Question 1

Which of the following situations will not result in modification of the auditor's report because of a scope limitation?

Accepted Answer

A)  Restriction imposed by the client. 
B)  Reliance placed on the report of another auditor. 
C)  Inability to obtain sufficient appropriate evidential matter. 
D)  Inadequacy in the accounting records.

Question 2

A change in reporting entity is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

Accepted Answer

A) True 
 B)False

Question 3

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should

Accepted Answer

A)  Be titled so that the financial statements are not confused with statements prepared to conform to generally accepted accounting principles. 
B)  Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. 
C)  Not express an opinion on whether the statements are presented in conformity with the basis of accounting used. 
D)  Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

Question 4

Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must

Accepted Answer

A)  Obtain written approval from the predecessor auditor to include the prior year's financial statements. 
B)  Issue a standard comparative audit report indicating the division of responsibility. 
C)  Express an opinion on the current year statements alone and make no reference to the prior year statements. 
D)  Disclose the reasons for any qualification in the predecessor auditor's opinion.

Question 5

An engagement to express an opinion on a system of internal control will generally

Accepted Answer

A)  Only require those procedures already applied in assessing control risk during a financial statement audit. 
B)  Increase the reliability of the financial statements that have already been audited. 
C)  Be more extensive in scope than the assessment of control risk made during a financial statement audit. 
D)  Be more limited in scope than the assessment of control risk made during a financial statement audit.

Question 6

An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified/unmodified audit report.

Accepted Answer

A) True 
 B)False

Question 7

A CPA who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. The disclaimer should

Accepted Answer

A)  Clearly state the specific reasons for lack of independence. 
B)  Not mention any reason for the disclaimer other than that the CPA was unable to conduct the examination in accordance with generally accepted auditing standards. 
C)  Not describe the reason for lack of independence but should state specifically that the CPA is not independent. 
D)  Include a middle paragraph clearly describing the CPA's association with the entity and explaining why the CPA was unable to gather sufficient appropriate evidential matter to warrant the expression of an opinion.

Question 8

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Accepted Answer

A)  Inspecting title documents to verify whether any assets are pledged as collateral. 
B)  Confirming with third parties the details of arrangements to maintain financial support. 
C)  Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation. 
D)  Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

Question 9

For which of the following events would an auditor issue a report that does not include any reference to consistency?

Accepted Answer

A)  A change in the method of accounting for inventories. 
B)  A change from an accounting principle that is not generally accepted to one that is generally accepted. 
C)  A change in the service life used to calculate depreciation expense. 
D)  A change in accounting principle without reasonable justification from management.

Question 10

Jeff Johns is a staff accountant and has been assigned to the audit of Worldwide Enterprises, Inc. Subsequent to the completion of fieldwork, Jeff was assigned to draft the audit report. The content of one of the paragraphs he has drafted reads as follows:
As explained in Note 2 to the financial statements, Worldwide Enterprises has charged goodwill and certain other intangible assets acquired in two separate acquisitions directly to shareholders' equity. Under generally accepted accounting principles, these intangibles should have been recorded as assets and amortized to income over future periods. Had these intangibles been capitalized, total assets would have increased by $400,000 as of December 31, 2011 and net income and earnings per share would be increased by $380,000 and $2.25, respectively (assuming a 20-year amortization period).
a. Based on the contents of the paragraph above, which condition requiring a departure from a standard unqualified/unmodified opinion exists in the engagement?
b. Assuming that the engagement partner agrees with the paragraph Jeff has prepared above, where in the auditor's report should the paragraph be placed?
c. How would the materiality of the condition above affect the final choice of opinion?

Accepted Answer

The answer of Jeff Johns is a staff accountant and...

Question 11

Other bases of accounting (special purpose frameworks) include all of the following except:

Accepted Answer

A)  Tax basis. 
B)  Non-GAAP methods used for internal reporting. 
C)  Cash basis. 
D)  Regulatory basis.

Question 12

An auditor is reporting on cash basis financial statements. These statements are best referred to in his or her report by which one of the following descriptions?

Accepted Answer

A)  Financial position and results of operations arising from cash transactions. 
B)  Assets and liabilities arising from cash transactions and revenue collected and expenses paid. 
C)  Balance sheet and income statement resulting from cash transactions. 
D)  Cash balance sheet and the source and application of funds.

Question 13

A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis:

Accepted Answer

A)  Read the financial statements of the current period. 
B)  Read the financial statements of the past five years. 
C)  Obtain a letter of representations from the current-year, successor auditor. 
D)  Read the financial statements of the current period and obtain a letter of representation from the current-year, successor auditor.

Question 14

When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence, the auditor should issue a(n)

Accepted Answer

A)  "Subject to" qualified opinion. 
B)  Disclaimer of opinion. 
C)  Adverse opinion. 
D)  Unqualified/unmodified opinion with a separate explanatory/emphasis-of-matter paragraph.

Question 15

All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in an entity's annual report except:

Accepted Answer

A)  The auditor is under no obligation to perform audit procedures on this other information. 
B)  The auditor must consider whether the other information is consistent with the information contained in the audited financial statements. 
C)  The auditor must request that material inconsistencies be corrected. 
D)  The auditor must perform audit procedures on this other information.

Question 16

Which of the following circumstances should be recognized as a consistency modification in the auditor's report, whether or not the item is fully disclosed in the financial statements?

Accepted Answer

A)  A change in accounting estimate. 
B)  A change from an unacceptable accounting principle to a generally accepted one. 
C)  Correction of an error not involving a change in accounting principle. 
D)  A change in classification.

Question 17

An auditor would issue an adverse opinion if

Accepted Answer

A)  The audit was begun by other independent auditors who withdrew from the engagement. 
B)  A qualified opinion cannot be given because the auditor lacks independence. 
C)  A restriction on the scope of the audit was significant. 
D)  The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

Question 18

Changes that do not affect consistency are normally disclosed in the footnotes but do not require an explanatory/emphasis-of-matter paragraph in the audit report.

Accepted Answer

A) True 
 B)False

Question 19

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to

Accepted Answer

A)  Prepare prospective financial information to verify whether management's plans can be effectively implemented. 
B)  Project future conditions and events for a period of time not to exceed one year following the date of the financial statements. 
C)  Issue a qualified or adverse opinion, depending upon materiality, because of the possible effects on the financial statements. 
D)  Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

Question 20

Changes in an entity's accounting choices either affect "consistency" in the application of GAAP or they do not. For each item listed below, state whether the item affects consistency and identify the effect the change will have on the audit report.
1. Change in accounting estimate.
2. Correction of an error in principle.
3. Change in reporting entity.
4. Correction of an error that does not involve an accounting principle.
5. Change in accounting principle.
6. Change in classification and reclassification.
7. Change expected to have a material future effect.

Accepted Answer

The answer of Changes in an entity's accounting choices either...

Exam 18: Reports on Audited Financial Statements

Which of the following situations will not result in modification of the auditor's report because of a scope limitation?

A change in reporting entity is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should

Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must

An engagement to express an opinion on a system of internal control will generally

An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified/unmodified audit report.

A CPA who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. The disclaimer should

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

For which of the following events would an auditor issue a report that does not include any reference to consistency?

Other bases of accounting (special purpose frameworks) include all of the following except:

An auditor is reporting on cash basis financial statements. These statements are best referred to in his or her report by which one of the following descriptions?

A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis:

When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence, the auditor should issue a(n)

All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in an entity's annual report except:

Which of the following circumstances should be recognized as a consistency modification in the auditor's report, whether or not the item is fully disclosed in the financial statements?

An auditor would issue an adverse opinion if

Changes that do not affect consistency are normally disclosed in the footnotes but do not require an explanatory/emphasis-of-matter paragraph in the audit report.

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to