware that a material purchase included in the Year 1 financial statements was not paid for until Year 2.
C.
The auditor becomes aware that a key member of management is resigning.
D.
The auditor becomes aware that a material receivable included in the Year 1 financial statements related to a sale to that customer that occurred in Year 2.
Choice "D" is correct. If an auditor becomes aware of material information existing at the date of the audit report, the auditor should advise the client to issue revised financial statements. In this case, since the sale did not occur until Year 2, there should have been no receivable recorded in Year 1.
Choice "A" is incorrect. The fact that an audit procedure was omitted does not necessarily mean that the financial statements are misstated. Perhaps another procedure compensated for the omission, or perhaps if the auditor applies this or an alternative procedure, he or she will still find that the financial statements are fairly stated.
Choice "B" is incorrect. Under the accrual basis of accounting, a purchase made in Year 1 should be included in the Year 1 financial statements regardless of when payment is made.
Choice "C" is incorrect. Personnel changes do not typically require revision of the financial statements.
194
When financial statements include supplementary information which is outside the basic financial statements, but required by GAAP, the auditor may choose any of the following options, except:
A.
Disclaim an opinion on the information.
B.
Report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate procedures have been applied.
C.
Express an opinion on the information, if he or she has been engaged to examine such information.
D.
Express negative assurance on the information, if review procedures have been appropriately performed.
Choice "D" is correct. The auditor would not perform a review or express negative assurance on supplementary information required by GAAP.
Choice "A" is incorrect. The auditor may disclaim an opinion on the information.
Choice "B" is incorrect. The auditor may report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate auditing procedures have been applied.
Choice "C" is incorrect. The auditor may express an opinion on the information, if he or she has been engaged to examine it.
195
An auditor is engaged to perform audit procedures and report on supplemental information that accompanies the financial statements pursuant to PCAOB standards. If the auditor is unable to obtain sufficient appropriate audit evidence to support an opinion on the supplemental information, the auditor should issue an opinion on the supplementary information that is a(n):
A.
Adverse or disclaimer of opinion.
B.
Qualified opinion.
C.
Adverse opinion.
D.
Disclaimer of opinion.
Choice “D” is correct. If the auditor is unable to obtain sufficient appropriate audit evidence to support an opinion on the supplemental information, the auditor should disclaim an opinion on the supplemental information. In those situations, the auditor’s report on the supplemental information should describe the reason for the disclaimer and state that the auditor is unable to and does not express an opinion on the supplemental information.
Choice “A” is incorrect. An adverse opinion would not be appropriate, because the auditor faces a scope limitation. An adverse opinion would be rendered if the supplemental information were materially misstated.
Choice “B” is incorrect. An auditor should issue a disclaimer of opinion when an auditor is unable to obtain sufficient appropriate audit evidence to support an opinion on the supplemental information. A qualified opinion is not appropriate in this circumstance.
Choice “C” is incorrect. An adverse opinion would not be appropriate, because the auditor faces a scope limitation. An adverse opinion would be rendered if the supplemental information were materially misstated.
196
Which of the following procedures would most likely help an auditor identify events after the date of the financial statements that should be disclosed?
A.
Inquire about changes in capital stock that was issued or repurchased.
B.
Review changes in the interest rate for cash accounts.
C.
Follow up on accounts receivable confirmations that were not returned for additional loss accruals.
D.
Evaluate depreciation schedules for additional depreciation expense.
Choice "A" is correct. An auditor has a responsibility to perform procedures to identify non-recognized subsequent events that may require disclosure in the financial statements. Such events provide information about events that took place after the balance sheet date and did not exist at the balance sheet date. Changes in capital stock that was issued or repurchased would represent a transaction that may require disclosure.
Choice "B" is incorrect. The change in an interest rate for a cash account would not be an event that would provide the financial statement user with key information on an event that occurred after the balance sheet date.
Choice "C" is incorrect. Following up on accounts receivable confirmations would not be considered a non-recognized subsequent event that may require disclosure. If information was obtained after the balance sheet date that provided material information on receivable balances that existed as of the balance sheet date, any loss accruals would be made directly in the financial statements rather than simply being disclosed.
Choice "D" is incorrect. Further evaluation of depreciation schedules for additional depreciation expense would not be considered a non-recognized subsequent event that may require disclosure. If information was obtained after the balance sheet date that provided material information on depreciation expense, any expense adjustments would be made directly in the financial statements rather than simply being disclosed.
197
In order to address an auditor's responsibilities regarding subsequent events during an audit of a nonissuer, the auditor should:
A.
Perform audit testing of significant transactions occurring from the date of the auditor's report to the release date of the auditor's report.
B.
Modify the auditor's opinion when subsequent events are identified by the auditor and confirmed by discussions with management.
C.
Read the minutes of all of the nonissuer's board of directors' meetings that occurred from the start of the fiscal year through the date of the financial statements.
D.
Determine that all subsequent events that require adjustment of, or disclosure in, the financial statements have been identified.
Choice "D" is correct. The auditor has an active responsibility to investigate certain subsequent events during the subsequent period. This responsibility includes both recognized and nonrecognized subsequent events.
Choice "A" is incorrect. The audit test work that the auditor performs in the subsequent period is from the date of the financial statements through the report date.
Choice "B" is incorrect. The auditor's opinion does not need to be modified when subsequent events are identified by the auditor and confirmed by management. Instead, the auditor would verify that the financial statements appropriately reflect the subsequent event.
Choice "C" is incorrect. As part of the auditor's procedures to identify subsequent events, the auditor will read minutes of the meetings during the subsequent period. Reading the minutes from throughout the year under audit is not done to identify subsequent events.
198
An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor's report but before issuance of the related financial statements. The auditor's responsibility for events occurring subsequent to the original report date was:
A.
Limited to the specific event referenced.
B.
Extended to subsequent events occurring through the later date.
C.
Extended to include all events occurring since the original report date.
D.
Limited to include only events occurring up to the date of the last subsequent event referenced.
Choice "A" 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, but before issuance of the related financial statements, the auditor's responsibility for events occurring subsequent to the original report date is limited to the specific event referenced.
Choice "B" is incorrect. The later date only applies to the particular subsequent event and not all events taking place up to that date.
Choice "C" is incorrect. The responsibility is only extended for the particular event when a report is dual dated.
Choice "D" is incorrect. A dual-dated report only extends responsibility for the particular subsequent event and not for all events taking place up to that event. The example wording would read "January 21, 20X2, except for Note 2, which is as of February 3, 20X2."
199
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
A.
Send confirmations for a material A/R balance from a customer originating after year-end.
B.
Inquire about payroll checks that were recorded before year-end but cashed after year-end.
C.
Determine that changes in employee pay rates after year-end were properly authorized.
D.
Investigate changes in long-term debt occurring after year-end.
Choice "D" is correct. Long-term debt that matures within one year is reported as a current liability on the balance sheet. An auditor reviews changes in long-term debt occurring after year-end to evaluate whether such debt is appropriately classified on the balance sheet.
Choice "A" is incorrect. A material receivable balance originating after year-end is not relevant to the current year's audit report.
Choice "B" is incorrect. Payroll checks that were recorded close to (but before) year-end often are not cashed until the subsequent period. The auditor would not be particularly concerned about this.
Choice "C" is incorrect. Subsequent changes in employee pay rates are not relevant to the current year's audit report.
200
The quarterly data required by SEC Regulation S-K have been omitted. Which of the following statements must be included in the auditor's report?
A.
The auditor will review the selected data during the review of the subsequent quarterly financial data.
B.
The company has not presented the selected quarterly financial data.
C.
The company's internal control provides an adequate basis to complete the review.
D.
The auditor was unable to review the data.
Choice "B" is correct. If the quarterly data required by SEC Regulation S-K have been omitted, the auditor's report must include a statement indicating that the company has not presented such data.
Choice "A" is incorrect. If an entity is required to file quarterly reports, a review of this quarterly data is also required. Such review should be completed before the quarterly report is filed, not postponed to a subsequent quarter.
Choice "C" is incorrect. Generally, the auditor's report does not make reference to a review of interim financial information, since such information is not a required part of GAAP financial statements. (Note, however, that the auditor's report might be modified to indicate that the company's internal control was not sufficient to provide an adequate basis for a review of such information, in situations where quarterly data is included but not reviewed).
Choice "D" is incorrect. The auditor's report should only state that the auditor was unable to review quarterly data required by SEC Regulation S-K when the data have been included, but the auditor has not reviewed such data.
201
An auditor withdrew from further association with a nonissuer entity after issuing an audit report on it. Subsequently, the auditor discovered facts that, if known to the auditor at the date of the auditor's report, could have caused the auditor to revise the report. Which of the following statements about this circumstance is correct?
A.
The auditor should discuss the matter with management and, if it is determined that the financial statements need revision, ask how management intends to address the matter in the financial statements.
B.
Because the auditor is no longer associated with the entity, the auditor has no further responsibilities with regard to the financial statements.
C.
The auditor should extend audit procedures with regard to management's revised financial statements with the objective of expressing a dual-dated qualified opinion.
D.
The auditor should talk with the successor auditor about the circumstances of the subsequently discovered information and advise whether the financial statements should be revised.
Choice “A” is correct. When facts are discovered after issuing an auditor's report that would have caused the auditor to revise the report, the auditor should discuss the matter with management and, if it is determined that the financial statements need revision, ask how management intends to address the matter in the financial statements.
Choice “B” is incorrect. The auditor still has a responsibility to respond appropriately to facts that become known to the auditor after the date of the auditor's report.
Choice “C” is incorrect. The auditor's objective is to ensure that the audit report is appropriate or is revised accordingly. The auditor's objective is not to issue a dual-dated qualified opinion.
Choice “D” is incorrect. The auditor should talk with management about the circumstances of the subsequently discovered information and advise whether the financial statements should be revised.
202
Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
A.
Request that management disclose the newly discovered information by issuing revised financial statements.
B.
Issue revised pro forma financial statements taking into consideration the newly discovered information.
C.
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
D.
Give public notice that the auditor is no longer associated with financial statements.
Choice "C" is correct. When subsequently discovered information is found both to be reliable and to have existed at the date of the auditor's report, the auditor should determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Choice "A" is incorrect. The auditor would request that management disclose the newly discovered information only after determining whether there are persons relying on the information.
Choice "B" is incorrect. Management, not the auditor, may issue revised financial statements.
Choice "D" is incorrect. The auditor would give public notice that he/she is no longer associated with the FS only after determining that there are persons relying on the information and only if the client refuses to issue revised FS.
203
Subsequent to the issuance of the audit report for the final year of a three-year contract, a fact is discovered that may have affected the final year's report. Which of the following actions is the auditor required to take?
A.
The auditor is not required to do anything because once the auditor has reported on audited financial statements, the auditor has no responsibility to carry out any retrospective review of the workpapers or show the effect of any newly discovered facts on them.
B.
The auditor is required to reissue the auditor's report and to reference discovery of the fact.
C.
The auditor is required to determine whether the information is reliable and whether the facts existed at the date of the report.
D.
The auditor is not required to do anything because the auditor was discharged for reasons other than professional misconduct after the audited financial statements were issued.
Choice “C” is correct. When information is identified subsequent to the issuance of the audit report that may have affected the final year's report, the auditor is required to determine whether the information is reliable and whether the facts existed at the date of the report.
Choice “A” is incorrect. With subsequently discovered facts, an auditor has a responsibility to determine whether the information is reliable and whether the facts existed at the date of the report.
Choice “B” is incorrect. An auditor must first determine whether the information is reliable and whether the facts existed at the date of the report. If adjustments or disclosures are made, then the auditor will need to extend the procedures for the subsequent discovery of facts and update the date on the audit report.
Choice “D” is incorrect. With subsequently discovered facts, an auditor is required to determine whether the information is reliable and whether the facts existed at the date of the report even if the auditor was discharged for reasons other than professional misconduct.
204
After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless:
A.
Information about an event that occurred after the date of the auditor's report comes to the auditor's attention.
B.
Information, which existed at the report date and may affect the report, comes to the auditor's attention.
C.
Management of the entity requests the auditor to reissue the auditor's report.
D.
Final determinations or resolutions are made of contingencies that had been disclosed in the financial statements.
Choice "B" is correct. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless information, which existed at the report date and may affect the report, comes to the auditor's attention. In this case the auditor would perform procedures to determine if the information affects the report and is important to the external users.
Choice "A" is incorrect. The auditor has no obligation to perform other procedures if information about an event that occurred after the date of the auditor's report comes to the auditor's attention (and the auditor has not been asked to reissue the report).
Choice "C" is incorrect. The auditor has no obligation to perform other procedures if management of the entity requests the auditor to reissue the auditor's report (if no significant changes have occurred since the report date).
Choice "D" is incorrect. Most contingencies are eventually resolved; however, such resolution does not require the auditor to perform other procedures.
205
Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
A.
New information is discovered concerning undisclosed lease transactions of the audited period.
B.
An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern.
C.
A subsidiary is sold that accounts for 25% of the entity's consolidated net income.
D.
A contingency is resolved that had been disclosed in the audited financial statements.
Choice "A" is correct. The question addresses the subsequent discovery of facts that may have existed at the balance sheet date. Such events will often require an adjustment to the financial statements. An example is new information discovered about undisclosed lease transactions of the audited period. As a result, the auditor should make further inquiry to determine whether the information is reliable and whether the facts existed at the date of the report.
Choice "B" is incorrect. The natural disaster is an example of a subsequent event occurring after the date of the auditor's report that the auditor has no obligation to investigate.
Choice "C" is incorrect. Sale of a subsidiary occurring after the date of the auditor's report is an example of a subsequent event that the auditor has no obligation to investigate.
Choice "D" is incorrect. The resolution of a disclosed contingency is an example of a subsequent event occurring after the date of the auditor's report that the auditor has no obligation to investigate.
206
Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
A.
The entity sells a subsidiary that accounts for 35% of the entity's consolidated sales.
B.
A lawsuit is resolved that is explained in a separate paragraph of the prior-year's auditor's report.
C.
A technological development occurs that affects the entity's ability to continue as a going concern.
D.
New information is discovered concerning undisclosed related party transactions of the prior year.
Choice "D" is correct. If an auditor becomes aware of material information that existed at the date of the auditor's report, and which would have affected that report, the auditor needs to take appropriate action. Since related party transactions should be disclosed in the financial statements, it is likely that the auditor would need to make further inquiries to determine whether the lack of disclosure will affect the previously issued report.
Choice "A" is incorrect. Sale of a subsidiary would not be likely to affect the previous year's audit report, as auditors are not required to update their reports for events occurring after the fact.
Choice "B" is incorrect. Resolution of a lawsuit that was disclosed in the prior year's audit report would not be likely to affect the audit report, as auditors are not required to update their reports for events occurring after the fact.
Choice "C" is incorrect. A technological development that affects the entity's ability to continue as a going concern would not be likely to affect the previous year's audit report, as auditors are not required to update their reports for events occurring after the fact.
207
Which of the following events occurring after the issuance of the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
A.
New information regarding significant unrecorded transactions from the year under audit is discovered.
B.
A subsidiary that accounts for 30% of the entity's consolidated net revenue is sold.
C.
Litigation that had been disclosed in the financial statements is resolved.
D.
The auditor discovers that the entity intends to present comparative financial statements in subsequent years.
Choice "A" is correct. The question addresses subsequent discovery of facts that may have existed at the balance sheet date. Such events will often require an adjustment to the financial statements. An example is new information discovered regarding significant unrecorded transactions from the year under audit. As a result, the auditor should make further inquiry to determine whether the information is reliable and whether the facts existed at the date of the report.
Choice "B" is incorrect. The sale of a subsidiary occurring after the date of the auditor's report is an example of a subsequent event that the auditor has no obligation to investigate. The sale of the subsidiary did not exist at the date of the auditor's report.
Choice "C" is incorrect. The resolution of a disclosed contingency is an example of a subsequent event occurring after the date of the auditor's report that the auditor has no obligation to investigate. The resolution did not exist at the date of the audit report.
Choice "D" is incorrect. An auditor is unlikely to make further inquiries about previously issued financial statements when the auditor discovers that the entity intends to present comparative financial statements in subsequent years. This information does not affect the current auditor's report.
208
Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
A.
The discovery of information regarding a contingency that existed before the financial statements were issued.
B.
The final resolution of a lawsuit explained in a separate paragraph of the auditor's report.
C.
A technological development that could affect the entity's future ability to continue as a going concern.
D.
The entity's sale of a subsidiary that accounts for 30% of the entity's consolidated sales.
Choice "A" is correct. With respect to events occurring after the issuance of an auditor's report, the auditor is only responsible for information that existed at the audit report date.
Choice "B" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry.
Choice "C" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry.
Choice "D" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry.
209
After issuing an auditor's report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless:
A.
A final resolution is made of a contingent liability that had been disclosed in the financial statements.
B.
Information about a material transaction that occurred just after the auditor's report was issued is deemed to be reliable.
C.
Information that existed at the report date and may affect the report comes to the auditor's attention.
D.
An event occurs just after the auditor's report was issued that affects the entity's ability to continue as a going concern.
Choice "C" is correct. After issuing his or her report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless information that existed at the report date and may affect the report comes to the auditor's attention.
Choice "A" is incorrect. After issuing his or her report, an auditor has no obligation to make continuing inquiries concerning resolutions of contingent liabilities.
Choice "B" is incorrect. An auditor has no obligation to make continuing inquiries concerning transactions that occurred after the auditor's report was issued.
Choice "D" is incorrect. An auditor has no obligation to make continuing inquiries concerning events occurring after the auditor's report was issued, even if those events affect the entity's ability to continue as a going concern.
210
If an auditor becomes aware of an apparent material misstatement of fact in other information included in a document containing audited financial statements, the auditor should first:
A.
Include in the auditor’s report an other-matter paragraph describing the material consistency.
B.
Request that management consult with the entity’s legal counsel.
C.
Notify those charged with governance.
D.
Discuss the matter with management.
Choice “D” is correct. If an auditor becomes aware of an apparent material misstatement of fact in other information included in a document containing audited financial statements, the auditor should first discuss the matter with management.
Choice “A” is incorrect. The auditor would not include an other-matter paragraph in the auditor's report. The auditor should first discuss with management and include a separate section in the auditor's report with the heading "Other Information" clarifying the auditor's responsibility with respect to the other information.
Choice “B” is incorrect. When an auditor identifies a material misstatement of fact, the auditor should first discuss the matter with management. If after these discussions the auditor still considers that there is an apparent material misstatement of fact, the auditor should request that management consult with a qualified third party, such as the entity’s legal counsel.
Choice “C” is incorrect. When an auditor identifies a material misstatement of fact, the auditor should first discuss the matter with management. If management refuses to correct the material misstatement of fact in the other information, then the auditor should notify those charged with governance.
211
If a subsequently discovered fact becomes known to the auditor after the report release date, the auditor should first:
A.
Discuss the matter with management.
B.
Notify each member of the board of directors that the auditor will seek to prevent future reliance on the auditor’s report.
C.
Determine the effects and issue revised financial statements.
D.
Notify regulatory agencies having jurisdiction over the client that the auditor’s report should no longer be relied upon.
Choice “A” is correct. If a subsequently discovered fact becomes known to the auditor after the report release date, the auditor should first discuss the matter with management.
Choice “B” is incorrect. This step would occur only if necessary after it is determined that management will not revise the financial statements and will not notify other third parties of the situation.
Choice “C” is incorrect. Management, not the auditor, is responsible for determining the effects and the issuance of the financial statements.
Choice “D” is incorrect. This step would occur only if necessary after it is determined that management will not revise the financial statements and will not notify the regulatory agencies of the situation.
212
Which best describes the auditor’s responsibility for other information that is outside the basic financial statements, but is included in documents containing audited financial statements?
A.
Read the other information and consider whether it is materially consistent with the audited financial statements.
B.
Apply certain limited procedures to the required supplementary information and add an other-matter paragraph to the financial statement audit report.
C.
Issue an opinion on the supplementary information and include a statement restricting the use of the report.
D.
The auditor has no responsibility to read the other information in a document containing audited financial statements.
Choice “A” is correct. The auditor should read the other information and consider whether it is materially consistent with the audited financial statements.
Choice “B” is incorrect. When audited financial statements are presented in a client’s document containing required supplementary information that is outside the basic financial statements, the auditor should apply certain limited procedures to the required supplementary information and add a separate section with the heading "Required Supplementary Information," not an other-matter paragraph, to the audit report.
Choice “C” is incorrect. An auditor is not responsible for issuing an opinion on other information, unless specifically engaged to do so. In addition, the report does not have to be restricted.
Choice “D” is incorrect. The auditor has a responsibility to read the other information and consider whether it is materially consistent with the audited financial statements.
213
After issuing an auditor's report, an auditor becomes aware of facts that existed at the report date that would have affected the report had the auditor known of the facts at the time. What is the first thing the auditor should do?
A.
Issue revised financial statements and auditor's report describing the reason for the revision in a note to the financial statements.
B.
Determine whether there are persons currently relying on, or likely to rely on, the financial statements and whether those persons would attach importance to the information.
C.
Notify regulatory agencies having jurisdiction over the client that the auditor's report should not be relied upon from this point forward.
D.
Notify each member of the board of directors that the auditor's report may not be associated with the financial statements from this point forward.
Choice "B" is correct. If an auditor becomes aware of material information that would have affected the report, and that persons are currently relying or are likely to rely on the financial statements covered by the report, the auditor should take appropriate action. In order to do this, the auditor must first determine whether there are indeed persons relying or likely to rely on the financial statements.
Choice "A" is incorrect. This step would occur only if necessary after it is determined that there were persons currently relying or likely to rely on the financial statements covered by the report.
Choice "C" is incorrect. This step would occur only if it is determined that there were persons currently relying or likely to rely on the financial statements covered by the report.
Choice "D" is incorrect. This step would occur only if necessary after it is determined that there were persons currently relying or likely to rely on the financial statements covered by the report.
214
An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may:
A.
Have been recorded based on year-end tests for asset obsolescence.
B.
Have been recorded based on preliminary accounting estimates.
C.
Require adjustments to the financial statements as of the year end.
D.
Require disclosure to keep the financial statements from being misleading.
Choice "D" is correct. Conditions that did not exist at year end but arose after year end are Type 2 (nonrecognized) subsequent events that must be disclosed to keep the financial statements from being misleading.
Choice "A" is incorrect. This is not a subsequent event as the recording of obsolescence at year end is based on the results of the performance of customary asset valuation tests - conditions that existed at year end.
Choice "B" is incorrect. An adjustment based on preliminary accounting estimates would not have been recorded as the conditions did not exist at year end.
Choice "C" is incorrect. An adjustment would not be required as the conditions did not exist at year end. Type 1 (recognized) subsequent events require adjustment to the financial statement.
215
An auditor is reviewing a client’s annual reports, which contain audited financial statements and other information. Which of the following is considered other information contained in this document?
A.
Notes to the financial statements
B.
Names of officers and directors
C.
Auditor’s report
D.
Income statement
Choice “B” is correct. Names of officers and directors is an example of other information. Other information is defined as “financial and nonfinancial information (other than the financial statements and the auditor’s report thereon) that is included in a document containing audited financial statements and the auditor’s report thereon, excluding required supplementary information.”
Choice “A” is incorrect. Notes to the financial statements are considered an integral part of the financial statements. These notes are part of audited financial statements.
Choice “C” is incorrect. The auditor’s report is not considered other information.
Choice “D” is incorrect. The income statement is part of the audited financial statements and would not be considered other information.
216
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
A.
Inquire about payroll checks that were recorded before year-end but cashed after year-end.
B.
Investigate changes in long-term debt occurring after year-end.
C.
Recompute depreciation charges for plant assets sold after year-end.
D.
Determine that changes in employee pay rates after year-end were properly authorized.
Choice "B" is correct. In obtaining evidence about subsequent events, an auditor would investigate changes in long-term debt occurring after year-end to determine if there was an unrecorded liability as of the end of the year. In addition, subsequent sales of LT debt require footnote disclosure.
Choice "A" is incorrect. Following up on payroll checks that were cashed after year-end is generally not the most effective way to audit accrued payroll and would provide little evidence about subsequent events.
Choice "C" is incorrect. Plant assets sold after the end of the year (that were not related to a current year transaction such as a discontinued operation) have no impact on the current year's financial statements.
Choice "D" is incorrect. Changes in employee pay rates occurring after year-end would have no effect on the year under audit.
217
Which of the following is a condition that must be met in order for an auditor to issue an opinion on supplementary information in relation to the financial statements as a whole?
A.
The auditor must consider subsequent events with respect to supplementary information.
B.
The supplementary information was derived from and relates directly to the information used to prepare the financial statements.
C.
The supplementary information must be in a separate document from the audited financial statements.
D.
A modified opinion was not issued on the financial statements.
Choice “B” is correct. A condition that must be met in order for an auditor to issue an opinion on supplementary information is that the supplementary information was derived from and relates directly to the information used to prepare the financial statements.
Choice “A” is incorrect. An auditor is not required to consider subsequent events with respect to supplementary information.
Choice “C” is incorrect. An auditor may issue an opinion on supplementary information if it is in the same document as the audited financial statements. There is no requirement that the supplementary information be included in a separate document from the audited financial statements. If supplementary information is included in a separate document from the audited financial statements, then the auditor should report on supplementary information in a separate report.
Choice “D” is incorrect. An auditor may issue an opinion on supplementary information if a qualified opinion is issued on the financial statements. However, the auditor may not issue an opinion on supplementary information if an adverse or disclaimer of opinion was issued on the financial statements.
218
Which of the following procedures would least likely help the auditor discover a subsequent event at the conclusion of the audit?
A.
Obtaining a legal letter from the client's attorney.
B.
Reviewing the minutes of meetings with board of directors.
C.
Reviewing the audit working papers.
D.
Reviewing and analyzing the latest available interim financial statements.
Choice "C" is correct. Subsequent events include events or transactions that occur after the balance sheet date but before the auditor's report is issued or available to be issued. The audit working papers would cover the procedures performed through the balance sheet date and, therefore, would be the least likely of the above procedures to help an auditor discover a subsequent event.
Choice "A" is incorrect. Obtaining a legal letter from the client's attorney is a procedure that the auditor should perform to help identify any subsequent events that may impact the financial statements.
Choice "B" is incorrect. Reviewing the minutes of meetings with board members is a procedure that the auditor should perform to help identify any subsequent events that may impact the financial statements.
Choice "D" is incorrect. Reviewing the latest available interim financial statements is a procedure that the auditor should perform to help identify any subsequent events that may impact the financial statements.
219
Which of the following procedures would an auditor generally perform regarding subsequent events?
A.
Compare the latest available interim financial statements with the statements being audited.
B.
Test internal control activities that were previously reported to management as inadequate.
C.
Review the client's cutoff bank statements for several months after the year-end.
D.
Inspect inventory items that were ordered before the year-end but arrived after the year-end.
Choice "A" is correct. An auditor generally would compare the latest available interim financial statements with the statements being audited when performing procedures regarding subsequent events.
Choice "B" is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date (but prior to the issuance of the financial statements) that require adjustment to or disclosure in the financial statements. Testing internal control activities that were previously reported to management as inadequate most likely would not provide an auditor with information about subsequent events.
Choice "C" is incorrect. Reviewing the client’s cutoff bank statement several months after year-end is unlikely to be performed by the auditor to identify subsequent events. Reviewing the cutoff statement shortly after year-end is typically performed by the auditor as part of testing the cash balance.
Choice "D" is incorrect. Inspecting inventory items that were ordered before year-end but arrived after year-end is generally performed to evaluate cutoff of inventory, not to identify subsequent events.
220
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A.
Review tax returns prepared by management after year end.
B.
Investigate changes in capital stock recorded after year end.
C.
Inquire about payroll checks that were recorded before year end but cashed after year end.
D.
Determine whether inventory ordered before the year end was included in the physical count.
Choice "B" is correct. A change in capital stock that is recorded after the year end is an example of a subsequent event that might require disclosure in the footnotes to the financial statements.
Choice "A" is incorrect. Tax returns prepared after year end would not be considered a subsequent event issue.
Choice "C" is incorrect. If the payroll checks were recorded prior to year end, there is no subsequent event issue.
Choice "D" is incorrect. The inventory issue would not be considered a subsequent event because the inventory was ordered before year end.
221
If a subsequent event occurs after the report date but prior to the release date of an audit report, resulting in management's revision of the financial statements of a nonissuer, then the auditor may do any of the following, except:
A.
Include an additional date in the audit report that is limited to the revision to the financial statements.
B.
Perform audit procedures necessary to obtain assurance about the revised financial statements.
C.
Revise the date of the audit report to reflect the necessity of additional audit procedures.
D.
Maintain the original date of the report and state that the opinion is limited to the financial statements as they existed prior to the subsequent event.
Choice "D" is correct. If management of a nonissuer revises the financial statements, management must disclose the dates through which subsequent events have been evaluated in its revised financial statements. Therefore, the auditor has an obligation to perform procedures and change date(s) on the audit report.
Choice "A" is incorrect. For a nonissuer that revises its financial statements, the auditor may keep the original report date and also include an additional date in the audit report that is specific to the revision made to the financial statements.
Choice "B" is incorrect. If management of a nonissuer deems a subsequent event material enough to revise the financial statements, the auditor would determine what additional audit procedures may be necessary to obtain assurance about the revised financial statements.
Choice "C" is incorrect. If a nonissuer revises its financial statements, the auditor may revise the date of the audit report to reflect that additional audit procedures were performed to that date.
222
Which best describes the auditor’s responsibility for required supplementary information that is outside the basic financial statements but required by the FASB?
A.
Read the required supplementary information and only add an other-matter paragraph when the auditor identifies material departures in the required supplementary information.
B.
The auditor has no responsibility to apply procedures to the required supplementary information, as it is outside the basic financial statements.
C.
The auditor’s report on the financial statements should include both an opinion on the supplementary information and a statement restricting the use of the report.
D.
Apply certain limited procedures to the required supplementary information and add a separate section with the heading "Required Supplementary Information" to the financial statement audit report.
Choice “D” is correct. When audited financial statements are presented in a client’s document containing required supplementary information that is outside the basic financial statements, the auditor should apply certain limited procedures to the required supplementary information and add a separate section with the heading "Required Supplementary Information" to the financial statement audit report.
Choice “A” is incorrect. An auditor must apply certain limited procedures to required supplementary information, not merely just read the information. In addition, a separate section with the heading "Required Supplementary Information", rather than an other-matter paragraph, is included even when there are no deficiencies or omissions in the required supplementary information.
Choice “B” is incorrect. The auditor should apply certain limited procedures to the required supplementary information (i.e., inquiry, determine consistency, obtain written representations regarding the information).
Choice “C” is incorrect. An auditor is not responsible for issuing an opinion on required supplementary information unless specifically engaged to do so. In addition, the report does not have to be restricted.
223
The client's financial reporting includes supplementary financial information outside the basic financial statements but required by the Financial Accounting Standards Board (FASB). Which of the following statements is correct regarding the auditor's responsibility for this supplementary financial information?
A.
The auditor is not required to report omissions.
B.
The auditor should apply tests of details of transactions.
C.
The auditor should perform limited procedures.
D.
The auditor should read the supplementary financial information.
Choice "C" is correct. An auditor should perform limited procedures on required supplementary information.
Choice "A" is incorrect. An auditor is required to report omissions of required supplementary information in a separate section with the heading "Required Supplementary Information" or explanatory paragraph for a nonissuer or issuer, respectively.
Choice "B" is incorrect. An auditor is not required to apply tests of details of transactions on required supplementary information. The auditor should perform limited procedures on required supplementary information.
Choice "D" is incorrect. Unlike other information, the auditor has to perform procedures beyond just reading for required supplementary information. An auditor is required to perform limited procedures on required supplementary information.
224
Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report?
A.
The cost-to-benefit ratio of performing additional procedures to better determine the impact of the newly discovered facts.
B.
The client's willingness to pay additional fees for the additional procedures to be performed.
C.
The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.
D.
The potential impact on financial statements and associated audit reports for the previous five years.
Choice "C" is correct. An auditor would consider the client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement the most important factor upon subsequent discovery of facts that existed at the date of the audit report that would have affected the report.
Choice "A" is incorrect. An auditor is required to determine the impact of the newly discovered facts regardless of the cost-to-benefit ratio.
Choice "B" is incorrect. The auditor's primary concern should not be on whether the auditor is going to be paid by the client for the additional procedures. Instead, the auditor's primary concern should be ensuring that revised financial statements or other disclosures are issued.
Choice "D" is incorrect. An auditor should determine the potential impact on financial statements and associated audit reports for prior years (not limited to just five years).
225
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A.
Investigating personnel changes in the accounting department occurring after year-end.
B.
Inquiring as to whether any unusual adjustments were made after year-end.
Choice "B" is correct. An auditor would most likely inquire as to whether any unusual adjustments were made after year-end that would require adjustment to and/or disclosure in the year-end financial statements.
Choice "A" is incorrect. Changes in accounting personnel at any time would probably not result in any subsequent event financial statement adjustment or disclosure.
Choice "C" is incorrect. Obtaining evidence about A/R that were established after year-end would not provide the auditor with information about subsequent events, since any information about these A/R would not require adjustment to or disclosure in the prior year financial statements.
Choice "D" is incorrect. Comparing the financial statements being reported on with those of the prior period is not a very good source of subsequent event information.
C.
Confirming a sample of material accounts receivable established after year-end.
D.
Comparing the financial statements being reported on with those of the prior period.
Choice "B" is correct. An auditor would most likely inquire as to whether any unusual adjustments were made after year-end that would require adjustment to and/or disclosure in the year-end financial statements.
Choice "A" is incorrect. Changes in accounting personnel at any time would probably not result in any subsequent event financial statement adjustment or disclosure.
Choice "C" is incorrect. Obtaining evidence about A/R that were established after year-end would not provide the auditor with information about subsequent events, since any information about these A/R would not require adjustment to or disclosure in the prior year financial statements.
Choice "D" is incorrect. Comparing the financial statements being reported on with those of the prior period is not a very good source of subsequent event information.
226
An auditor is engaged to report on supplementary information in relation to the financial statements as a whole. Which of the following audit procedures is least likely to be performed on the supplementary information?
A.
Obtain an additional understanding of the entity’s internal controls related to identifying and reporting on supplemental information.
B.
Inquire of management about any significant assumptions underlying the presentation of the information.
C.
Compare and reconcile the supplementary information to the audited financial statements and underlying accounting records.
D.
Obtain written representations from management regarding the supplementary information.
Choice “A” is correct. An auditor is not required to obtain a separate understanding of the entity’s internal controls related to identifying and reporting on supplemental information when engaged to provide an opinion on supplementary information in relation to the financial statements as a whole.
Choice “B” is incorrect. An auditor should ask management about any significant assumptions underlying the presentation of the information when engaged to report on supplementary information in relation to the financial statements as a whole.
Choice “C” is incorrect. An auditor should compare and reconcile the supplementary information to the audited financial statements and underlying accounting records when engaged to report on supplementary information in relation to the financial statements as a whole.
Choice “D” is incorrect. An auditor should obtain written representations from management regarding the supplementary information when engaged to report on supplementary information in relation to the financial statements as a whole.
227
Which of the following statements is not true regarding the auditor's responsibility for subsequent events?
A.
The auditor has an active responsibility to make continuing inquiries between the date of the auditor's report and the date on which the report is submitted.
B.
The auditor has no active responsibility to make continuing inquiries after the date of the auditor's report.
C.
The auditor has an active responsibility to make continuing inquiries between the date of the financial statements and the date of the auditor's report.
D.
The auditor has an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained.
Choice "A" is correct. The auditor has no active responsibility to make continuing inquiries between the date of the auditor's report and the date on which the report is submitted. The auditor's active responsibility stops on the date of the auditor's report.
Choice "B" is incorrect. The auditor has no active responsibility to make continuing inquiries after the date of the auditor's report.
Choice "C" is incorrect. The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date of the auditor's report.
Choice "D" is incorrect. The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained.
228
Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements?
A.
New convertible bonds are issued to expand the company's product line.
B.
Negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter.
C.
A loss is reported on uncollectible accounts of an acknowledged distressed customer.
D.
A fixed asset used in operations is sold at a substantial profit.
Choice "A" is correct. This transaction does not relate to the year under audit, so no adjustment is needed to the financial statements, but it is considered a significant event that should be disclosed. This information would most likely appear in the subsequent events footnote.
Choice "B" is incorrect. Negotiations that require compensation adjustments retroactive to the year under audit would be considered a recognized subsequent event that would require adjustment to the financial statement amounts. This information should be used to adjust accounts related to compensation for union employees.
Choice "C" is incorrect. A loss reported on uncollectible accounts is considered a recognized subsequent event that would require adjustment to the financial statement amounts. This event provides us with additional information that should be used to adjust the estimate for allowance for doubtful accounts. This event probably would not be disclosed in the financial statements.
Choice "D" is incorrect. The sale of a fixed asset is a nonrecognized subsequent event that would not require disclosure or adjustment in the financial statements.
229
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A.
Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year-end.
B.
Recomputing a sample of large-dollar transactions occurring after year-end for arithmetic accuracy.
C.
Confirming bank accounts established after year-end.
D.
Investigating changes in stockholders' equity occurring after year-end.
Choice "A" 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 "B" 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 "C" 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.
Choice "D" 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.
230
Question
Which of the following is a true statement regarding other information included in documents containing audited financial statements?
A.
The auditor may choose to add an emphasis-of-matter paragraph, which includes a disclaimer of opinion on other information, in the audit report on the financial statements.
B.
The auditor has no responsibility for other information as long as it is outside the basic financial statements.
C.
The auditor should add a separate section with the heading "Other Information," which includes a disclaimer of opinion on other information, in the audit report on the financial statements.
D.
The auditor is not required to reference the other information in the audit report on the financial statements.
Choice “C” is correct. The auditor should add a separate section with the heading "Other Information," which includes a disclaimer of opinion on other information, in the audit report on the financial statements. Disclaimer of opinion means to deny providing an opinion. The section will include the statement, “we do not express an opinion . . . .”
Choice “A” is incorrect. The auditor would add a separate section with the heading "Other Information" rather than an emphasis-of-matter paragraph.
Choice “B” is incorrect. The auditor has a responsibility to read other information included in documents containing audited financial statements.
Choice “D” is incorrect. The auditor is required to reference the other information in the audit report on the financial statements in a separate section with the heading "Other Information."
231
When auditing a nonissuer, what is an auditor's responsibility for supplementary information, such as disclosure of pension information, which is outside the basic financial statements but required by GAAP?
A.
The auditor should apply certain limited procedures to the supplementary information.
B.
The auditor should perform tests of transactions to the supplementary information to verify that it is reasonably comparable to the prior year's information.
C.
The auditor should engage a specialist, such as an actuary, to verify that management's assertions are reasonable.
D.
The auditor's only responsibility for supplementary information is to determine that such information has not been omitted.
Choice "A" is correct. The auditor should apply certain limited procedures to the supplementary information and add a separate section with the heading "Required Supplemental Information" to the financial statement audit report.
Choice "B" is incorrect. The auditor is not required to apply audit procedures to the supplementary information, or to verify whether it is comparable to the prior year's information.
Choice "C" is incorrect. The auditor is not required to engage a specialist, nor is the auditor required to verify that management's assertions are reasonable.
Choice "D" is incorrect. The auditor also needs to determine if the required information departs materially from GAAP guidelines. In addition, if the auditor does not disclaim an opinion, then he/she needs to determine whether the information is fairly stated in all material respects in relation to the financial statements taken as a whole.
