Question 1

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 2

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 3

An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include all of the following except:

Accepted Answer

A)  an opinion as to whether the basis of accounting used is appropriate under the circumstances. 
B)  an opinion as to whether the financial statements are presented fairly in conformity with the other basis of accounting. 
C)  reference to the note to the financial statements that describes the basis of presentation. 
D)  a statement that the basis of presentation is a basis of accounting other than generally accepted accounting principles.

Question 4

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 5

The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to

Accepted Answer

A)  indicate in the auditor's report that the "other financial information" is unaudited. 
B)  consider whether the "other financial information" is accurate by performing a limited review. 
C)  obtain written representations from management as to the material accuracy of the "other financial information." 
D)  read and consider the manner of presentation of the "other financial information."

Question 6

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.

Question 7

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 8

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 9

Which of the following would be considered a change that does not affect consistency?

Accepted Answer

A)  Change in accounting estimate. 
B)  Change in accounting principle. 
C)  Correction of an error in principle. 
D)  None of these are considered changes that do not affect consistency.

Question 10

When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented for a public company and the auditor concurs with the change,the auditor should

Accepted Answer

A) Option A. 
B) Option B. 
C) Option C. 
D) Option D.

Question 11

In connection with the examination of the consolidated financial statements of Mott Industries,Frazier,CPA,plans to refer to another CPA's examination of the financial statements of a subsidiary company.Under these circumstances,Frazier's report must disclose

Accepted Answer

A)  the name of the other CPA and the type of report issued by the other CPA. 
B)  the portion of the financial statements examined by the other CPA. 
C)  the nature of Frazier's review of the other CPA's work. 
D)  in a footnote the portions of the financial statements that were covered by the examinations of both auditors.

Question 12

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

Accepted Answer

A)  ability to expand operations into new product lines in the future. 
B)  feasibility of plans to purchase leased equipment at less than market value. 
C)  marketability of assets that management plans to sell. 
D)  committed arrangements to convert preferred stock to long-term debt.

Question 13

Management 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 the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements,the auditor should issue a(an)

Accepted Answer

A)  qualified report due to a scope limitation. 
B)  qualified report due to a departure from GAAP. 
C)  unqualified report with an explanatory/emphasis-of-matter paragraph. 
D)  a standard unmodified auditor's report.

Question 14

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 15

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 16

What is an auditor's responsibility for supplementary information,such as segment information,that is outside the basic financial statements,but required by the FASB?

Accepted Answer

A)  The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements. 
B)  The auditor's only responsibility for required supplementary information is to assist in preparing the supplementary information. 
C)  The auditor is required to read the other information and consider whether such information is consistent with the information in the financial statements. 
D)  The auditor should apply tests of details of transactions and balances to the required supplementary information and report any material misstatements in such information.

Question 17

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 18

When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented,the successor auditor should make

Accepted Answer

A)  no reference to the predecessor auditor. 
B)  reference to the predecessor auditor only if the predecessor auditor expressed a qualified opinion. 
C)  reference to the predecessor auditor only if the predecessor auditor expressed an unqualified opinion. 
D)  reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.

Question 19

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 opinion.

Question 20

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 opinion. 
D)  disclaimer of opinion.

Exam 18: Reports on Audited Financial Statements

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