Question 1

When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the entity's financial statement?

Accepted Answer

A)   When the auditor believes the financial statements are misleading.
B)   When the auditor was unable to observe the taking of the physical inventory.
C)   When the auditor is uncertain about the outcome of a material uncertainty.
D)   When the auditor has performed insufficient auditing procedures to express an opinion. A

Question 2

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

Accepted Answer

A)   Is considered an "except for" qualification of the opinion.
B)   Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
C)   Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
D)   Is appropriate and would not negate the unqualified/unmodified opinion. D

Question 3

Which of the following would be considered a change that affects consistency?

Accepted Answer

A)   Change in accounting estimate.
B)   Change in accounting principle.
C)   Change in classification and reclassification.
D)   All of the other options are correct. B

Question 4

If a public 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)

Accepted Answer

A)   Disclaimer of opinion.
B)   Qualified opinion.
C)   Review report.
D)   Unqualified opinion with a separate explanatory paragraph.

Question 5

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion?

Accepted Answer

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.

Question 6

Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report?

Accepted Answer

A)   Additional emphasis.
B)   Lack of consistency in the financial statements due to accounting changes.
C)   Going concern.
D)   Opinion based in part on the report of another auditor.

Question 7

For each of the following situations, indicate what type of audit report is most appropriate.
a. The auditor lacks independence in fact, but not necessarily in appearance.
b. There is a scope limitation and it is material but the overall financial statements are still presented fairly.
c. The uncorrected misstatements are immaterial.
d. There is a departure from GAAP and it is pervasively material.

Accepted Answer

The answer of For each of the following situations, indicate...

Question 8

In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor

Accepted Answer

A)   Issues an unqualified/unmodified opinion on the consolidated financial statements.
B)   Learns that the other CPA issued an unqualified/unmodified opinion on the subsidiary's financial statements.
C)   Is unable to review the other CPA's audit programs and working papers.
D)   Is satisfied as to the other CPA's independence and professional reputation.

Question 9

When audited financial statements are presented in a document containing other information, the auditor

Accepted Answer

A)   Has an obligation to perform auditing procedures to corroborate the other information.
B)   Is required to issue an "except for" qualified opinion if the other information has a material misstatement of fact.
C)   Should read the other information to consider whether it is inconsistent with the audited financial statements.
D)   Has no responsibility for the other information because it is not part of the basic financial statements.

Question 10

In the first audit of an entity, because of the entity's record retention policies, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. If the amounts in question could materially affect current operating results, the auditor would

Accepted Answer

A)   Be unable to express an opinion on the current year's results of operations and cash flows.
B)   Express a qualified opinion on the financial statements because of a client-imposed scope limitation.
C)   Withdraw from the engagement and refuse to be associated with the financial statements.
D)   Specifically state that the financial statements are not comparable to the prior year because of an uncertainty.

Question 11

An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements.

Accepted Answer

A) True 
 B)False

Question 12

The choice of which audit report to issue depends on the condition and the materiality of any departure.

Accepted Answer

A) True 
 B)False

Question 13

A special report related to compliance with contractual provisions provides

Accepted Answer

A)   Positive assurance.
B)   Negative assurance.
C)   No assurance.
D)   None of these.

Question 14

When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the

Accepted Answer

A)   Possibility of purchasing certain assets rather than leasing them.
B)   Capability of extending the due dates of existing debt.
C)   Appropriateness of changing depreciation methods from double declining balance to straight line.
D)   Marketability of property and equipment that management plans to keep.

Question 15

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

Accepted Answer

A)   Adverse and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added.
B)   Disclaimer and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added.
C)   Qualified and adverse.
D)   Qualified and disclaimer.

Question 16

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

Accepted Answer

A)   Significant related party transactions are pervasive.
B)   Usual trade credit from suppliers is denied.
C)   Arrearages in preferred stock dividends are paid.
D)   Restrictions on the disposal of principal assets are present.

Question 17

When audited financial statements are presented in an entity's document containing other information, the auditor should

Accepted Answer

A)   Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
B)   Add an explanatory paragraph to the auditor's report without changing the opinion on the financial statements.
C)   Perform the appropriate substantive auditing procedures to corroborate the other information.
D)   Read the other information to determine that it is consistent with the audited financial statements.

Question 18

When an auditor expresses an adverse opinion, the opinion paragraph should include

Accepted Answer

A)   The principal effects of the departure from generally accepted accounting principles.
B)   A direct reference to a separate paragraph disclosing the basis for the opinion.
C)   The substantive reasons for the financial statements being misleading.
D)   A description of the uncertainty or scope limitation that prevents an unqualified opinion.

Question 19

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n)

Accepted Answer

A)   "Except for" opinion.
B)   Adverse opinion.
C)   Unqualified/unmodified opinion.
D)   Disclaimer of opinion.

Question 20

Which of the following parties is responsible for the fairness of the representations made in financial statements?

Accepted Answer

A)   Entity's management.
B)   Independent auditor.
C)   Audit committee.
D)   AICPA.

Exam 18: Reports on Audited Financial Statements