Question 1

Indicate which change(s) would require an explanatory paragraph in the audit report.

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 2

When other auditors are involved in the audit and they qualify their portion of the audit, the principal auditor must decide if the amount in question is material to the financial statements as a whole.

Accepted Answer

A) True 
 B)False

Question 3

When accounting principles are not consistently applied, and the materiality level is immaterial, the auditor will issue a(n)

Accepted Answer

A)  standard unmodified opinion. 
B)  unmodified opinion with an explanatory paragraph. 
C)  adverse opinion. 
D)  disclaimer opinion. 
A)  standard unmodified opinion. 
B)  unmodified opinion with an explanatory paragraph. 
C)  adverse opinion. 
D)  disclaimer opinion.

Question 4

In the case of a disclaimer due to lack of independence, the entire scope paragraph is excluded from the report.

Accepted Answer

A) True 
 B)False

Question 5

The separate report on internal control over financial reporting

Accepted Answer

A)  cannot contain a cross-reference to the auditor's report on the financial statements. 
B)  includes a paragraph that addresses the inherent limitations of internal controls. 
C)  is addressed to the PCAOB. 
D)  includes a scope paragraph which refers to the framework used to evaluate internal controls. 
A)  cannot contain a cross-reference to the auditor's report on the financial statements. 
B)  includes a paragraph that addresses the inherent limitations of internal controls. 
C)  is addressed to the PCAOB. 
D)  includes a scope paragraph which refers to the framework used to evaluate internal controls.

Question 6

The final step in the auditor's decision process for audit reports is to write the audit report.

Accepted Answer

A) True 
 B)False

Question 7

When there is a lack of consistent application in accounting principles,

Accepted Answer

A)  the nature and impact of the change should be adequately disclosed. 
B)  the auditor should discuss the nature of the change and point the reader to the footnote that discusses the change. 
C)  the materiality of the change is evaluated based on the current year effect of the change. 
D)  all of the above. 
A)  the nature and impact of the change should be adequately disclosed. 
B)  the auditor should discuss the nature of the change and point the reader to the footnote that discusses the change. 
C)  the materiality of the change is evaluated based on the current year effect of the change. 
D)  all of the above.

Question 8

The highest level of materiality exists when

Accepted Answer

A)  users are likely to make incorrect decisions if they rely on the overall financial statements. 
B)  there has been a departure from GAAP. 
C)  amounts are material but do not overshadow the financial statements as a whole. 
D)  a scope limitation has been imposed. 
A)  users are likely to make incorrect decisions if they rely on the overall financial statements. 
B)  there has been a departure from GAAP. 
C)  amounts are material but do not overshadow the financial statements as a whole. 
D)  a scope limitation has been imposed.

Question 9

The phrase "Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material error" is included in the auditor's opinion section of an audit report.

Accepted Answer

A) True 
 B)False

Question 10

Assume you are the partner in charge of the 2019 audit of Becker Corporation, a private company. The audit report has not yet been prepared. In each independent situation following
(1-8), indicate the appropriate action (a-g) to be taken. The possible actions are as follows:
a. Issue an unmodified opinion audit report.
b. Qualify both the scope and opinion paragraphs.
c. Qualify the opinion paragraph.
d. Issue an unmodified opinion with an explanatory paragraph.
e. Issue an unmodified opinion with revised wording (no explanatory paragraph).
f. Issue an adverse opinion.
g. Disclaim an opinion.
The situations are as follows:
________ 1. Becker Corporation carries its property, plant, and equipment accounts at current market values. Current market values exceed historical cost by a highly material amount, and the effects are pervasive throughout the financial statements.
________ 2. Management of Becker Corporation refuses to allow you to observe, or make, any counts of inventory. The recorded book value of inventory is highly material.
________ 3. You were unable to confirm accounts receivable with Becker's customers. However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures.
________ 4. One week before the end of fieldwork, you discover that the audit manager on the Becker engagement owns a material amount of Becker's common stock.
________ 5. You relied upon another CPA firm to perform part of the audit. Although you were the principal auditor, the other firm audited a material portion of the financial statements. You wish to refer to (but not name) the other firm in your report.
________ 6. You have substantial doubt about Becker's ability to continue as a going concern.
________ 7. Becker Corporation changed its method of computing depreciation in 2019. You concur with the change and the change is properly disclosed in the financial statement footnotes.
________ 8. Ten days after the balance sheet date, one of Becker's buildings was destroyed by a fire. Becker refuses to disclose this information in a footnote to the financial statements, but you believe disclosure is required to conform with GAAP. The amount of the uninsured loss was material, but not highly material.

Accepted Answer

1. f, 2. g, 3. a, 4.

Question 11

Auditing standards require that the audit report must be titled and that the title must

Accepted Answer

A)  include the word "independent." 
B)  indicate if the auditor is a CPA. 
C)  indicate if the auditor is a proprietorship, partnership, or corporation. 
D)  indicate the type of audit opinion issued. 
A)  include the word "independent." 
B)  indicate if the auditor is a CPA. 
C)  indicate if the auditor is a proprietorship, partnership, or corporation. 
D)  indicate the type of audit opinion issued.

Question 12

Which of the following is correct regarding IFRS?

Accepted Answer

A)  Companies that are required to file their financial statements with the SEC must follow IFRS starting in 2018. 
B)  Recent developments suggest that the SEC may be slowing down its efforts towards adopting IFRS any time soon. 
C)  When an auditor is engaged to report on financial statements prepared in accordance with IFRS, they must issue a qualified opinion. 
D)  The introductory paragraph of the audit report is modified to indicate that the audit was conducted in accordance with International Standards on Auditing. 
A)  Companies that are required to file their financial statements with the SEC must follow IFRS starting in 2018. 
B)  Recent developments suggest that the SEC may be slowing down its efforts towards adopting IFRS any time soon. 
C)  When an auditor is engaged to report on financial statements prepared in accordance with IFRS, they must issue a qualified opinion. 
D)  The introductory paragraph of the audit report is modified to indicate that the audit was conducted in accordance with International Standards on Auditing.

Question 13

The standard unmodified audit report

Accepted Answer

A)  is sometimes called a clean opinion. 
B)  can be issued only with an explanatory paragraph. 
C)  can be issued if only a balance sheet and income statement are included in the financial statements. 
D)  is sometimes called a disclaimer report. 
A)  is sometimes called a clean opinion. 
B)  can be issued only with an explanatory paragraph. 
C)  can be issued if only a balance sheet and income statement are included in the financial statements. 
D)  is sometimes called a disclaimer report.

Question 14

Discuss each of the five circumstances when an auditor would issue an unmodified opinion audit report with an emphasis-of-matter paragraph or nonstandard report wording.

Accepted Answer

An unmodified opinion audit report with

Question 15

The European Union has not yet implemented requirements for mandatory audit rendering and auditor rotation despite many years of debate on this subject.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?

Accepted Answer

A)  The entity is suing a competitor for a minor patent infringement. 
B)  The entity has lost a major customer. 
C)  The entity has significant recurring operating losses. 
D)  The entity has working capital deficiencies. 
A)  The entity is suing a competitor for a minor patent infringement. 
B)  The entity has lost a major customer. 
C)  The entity has significant recurring operating losses. 
D)  The entity has working capital deficiencies.

Question 17

In auditing the long-term investments account, Arens, CPA, is unable to obtain audited financial statements for an investee located in a foreign country. Levine concludes sufficient appropriate audit evidence regarding this investment cannot be obtained.
For each of the following situations below, identify the appropriate opinion type and report modification by selecting a choice from the appropriate tables below.

Accepted Answer

The answer of In auditing the long-term investments account, Arens,...

Question 18

The following is the introductory paragraph, and the Basis for Qualified Opinion paragraph for Fast Times Corporation, a nonpublic company.
Independent Auditor's Report
To the shareholders and the board of directors of Fast Times Corporation
We have audited the accompanying balance sheet of Fast Times Corporation as of September 30, 2019, and the related statements of income, retained earnings, and cash flows for the year then ended, and the related notes to the financial statements.
Basis for Qualified Opinion
We were unable to obtain audited financial statements supporting the company's investment in a foreign affiliate stated at $1,040,000, or its equity in earnings of that affiliate of $501,000, which is included in net income, as described in Note 14 to the financial statements. Because of the nature of the company's records, we were unable to satisfy ourselves as to the carrying value of the investment or the equity in its earnings by means of other auditing procedures.
Required:
Prepare the opinion paragraph for the above audit report. Do not date or sign the report.

Accepted Answer

In our opinion, except for the effects o

Question 19

An item with a "psychological" effect (e.g., where the item maintains an increasing earnings trend) is a qualitative factor that may affect the auditor's decision regarding materiality.

Accepted Answer

A) True 
 B)False

Question 20

The critical audit matters section of the auditor's report notes that this communication of critical audit matters alters the auditor's opinion on the financial statements.

Accepted Answer

A) True 
 B)False

Exam 3: Audit Reports

Indicate which change(s) would require an explanatory paragraph in the audit report.

When other auditors are involved in the audit and they qualify their portion of the audit, the principal auditor must decide if the amount in question is material to the financial statements as a whole.

When accounting principles are not consistently applied, and the materiality level is immaterial, the auditor will issue a(n)

In the case of a disclaimer due to lack of independence, the entire scope paragraph is excluded from the report.

The separate report on internal control over financial reporting

The final step in the auditor's decision process for audit reports is to write the audit report.

When there is a lack of consistent application in accounting principles,

The highest level of materiality exists when

The phrase "Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material error" is included in the auditor's opinion section of an audit report.

Auditing standards require that the audit report must be titled and that the title must

Which of the following is correct regarding IFRS?

The standard unmodified audit report

Discuss each of the five circumstances when an auditor would issue an unmodified opinion audit report with an emphasis-of-matter paragraph or nonstandard report wording.

The European Union has not yet implemented requirements for mandatory audit rendering and auditor rotation despite many years of debate on this subject.

Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?

An item with a "psychological" effect (e.g., where the item maintains an increasing earnings trend) is a qualitative factor that may affect the auditor's decision regarding materiality.

The critical audit matters section of the auditor's report notes that this communication of critical audit matters alters the auditor's opinion on the financial statements.

The Demand for Audit and Other Assurance Services

The CPA Profession

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Materiality

Assessing the Risk of Material Misstatement

Fraud Auditing

Internal Control and Coso Framework

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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