Certified Public Accountant CPA Questions + Answers Part 19

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QUESTION 23
Reference in a principal auditor's report to the fact that part of the audit was performed by another auditor most likely would be an indication of the:

A. Dividedresponsibilitybetweentheauditorswhoconductedtheauditsofthecomponentsoftheoverallfinancialstatements. B. Lackofmaterialityoftheportionofthefinancialstatementsauditedbytheotherauditor.
C. Principal auditor's recognition of the other auditor's competence, reputation, and professional certification.
D. Different opinions the auditors are expressing on the components of the financial statements that each audited.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Reference to another auditor indicates division of responsibility for the audits of the components of the overall financial statements. Choice "b" is incorrect. Reference to another auditor would not generally be made if the other auditor's portion of the financial statements were immaterial. Choice "c" 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. Choice "d" is incorrect. The reference to the other auditor would be made regardless of what type of opinion is expressed by each auditor.
QUESTION 24
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. Isconsideredan"exceptfor"qualificationoftheopinion.
B. Violatesgenerallyacceptedauditingstandardsifthisinformationisalreadydisclosedinfootnotestothefinancialstatements. 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.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Emphasis of a matter should be disclosed in an explanatory paragraph appended to an otherwise unqualified opinion. Choice "a" is incorrect. An "except for" qualification is used for a scope limitation or a departure from GAAP, but not for emphasis of a matter. Choice "b" is incorrect. The auditor may emphasize a matter even if it is included in the footnotes.
Choice "c" is incorrect. A phrase such as "with the foregoing Explanation: " should not be used in an unqualified opinion.
QUESTION 25

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. Refertothechangeinanexplanatoryparagraph. B. Explicitlyconcurthatthechangeispreferred.
C. Not refer to consistency in the auditor's report.
D. Refer to the change in the opinion paragraph.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" 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 "a" is incorrect. The change would only be referred to in an explanatory paragraph if the effect were material.
Choice "b" is incorrect. The auditor does not explicitly concur with the change in the report. Choice "d" is incorrect. Even if the change had a material effect, the opinion paragraph would not be affected. The explanatory paragraph would follow the opinion paragraph.
QUESTION 26
When single-year financial statements are presented, an auditor ordinarily would express an unqualified opinion in an unmodified report if the:
A. Auditorisunabletoobtainauditedfinancialstatementssupportingtheentity'sinvestmentinaforeignaffiliate.
B. Entitydeclinestopresentastatementofcashflowswithitsbalancesheetandrelatedstatementsofincomeandretainedearnings.
C. Auditor wishes to emphasize an accounting matter affecting the comparability of the financial statements with those of the prior year. D. Prior year's financial statements were audited by another CPA whose report, which expressed an unqualified opinion, is not presented.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Since only single-year financial statements are presented, the fact that another CPA audited the prior year's financial statements is not relevant. Therefore, the auditor would express an unqualified opinion in an unmodified report. Choice "a" is incorrect. The situation described would result in a qualified opinion or disclaimer of opinion due to a scope limitation.
Choice "b" is incorrect. The situation described would result in an qualified opinion due to inadequate disclosure.

Choice "c" is incorrect. The situation described would result in an otherwise unqualified opinion modified by adding an additional explanatory paragraph after the opinion paragraph.
QUESTION 27
Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, 20X3. 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, 20X3, inventory balances. Park's opinion on Tech's 20X3 financial statements most likely will be:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" 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 unqualified opinion on the balance sheet, since inventory can be verified as of the balance sheet date.
Choices "a", "c", and "d" are incorrect, based on the Explanation: above.
QUESTION 28
Which paragraphs of an auditor's standard report on financial statements should refer to generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP)?
A. Option A

B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor states that the audit was conducted in accordance with GAAS in the scope paragraph. The auditor expresses an opinion on the financial statements' conformity with GAAP in the opinion paragraph.
Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 29
In which of the following circumstances would an auditor be most likely to express an adverse opinion?
A. Thechiefexecutiveofficerrefusestheauditoraccesstominutesofboardofdirectors'meetings.
B. Testsofcontrolsshowthattheentity'sinternalcontrolissopoorthatitcannotbereliedupon.
C. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.
D. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An adverse opinion is issued when the financial statements are not presented in accordance with GAAP.
Choice "a" 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 "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 "d" is incorrect. Substantial doubt with regard to the entity's ability to continue as a going concern should be disclosed in an additional explanatory paragraph appended to an otherwise unqualified opinion.
QUESTION 30
When disclaiming an opinion due to a client-imposed scope limitation, an auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards.
The auditor should also omit the:

A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
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. The auditor should also omit the scope paragraph. The opinion paragraph is not omitted; however it indicates that no opinion is expressed.
Choices "a", "b", and "c" are incorrect, as per the above Explanation: .
QUESTION 31
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. Aclient-imposedscopelimitation.
B. Adeparturefromgenerallyacceptedauditingstandards. C. The possible effects on the financial statements.
D. Inadequate disclosure of necessary information.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation

Explanation/Reference:
Explanation:
Choice "c" 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. 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. 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 "d" is incorrect. Inadequate disclosure of necessary information is a departure from GAAP, rather than a scope limitation.
QUESTION 32
When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate explanatory paragraph and modify the:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In a report qualified for inadequate disclosure, the auditor would add an explanatory paragraph and modify the opinion paragraph, but the introductory and scope paragraphs would not be modified.
Choices "a", "b", and "c" are incorrect, as per the above Explanation: .

QUESTION 33
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. "Exceptfor"qualifiedopinion. B. Explanatoryparagraph.
C. Unqualified opinion.
D. Consistencymodification.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" 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. Accounting changes that are accounted for properly do not result in qualified opinions.
Choices "b" and "d" are incorrect. A consistency modification (explanatory paragraph) is not necessary when the effect of a change is immaterial.
QUESTION 34
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. Disclaimerofopinion.
B. Qualifiedopinion.
C. Review report.
D. Unqualified opinion with a separate explanatory paragraph.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" 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 "c" is incorrect. The auditor would not issue a review report when performing an audit. Choice "d" is incorrect. The auditor cannot issue an unqualified report if the client omits a statement of cash flows from the financial statements.
QUESTION 35
In which of the following circumstances would an auditor most likely add an explanatory paragraph to the standard report while not affecting the auditor's unqualified opinion?
A. Theauditorisaskedtoreportonthebalancesheet,butnotontheotherbasicfinancialstatements. B. Thereissubstantialdoubtabouttheentity'sabilitytocontinueasagoingconcern.
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.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. 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 an explanatory paragraph to reflect that conclusion. 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 explanatory 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.
QUESTION 36
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 explanatory paragraph added to the auditor's report. This paragraph should identify the nature of the change and:
A. Explainwhythechangeisjustifiedundergenerallyacceptedaccountingprinciples. B. Describethecumulativeeffectofthechangeontheauditedfinancialstatements. C. State the auditor's explicit concurrence with or opposition to the change.
D. Refer to the financial statement note that discusses the change in detail.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics

Explanation Explanation/Reference:
Explanation:
Choice "d" 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 explanatory paragraph:
"As discussed in Note X to the financial statements, the company changed its method of accounting for income taxes in X2."
Choice "a" is incorrect. The auditor need not explain why a change from one generally accepted accounting principle to another is justified.
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.
QUESTION 37
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. Unqualifiedopinion.
B. Unqualifiedopinionwithanexplanatoryparagraph.
C. Qualified opinion due to a scope limitation.
D. Qualified opinion due to a departure from generally accepted auditing standards.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
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 unqualified opinion could be issued.
Choice "b" is incorrect. Since Green was satisfied as far as the accounts receivable balances, there is no need to add an explanatory paragraph.
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 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.
QUESTION 38

Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period of time. In evaluating Hill's plans for dealing with the adverse effects of future conditions and events, Davis most likely would consider, as a mitigating factor, Hill's plans to:
A. Accelerateresearchanddevelopmentprojectsrelatedtofutureproducts. B. AccumulatetreasurystockatpricesfavorabletoHill'shistoricpricerange. C. Purchase equipment and production facilities currently being leased.
D. Negotiate reductions in required dividends being paid on preferred stock.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Negotiating reductions in required dividends would conserve cash, which would be a mitigating factor in Davis' concerns about Hill's ability to continue as a going concern.
Choice "a" is incorrect. Accelerating R&D projects would use cash and impair the company's ability to continue as a going concern.
Choice "b" is incorrect. Accumulating treasury stock would consume cash and aggravate the situation.
Choice "c" is incorrect. Purchasing equipment that is currently leased would use cash and impair the company further.
QUESTION 39
In the auditor's report, the principal auditor decides not to make reference to another CPA who audited a client's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor:
A. Issuesanunqualifiedopinionontheconsolidatedfinancialstatements.
B. LearnsthattheotherCPAissuedanunqualifiedopiniononthesubsidiary'sfinancialstatements. C. Is unable to review the audit programs and audit documentation of the other CPA.
D. Is satisfied as to the independence and professional reputation of the other CPA.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If, among other requirements, the principal auditor is satisfied as to the independence and the professional reputation of the other auditor, the principal auditor may express an opinion on the financial statements taken as a whole without making reference to the audit of the other auditor.
Choice "a" is incorrect. Whether or not an unqualified opinion is issued is not the determining factor as to whether the principal auditor must make reference to

another CPA. Choice "b" is incorrect. Whether or not an unqualified opinion is issued on the subsidiary's financial statements is not the determining factor as to whether the principal auditor must make reference to another CPA.
Choice "c" is incorrect. If the principal auditor is unable to review the audit programs and audit documentation of the other CPA, he or she is likely to divide responsibility by making reference to the other CPA in the auditor's report.
QUESTION 40
A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when management:
A. Isunabletoobtainauditedfinancialstatementssupportingtheentity'sinvestmentinaforeignsubsidiary.
B. RefusestodiscloseinthenotestothefinancialstatementsrelatedpartytransactionsauthorizedbytheBoardofDirectors.
C. Does not provide the auditor with an engagement letter specifying the responsibilities of both the entity and the auditor.
D. Fails to correct a significant deficiency in internal control communicated to those charged with governance after the prior year's audit.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" 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 "b" 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.
Choice "c" is incorrect. The auditor sends an engagement letter to the client, not vice versa. Choice "d" is incorrect. Management may choose not to correct a significant deficiency in internal control if the cost of correcting the condition outweighs the benefit.
QUESTION 41
When an auditor expresses an adverse opinion, the opinion paragraph should include:
A. Theprincipaleffectsofthedeparturefromgenerallyacceptedaccountingprinciples. B. Adirectreferencetoaseparateparagraphdisclosingthebasisfortheopinion.
C. The substantive reasons for the financial statements being misleading.
D. A description of the uncertainty or scope limitation that prevents an unqualified opinion.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation

Explanation/Reference:
Explanation:
Choice "b" is correct. The opinion paragraph in an adverse opinion reads, "in our opinion, because of the effects of the matters discussed in the preceding paragraphs, the financial statements...."
Choice "a" is incorrect. The principal effects of the departure from GAAP are included in the explanatory paragraph, not the opinion paragraph.
Choice "c" is incorrect. The "substantive reasons for the financial statements being misleading" are discussed in the explanatory paragraph, not the opinion paragraph. 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.)
QUESTION 42
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
A. Thefinancialstatementsfailtocontainadequatedisclosureofrelatedpartytransactions.
B. Theclientrefusestopermititsattorneytofurnishinformationrequestedinaletterofauditinquiry.
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 auditor is unable to determine the amounts associated with illegal acts committed by the client's management.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" 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 "b" 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 "c" is incorrect. The auditor's inability to observe physical inventories or apply alternative procedures to verify their balances could result in a disclaimer. Choice "d" 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.
QUESTION 43
Green, CPA, concludes that there is substantial doubt about JKL Co.'s ability to continue as a going concern. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report should:

A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. "Yes - Yes - Yes."
When a CPA concludes that there is substantial doubt about an entity's ability to continue as a going concern and the entity adequately discloses its financial difficulties, an unqualified opinion is appropriate.
An explanatory paragraph (following the opinion paragraph) should be used to highlight the situation.
This paragraph should include the phrases "substantial doubt" and "going concern." Choices "b", "c", and "d" are incorrect, per above.
QUESTION 44
An auditor may reasonably issue an "except for" qualified opinion for a(an):

A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Yes - Yes.
An "except for" qualified opinion is expressed when the "exceptions to GAAP" are not material enough to warrant an adverse opinion, or when scope restrictions are not material enough to warrant a disclaimer.
Choices "a", "b", and "d" are incorrect, per rule above.
QUESTION 45
The following explanatory paragraph was included in an auditor's report to indicate a lack of consistency:
"As discussed in note T to the financial statements, the company changed its method of computing depreciation in X0."
How should the auditor report on this matter if the auditor concurred with the change? Type of Location of opinion explanatory paragraph
A. UnqualifiedBeforeopinionparagraph B. UnqualifiedAfteropinionparagraph C. Qualified Before opinion paragraph D. Qualified After opinion paragraph
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics

Explanation Explanation/Reference:
Explanation:
Choice "b" is correct. If the auditor concurred with the change, a lack of consistency in applying GAAP would result in an unqualified opinion with an explanatory paragraph following the opinion paragraph.
Choice "c" is incorrect. If the change in accounting principle is not accounted for properly, then a qualified opinion would be appropriate and the explanatory paragraph would appear before the opinion paragraph.
Choices "a" and "d" are incorrect, per the above rules.
QUESTION 46
How does an auditor make the following representations when issuing the standard auditor's report on comparative financial statements?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Explicitly - Implicitly.
The auditor explicitly states in the scope paragraph of his opinion: "an audit includes examining, on a test basis, evidence supporting..." Consistency is implied in the auditor's standard report. Choices "a", "b", and "c" are incorrect, as per above Explanation: .
QUESTION 47
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. Qualifiedopinionandanunqualifiedopinionwithanexplanatoryparagraph. B. Unqualifiedopinionwithanexplanatoryparagraphandanadverseopinion. C. Adverse opinion and a disclaimer of opinion.
D. Disclaimer of opinion and a qualified opinion.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" 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 "a" is incorrect. An unqualified opinion would only be justified if the transactions in question were not material, but in such situations, no explanatory paragraph would be required. Choices "b" and "c" are incorrect. An adverse opinion pertains to GAAP and would not be used for reporting restrictions of scope.
QUESTION 48
In which of the following situations would a principal auditor least likely make reference to another auditor who audited a subsidiary of the entity?
A. Theotherauditorwasretainedbytheprincipalauditorandtheworkwasperformedundertheprincipalauditor'sguidanceandcontrol.
B. Theprincipalauditorfindsitimpracticabletoreviewtheotherauditor'sworkorotherwisebesatisfiedastotheotherauditor'swork.
C. The financial statements audited by the other auditor are material to the consolidated financial statements covered by the principal auditor's opinion. D. The principal auditor is unable to be satisfied as to the independence and professional reputation of the other auditor.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When the principal auditor assumes responsibility for the other auditor's work, the principal auditor would not mention the other auditor in his audit report (opinion). The principal auditor would generally assume responsibility after reviewing the audit documentation of the other auditor and performing supplemental audit tests, or by reputation, e.g., if the other auditor is a correspondent (foreign) firm in which the principal auditor has developed confidence. Choices "b" and "c" are incorrect. When the principal auditor finds it impractical to review the other auditor's work, or when the FS audited by the other auditor are material, it is more likely that the principal auditor will divide responsibility and make reference to the other auditor. Choice "d" is incorrect. The principal auditor should always make inquiries regarding the independence and professional reputation of the other auditor. Inability to become satisfied in this regard would constitute a scope limitation, resulting in a qualified opinion or disclaimer of opinion. In either of these scenarios, it is likely that the other auditor would be

mentioned within an explanatory paragraph.
QUESTION 49
In which of the following situations would an auditor ordinarily issue an unqualified audit opinion without an explanatory paragraph?
A. Theauditorwishestoemphasizethattheentityhadsignificantrelatedpartytransactions.
B. Theauditordecidestomakereferencetothereportofanotherauditorasabasis,inpart,fortheauditor'sopinion.
C. The entity issues financial statements that present financial position and results of operations, but omits the statement of cash flows.
D. The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An auditor would generally issue an unqualified audit opinion without an explanatory paragraph when the auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion. The auditor would modify his/her report (all three paragraphs), but would not add an explanatory paragraph. Choices "a" and "d" are incorrect. An auditor ordinarily would issue an unqualified opinion with an explanatory paragraph if he or she wishes to emphasize that the entity had significant related party transactions, or if the auditor has substantial doubt about the entity's ability to continue as a going concern (even if the circumstances are fully disclosed in the financial statements). 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.
QUESTION 50
When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented and the auditor concurs with the change, the auditor should:
A. Option A

B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
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 explanatory paragraph following the unqualified opinion paragraph.
Choices "b" and "c" are incorrect. The auditor's concurrence with a change in GAAP is implicit, not explicit.
Choice "d" is incorrect. An unqualified opinion should be issued, not an "except for" qualified opinion.
QUESTION 51
When a qualified opinion results from a limitation on the scope of the audit, the situation should be described in an explanatory paragraph:
A. Precedingtheopinionparagraphandreferredtoonlyinthescopeparagraphoftheauditor'sreport.
B. Followingtheopinionparagraphandreferredtoinboththescopeandopinionparagraphsoftheauditor'sreport. C. Following the opinion paragraph and referred to only in the scope paragraph of the auditor's report.
D. Preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When a qualified opinion results from a limitation of scope, it should be described in an explanatory paragraph preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report. Choices "a", "b", and "c" are incorrect, as they do not comply with the rule above.
QUESTION 52
Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35% of all assets. Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should issue a(an):

A. "Exceptfor"qualifiedopinion.
B. Disclaimerofopinion.
C. Unqualified opinion with a separate explanatory paragraph.
D. Unqualified opinion with an Explanation: in the scope paragraph.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Restrictions of scope imposed on the audit of such a large (35%) asset would require a disclaimer of opinion. Choices "a" and "c" are incorrect. The asset not audited is too large for a qualified opinion and much too large for an unqualified opinion. Choice "d" is incorrect. Explanatory language does not get inserted into the scope paragraph, nor is an unqualified opinion appropriate.
QUESTION 53
An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include a(an):
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:

Choice "d" is correct. Yes - No.
If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern and that the entity's disclosures are adequate, then the audit report may be either:
- Unqualified with explanatory paragraph, or
- Disclaimed.
(Generally, an unqualified opinion is issued, but the auditor is not prohibited from choosing to issue a disclaimer.)
Choice "a" is incorrect. An "except for" qualified opinion would be appropriate if the entity's disclosures were inadequate.
Choice "b" is incorrect. While an unqualified opinion is generally issued, the auditor is not prohibited from choosing to issue a disclaimer; for example, in areas involving a high degree of uncertainty.
Choice "c" is incorrect, per Explanation: above.
QUESTION 54
An auditor should disclose the substantive reasons for expressing an adverse opinion in an explanatory paragraph:
A. Precedingthescopeparagraph.
B. Precedingtheopinionparagraph.
C. Following the opinion paragraph.
D. Within the notes to the financial statements.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor should disclose the substantive reasons for expressing an adverse opinion in a separate explanatory paragraph preceding the opinion paragraph. Choice "a" is incorrect. There are no circumstances where an explanatory paragraph precedes the scope paragraph.
Choice "c" is incorrect. The explanatory paragraph follows the opinion paragraph when there is a change in accounting principle or when there is doubt as to going concern. Choice "d" is incorrect. The auditor cannot include an explanatory paragraph in the financial statements, which are the responsibility of management.
QUESTION 55
When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative financial statements, the auditor should express a qualified opinion:
A. Onlyintheyearoftheaccountingprinciplechange.
B. Eachyearthatthefinancialstatementsinitiallyreflectingthechangearepresented. C. Each year until management changes back to the accounting principle formerly used. D. Only if the change is to an accounting principle that is not generally accepted.

Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative FS, the auditor should express a qualified opinion each year that the FS initially reflecting the change are presented. Choices "a", "c", and "d" are incorrect, per the rule stated above.
QUESTION 56
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. Compilationreport.
B. Disclaimerofopinion.
C. Unaudited association report. D. Qualified opinion.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" 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 "a" 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.
QUESTION 57
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. 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. Disclaimerofopinion.
B. Qualifiedopinion.
C. Adverse opinion.
D. Unqualified opinion with an explanatory paragraph.

Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" 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 quite material), a disclaimer of opinion (rather than simply a qualification) is appropriate.
Choice "b" is incorrect. Since the inventory balance is so material, a qualified opinion is not sufficient in this case.
Choice "c" is incorrect. An adverse opinion is not an appropriate response to a scope limitation. Choice "d" is incorrect. Since the scope limitation relates to a material balance, an unqualified opinion is not appropriate.
QUESTION 58
Which of the following audit 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?
A. Readingtheminutesofmeetingsofthestockholdersandtheboardofdirectors.
B. Comparingthemarketvalueofpropertytoamountsowedontheproperty.
C. Reviewing lease agreements to determine whether leased assets should be capitalized. D. Inspecting title documents to verify whether any assets are pledged as collateral.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor should examine any evidence that appears contrary to the basic principle of going concern. Reviewing the minutes from stockholder and board of director meetings is one procedure that is used in this regard. Choice "b" is incorrect. Comparison of the market value of property to amounts owed on the property determines its net value, but would not necessarily indicate a going concern issue. Choice "c" is incorrect. Reviewing lease agreements to determine whether leased assets should be capitalized is important in evaluating the financial statements, but it would not provide evidence of going concern issues.
Choice "d" is incorrect. Inspecting title documents to verify whether any assets are pledged as collateral provides information regarding presentation and disclosure, but would not provide evidence of going concern issues.
QUESTION 59
Which of the following 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?

A. Performingcutofftestsofsalestransactionswithcustomerswithlong-standingreceivablebalances. B. Evaluatingtheentity'sproceduresforidentifyingandrecordingrelatedpartytransactions.
C. Inspecting title documents to verify whether any real property is pledged as collateral.
D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If a liability is significant enough, it may give rise to a situation in which there is substantial doubt about an entity's ability to continue as a going concern. Inquiring of an entity's legal counsel about litigation, claims, and assessments is one way to determine whether such a liability exists.
Choice "a" is incorrect. Cutoff tests are used to determine whether sales are recorded in the proper period. Applying such tests to customer accounts with long- standing receivable balances would not provide information about the entity's ability to continue a as a going concern. Choice "b" is incorrect. Evaluating the entity's procedures for identifying and recording related party transactions is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues. Choice "c" is incorrect. Identifying situations in which real property is pledged as collateral is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues.
QUESTION 60
A CPA's standard report on audited financial statements would be inappropriate if it referred to:
A. Management'sresponsibilityforthefinancialstatements. B. Anassessmentoftheentity'saccountingprinciples.
C. Significant estimates made by management.
D. The CPA's assessment of sampling risk factors.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The CPA's standard report on audited financial statements does not include matters related to the auditor's assessment of specific risk factors. Choice "a" is incorrect. The CPA's standard report on audited financial statements states that, "These financial statements are the responsibility of the Company's management." Choices "b" and "c" are incorrect. The CPA's standard report on audited financial statements states that, "An audit also includes assessing the accounting principles used and significant estimates made by management."