Certified Public Accountant CPA Questions + Answers Part 18

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QUESTION 493
What term is used to describe a partnership without a specified duration?
A. Aperpetualpartnership. B. Apartnershipbyestoppel. C. An indefinite partnership. D. A partnership at will.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A partnership at will is a partnership with no definite term (i.e., without specified duration). Such a partnership can be terminated at any time. Choice "a" is incorrect. A partnership without a specified duration is called a partnership at will, not a perpetual partnership. There is no such thing as a perpetual partnership because a partnership is not perpetual. A partnership may be dissolved after a partner dies or otherwise dissociates from the partnership.
Choice "b" is incorrect. A partnership by estoppel is the appearance of a partnership when there is no formal partnership. If parties who are not partners give the appearance to third parties that they are partners, the law may deem the parties to be a partnership by estoppel. The parties will be treated as partners, even though they are not.
Choice "c" is incorrect. The legal term for a partnership of indefinite duration is a partnership at will, not an indefinite partnership.
General Partnership
QUESTION 494
On February 1, Addison, Bradley, and Carter, physicians, formed ABC Medical Partnership. Dr. Bradley was placed in charge of the partnership's financial books and records. On April 1, Dr. Addison joined the City Hospital Medical Partnership, retaining the partnership interest in ABC. On May 1, ABC received a writ of attachment from the court attaching Dr. Carter's interest in ABC. The writ resulted from Dr. Carter's failure to pay a credit card bill. On June 1, Dr. Addison was adjudicated bankrupt. On July 1, Dr. Bradley was sued by the other partners of ABC for an accounting of ABC's revenues and expenses.
Under the Revised Uniform Partnership Act, which of the preceding events resulted in the dissociation of a partner? A. Dr.AddisonjoiningtheCityHospitalMedicalPartnership.

B. Dr.Carter'sinterestinthepartnershipbeingattachedbythecourt.
C. Dr. Addison being adjudicated bankrupt.
D. Dr. Bradley being sued for an accounting by the other partners of ABC.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The bankruptcy of a partner will result in the dissociation of a partner. Choice "a" is incorrect, because although joining the city hospital medical partnership could be construed as a breach of fiduciary duty owed to the other partners in ABC medical partnership, standing alone, it would not result in a dissociation.
Choice "b" is incorrect. All that was attached was the partner's right to distributions, which does not cause dissociation.
Choice "d" is incorrect, because although being sued might cause Dr. Bradley to resign, which would cause dissociation, standing alone, being sued by the other partners does not cause dissociation.
QUESTION 495
The partners of College Assoc., a general partnership, decided to dissolve the partnership and agreed that none of the partners would continue to use the partnership name. Under the Revised Uniform Partnership Act, which of the following events will occur on dissolution of the partnership?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation

Explanation/Reference:
Explanation:
Choice "c" is correct. "No - Yes."
Rule: Upon the dissolution of the partnership, each of the partners continues to have liability for partnership debts. Upon dissolution of the partnership each of the partners will continue to have apparent authority. The apparent authority of a partner can only be negated upon proper notice to third parties.
Choices "a", "b", and "d" are incorrect, per the above rule.
QUESTION 496
Which of the following requirements must be met to have a valid partnership exist?
A. Co-ownershipofallpropertyusedinabusiness. II. Co-ownership of a business for profit.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct.
Rule: A partnership is defined as an association of two or more persons who agree to carry on as coowners a business for profit. Thus, II is necessary. However, there is no requirement that all property used in the business be co-owned; it may be owned by individual partners. Thus I is not necessary. Choices "a", "c", and "d" are incorrect, per the above rule.
QUESTION 497
If a nation has many rival domestic firms which are all competitive in the global marketplace for a product, which of the four major factors that Michael Porter has indicated impact the global competitive environment would allow this nation to fare better with respect to global competitive advantage?
A. Conditionsofthefactorsofproduction. B. Conditionsofdomesticdemand.
C. Related and supporting industries.
D. Firm strategy, structure, and rivalry.

Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The factor of related and supporting industries deals with whether there are suppliers of material inputs that exist within a nation or whether there are rival firms who are competitive in the international environment, both of which would increase the nation's competitive advantage.
Choice "a" is incorrect. If a nation has a strong set of factors of production (such as low-cost, high quality raw material inputs), that are required in a given industry, it will fare better with regard to competitive advantage. However, this factor is different from the "many rival domestic firms which are all competitive in the global marketplace for a product" as stated in the question. Choice "b" is incorrect. The factor of conditions of domestic demand related to the nation's domestic demand for the product, which is directly related to the ability of the nation to fare better with regard to competitive advantage. However, this factor is different from the "many rival domestic firms which are all competitive in the global marketplace for a product" as stated in the question. Choice "d" is incorrect. The factor of firm strategy, structure, and rivalry relates to the practices of a nation with respect to how the companies are managed and organized, along with the laws of the nation that regulate the formation of the companies, and how intense the rivalry is with respect to competing firms in the nation. However, this factor is different from the "many rival domestic firms which are all competitive in the global marketplace for a product" as stated in the question.
QUESTION 498
Which of the following is not an external factor that directly affects the competitive environment of the firm?
A. Barrierstomarketentry.
B. Bargainingpowerofsuppliers. C. Political issues.
D. Existence of substitute products.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Political issues are external factors that affect the overall industry, not simply the competitive environment of the firm. Choices "a", "b", and "d" are incorrect, as all of these factors directly affect the competitive environment of the firm.
QUESTION 499
When does competition not become an even stronger force impacting the profitability of a firm? A. Variousfirmsusevarioustypesofstrategicplans.

B. Customersdonothavestrongbrandpreferences.
C. The market is not growing fast.
D. The costs of exiting the market are less than the costs of continuing to operate.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is the proper choice, as it is not a factor that would cause market competitiveness to be even stronger.
Choices "a", "b", and "c" are incorrect because they are all reasons that competition becomes an even stronger force that impacts the firm's profitability. Following are situations that would cause competition to be an even stronger force impacting the profitability of a firm:
· The market is not growing fast.
· There are several equal-sized firms in the market.
· Customers do not have strong brand preferences.
· The costs of exiting the market exceed the costs of continuing to operate. · Some firms profit from making certain moves to increase market share. · The various firms in the market use different types of strategic plans.
QUESTION 500
Which of the following statements regarding the existence of substitute products is true?
A. Theimpactofsubstituteswillhavemoreofaneffectonthecompetitiveenvironmentofafirmifthesubstitutesarereadilyavailableforcustomerstoobtain. B. Whenthecostofbuyersswitchingtonewproductsishigh,theeffectofsubstitutesonthecompetitiveenvironmentofafirmishigh.
C. If many close substitutes exist, buyers have little choice of products and may be willing to pay a higher price for the products that are available.
D. If substitutes have equal performance and are priced at or below the firm's product, the competitive force of substitutes with respect to the firm is weak.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The impact of substitutes will have more of an effect on the competitive environment of a firm if the substitutes are readily available to consumers. Choice "b" is incorrect. When the cost of buyers switching to new products is low (not high), the effect of substitutes on the competitive environment of a firm is high. Choice "c" is incorrect. If few (not many close) substitutes exist, buyers have little choice of products and may be willing to pay a higher price for the products that are available. Choice "d" is incorrect. If substitutes have equal performance and are priced at or below the firm's product, the competitive force of

substitutes with respect to the firm is strong (not weak).
QUESTION 501
Which of the following is not considered a factor that increases the bargaining power of the customer?
A. Muchinformationisavailabletothecustomertocompareandcontrastfeaturesofallproductsonthemarket. B. Onegroupofcustomersmakesupalargevolumeofthefirm'sbusiness.
C. Strategic alliances have been formed with suppliers and other firms.
D. Several alternate suppliers (sellers) of the product exist.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When strategic alliances exist between a supplier and other firms that is a situation, which increases the bargaining power of the suppliers. Choices "a", "b", and "d" are incorrect because they all are factors that increase the bargaining power of the customer, which are:
· Customers make up a large volume of a firm's business.
· There is much information available to customers.
· The buyers have low switching costs.
· There are a high number of alternate suppliers (sellers) of the product.
QUESTION 502
Which one of the following statements pertaining to the return on investment (ROI) as a performance measurement is incorrect?
A. Whentheaverageageofassetsdifferssubstantiallyacrosssegmentsofabusiness,theuseofROImaynotbeappropriate.
B. ROIreliesonfinancialmeasuresthatarecapableofbeingindependentlyverifiedwhileotherformsofperformancemeasuresaresubjecttomanipulation.
C. The use of ROI may lead managers to reject capital investment projects that can be justified by using discounted cash flow models.
D. The use of ROI can make it undesirable for a skillful manager to take on trouble-shooting assignments such as those involving turning around unprofitable divisions.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:

Choice "b" is correct. ROI is no more and no less capable of being independently verified or manipulated than other performance measure. Choice "a" is incorrect. Old fixed assets may be undervalued and make comparison with a segment with newer assets inappropriate. Choice "c" is incorrect. Investment projects with positive present value may be rejected because ROI is too low.
Choice "d" is incorrect. Turning around an unprofitable division would be good for the company but would probably lower a manager's ROI.
QUESTION 503
The basic objective of the residual income approach of performance measurement and evaluation is to have a division maximize its:
A. Returnoninvestmentrate.
B. Imputedinterestratecharge.
C. Cash flows in excess of a desired minimum amount. D. Income in excess of a desired minimum amount.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Residual income is defined as income in excess of a desired minimum return. Choices "a" and "b" are incorrect, as residual income is not a "rate" of return; it is a dollar amount. Choice "c" is incorrect, as residual income is an accrual method.
QUESTION 504
Minon, Inc. purchased a long-term asset on the last day of the current year. What are the effects of this purchase on return on investment and residual income?
A. Option A B. OptionB C. Option C

D. Option D
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The addition of an asset at year end serves to reduce both return on investment and residual income. The addition of an asset increases then denominator in the ROI computation and increases the threshold earnings required using the residual income approach. Both measures would suffer as a result of addition of assets. See illustration below:
The purchase of the additional asset reduces ROI from 10% to 8% and produces negative residual income. Choices "a", "c", and "d" are incorrect, per the above illustration.
QUESTION 505
Vested, Inc. made some changes in operations and provided the following information:

What percentage represents the return on investment for year 3?
A. 28.57% B. 25%
C. 20.31% D. 20%
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Return on investment is the ratio of operating income to average operating assets and is computed as follows based on Year 2 and Year 3 data:
Choice "a" is incorrect per the above computation.
Choice "c is incorrect. The year 3 return on investment is not computed by combining revenues, expenses, and assets for all year's presented.
Choice "d" is incorrect. The year 3 return on investment is based on the average assets (($1,200,000 + $2,000,000)/2 = $1,600,000), not simply on the total assets at the end of year 3 ($2,000,000).
QUESTION 506
A natural monopoly exists because:

A. Thefirmownsnaturalresources.
B. Economicandtechnicalconditionspermitonlyoneefficientsupplier. C. The government is the only supplier.
D. Other firms are unable to enter the industry.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A natural monopoly exists when economic and technical conditions permit only one efficient supplier. Choice "a" is incorrect. Owning natural resources, even if they are unique, would not create a monopoly.
Substitutes for the resource may be available.
Choice "c" is incorrect. Government control may create a monopoly, but not a natural monopoly. This is a regulated monopoly. Choice "d" is incorrect. Barriers to entry help create a monopoly, but the product must be unique.
QUESTION 507
Karen Parker wants to establish an environmental testing company that would specialize in evaluating the quality of water found in rivers and streams. However, Parker has discovered that she needs either certification or approval from five separate local and state government agencies before she can commence business. Also, the necessary equipment to begin would cost several million dollars. However, Parker believes that if she is able to obtain capital resources, she can gain market share from the two major competitors.
The large capital outlay necessary for the equipment is an example of a(n):
A. Entrybarrier.
B. Minimumefficiencyscale. C. Created barrier.
D. External cost.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Large capital (money) requirements are the basic example of barriers to entry. A barrier to entry effectively prevents firms from entering the market to compete against existing firms. Choice "b" is incorrect. Minimum efficient scale is the output level at which long run average costs are minimized. Here, Parker has not even been able to enter the industry. Choice "c" is incorrect. A created barrier is made by firms already in the industry. Here, Parker's barrier was

not created.
Choice "d" is incorrect. An external cost is a cost that the company does not account for, but passes on to the detriment of society.
QUESTION 508
Entry into monopolistic competition is:

A. Frequent,asnoobstaclesexist.
B. Difficult,withsignificantobstacles.
C. Rare, as significant capital is required.
D. Relatively easy, with only a few obstacles.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The characteristics of monopolistic competition include: · Numerous firms with differentiated products.
· Ease of entry - few barriers.
· Firms exact some influence over price and market.
· Non-price competition is frequent and critical.
Choice "a" is incorrect. Monopolistic competition has a few obstacles. A market with no obstacles is in perfect competition.
Choice "b" is incorrect. Significant obstacles are characteristic of oligopoly. Choice "c" is incorrect. Significant capital requirements represent a significant barrier to entry, which is characteristic of oligopoly.
QUESTION 509
Monopolistic competition is characterized by:
A. Arelativelylargegroupofsellerswhoproducedifferentiatedproducts. B. Arelativelysmallgroupofsellerswhoproducedifferentiatedproducts.

C. One or two companies producing similar products.
D. A relatively large group of sellers who produce a homogeneous product.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Monopolistic competition is characterized by a relatively large number of sellers who produce differentiated products. There are few barriers to entry and firms exert some influence over the price and the market. Best examples are brand name consumer products. Choice "b" is incorrect. Relatively few sellers with differentiated products would indicate an oligopoly. Choice "c" is incorrect. One company would be a monopoly, two an oligopoly. Choice "d" is incorrect. A relatively large number of sellers and a standardized product indicates perfect competition.
QUESTION 510
An industry that is oligopolistic would be best characterized by:
A. Onefirmsellingaproductwithnoclosesubstitutes.
B. Significantbarrierstoentry.
C. Horizontal or flat demand curves for the output of individual firms. D. The absence of significant economies of scale.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Oligopoly market conditions are characterized by:
· Few firms in the market
· Significant barriers to entry · Differentiated products
· Fixed (or semi fixed) prices · Kinked demand curves
Choice "a" is incorrect. This is an example of monopoly. Choice "c" is incorrect. Horizontal demand curves represent demand that is perfectly price elastic (buyers will only pay one price for any quantity of a product). This occurs in perfectly competitive markets.

Choice "d" is incorrect. This is characteristic of perfect competition, as there are no barriers to entry ("size doesn't matter") in perfect competition.

Auditing and Attestation (I) QUESTION 1
When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the:
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 a qualified opinion is issued due to a lack of sufficient audit evidence, the lack of evidence should be disclosed in an explanatory paragraph before the opinion paragraph. Since insufficient evidence is a scope limitation, the scope paragraph should also be modified to refer to the limitation and to the explanatory paragraph that discusses it. Choices "a" and "c" are incorrect. Management (and not the auditor) prepares the notes to the financial statements. The auditor therefore would not refer to this (or any other) situation in the notes to the financial statements.
Choice "d" is incorrect. The auditor does refer to the situation in the scope paragraph.
QUESTION 2
When an auditor believes there is substantial doubt about the ability of an entity to continue as a going concern, all of the following should be included in the audit documentation, except:
A. Theconditionsthatgaverisetothesubstantialdoubt.
B. Theauditor'sconclusionaboutwhethersubstantialdoubtremainsorisalleviated.
C. Management's conclusion regarding whether substantial doubt remains or is alleviated.

D. The effect of the auditor's conclusion on the auditor's report.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Whether substantial doubt remains or is alleviated is a judgment call made by the auditor, and there is no requirement to document management's opinion on the matter. Choices "a", "b", and "d" are incorrect. When an auditor believes there is substantial doubt about the ability of an entity to continue as a going concern, the conditions that gave rise to the substantial doubt, the auditor's conclusion about whether substantial doubt remains or is alleviated, and the effect of the auditor's conclusion on the auditor's report should all be documented.
QUESTION 3
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?
A. Theauditordidnotobservetheentity'sphysicalinventoryandisunabletobecomesatisfiedaboutitsbalancebyotherauditingprocedures.
B. Conditionsthatcausetheauditortohavesubstantialdoubtabouttheentity'sabilitytocontinueasagoingconcernareinadequatelydisclosed. C. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements.
D. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Inadequate disclosure of the substantial doubt about an entity's ability to continue as a going concern is a departure from GAAP, resulting in either a qualified or adverse opinion.
Choices "a" and "d" are incorrect. Scope limitations result in either a qualified opinion or in a disclaimer of opinion, but not in an adverse opinion. Choice "c" is incorrect. A change in accounting principle results in a modified unqualified report, as long as the change was accounted for properly.
QUESTION 4
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?
A. Significantrelatedpartytransactionsarepervasive. B. Usualtradecreditfromsuppliersisdenied.
C. Arrearages in preferred stock dividends are paid.

D. Restrictions on the disposal of principal assets are present.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Indications of possible financial difficulties, such as denial of usual trade credit from suppliers, may cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.
Choice "a" is incorrect. The existence of related parties and the occurrence of related party transactions do not indicate doubt about the entity's ability to continue as a going concern. Choice "c" is incorrect. Payment of preferred stock dividends in arrears might very well indicate an improvement in the entity's financial situation. It is the lack of payment of preferred, cumulative dividends (a possible indication of financial difficulty) that might cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Choice "d" is incorrect. Restrictions on the disposal of assets might limit the options available to management as far as mitigating adverse conditions, but it would not in and of itself cause the auditor to have substantial doubt about an entity's ability to continue as a going concern.
QUESTION 5
In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If the amounts in question could materially affect current operating results, the auditor would:

A. Beunabletoexpressanopiniononthecurrentyear'sresultsofoperationsandcashflows.
B. Expressaqualifiedopiniononthefinancialstatementsbecauseofaclient-imposedscopelimitation.
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 due to an uncertainty.
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 was unable to gather sufficient evidence on the beginning balances of the balance sheet accounts, the auditor would be unable to express an opinion on the current year's results of operations and cash flows. The auditor could express an opinion on the statement of financial position. Choice "b" is incorrect. Since the scope limitation could have a pervasive effect on the financial statements (affecting all assets and liabilities), a disclaimer of opinion (and not merely a qualified opinion) is required on the income statement and statement of cash flows. An opinion may be expressed on the year-end statement of financial position. Choice "c" is incorrect. The auditor does not need to withdraw from the engagement and refuse to be associated with the financial statements.
Choice "d" is incorrect. An uncertainty does not exist. The auditor can express an opinion on one of the financial statements.
QUESTION 6
Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to Smith's audit?
A. PellreviewsSmith'sauditdocumentationandassumesresponsibilityforSmith'swork,butexpressesaqualifiedopiniononTech'sfinancialstatements.
II. Pell is unable to review Smith's audit documentation; however, Pell's inquiries indicate that Smith has an excellent reputation for professional competence and integrity.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The principal auditor makes reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it. Choice "a" is incorrect. When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed.
Choice "c" is incorrect. When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed.
Choice "d" is incorrect. The principal auditor will make reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it.

QUESTION 7
Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero's plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero's plans to:
A. Discusswithlendersthetermsofalldebtandloanagreements.
B. Strengtheninternalcontrolsovercashdisbursements.
C. Purchase production facilities currently being leased from a related party. D. Postpone expenditures for research and development projects.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When assessing management's plans for dealing with the adverse effects of future conditions and events, mitigating factors would include:
1. The postponement of expenditures (including R&D), 2. Plans to dispose of assets,
3. Plans to borrow money or restructure debt,
4. Plans to increase ownership equity (sell stock).
Choice "a" is incorrect. Discussions with lenders regarding terms would not be a mitigating factor. Actual agreements regarding restructuring of debt or amendments to covenants would be required.
Choice "b" is incorrect. Strengthening internal controls over cash would not qualify as a management tactic to address going concern issues.
Choice "c" is incorrect. Purchasing facilities which are currently being leased would only further decrease cash flow.
QUESTION 8
Which of the following statements is a basic element of the auditor's standard report?
A. Thedisclosuresprovidereasonableassurancethatthefinancialstatementsarefreeofmaterialmisstatement. B. Theauditorevaluatedtheoverallinternalcontrol.
C. Anauditincludesassessingsignificantestimatesmadebymanagement.
D. The financial statements are consistent with those of the prior period.
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's standard audit report includes a statement that "An audit includes assessing...significant estimates made by management..." Choice "a" is incorrect. The standard audit report does not state that disclosures provide reasonable assurance that the financial statements are free of material misstatement. The correct statement is:
"...standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement." Choice "b" is incorrect. The standard audit report does not state that the auditor evaluated the overall internal control. The correct statement is "An audit includes...evaluating the overall financial statement presentation." Internal control is not mentioned in the standard audit report. Choice "d" is incorrect. The standard audit report does not state "The financial statements are consistent with those of the prior period." According to the second standard of reporting, consistency is implicitly reported. Only if there is an inconsistency is an explicit statement included.
QUESTION 9
An auditor may not issue a qualified opinion when:
A. AnaccountingprincipleatvariancewithGAAPisused.
B. Theauditorlacksindependencewithrespecttotheauditedentity.
C. A scope limitation prevents the auditor from completing an important audit procedure. D. The auditor's report refers to the work of a specialist.
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 lacks independence with respect to an audit client, the auditor must disclaim an opinion on the financial statements. A qualified opinion is not an option. Choice "a" is incorrect. A departure from GAAP (which is not sufficiently material to warrant an adverse opinion) may justify a qualification of the auditor's report. Choice "c" is incorrect. A scope limitation may result in a qualified opinion or a disclaimer of opinion.
Choice "d" is incorrect. The auditor's report may make reference to the use of a specialist only if the specialist's findings result in a change to the auditor's report, such as a qualified opinion.
QUESTION 10
An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor:
A. Wishestoemphasizethattheentityhadsignificanttransactionswithrelatedparties.
B. Concurswiththeentity'schangeinitsmethodofcomputingdepreciation.
C. Discovers that supplementary information required by FASB has been omitted.
D. Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.

Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.
Choice "a" is incorrect. Emphasis of a matter, such as the existence of significant transactions with related parties, may result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
Choice "b" is incorrect. A change in accounting principle does result in an additional explanatory paragraph appended to an otherwise unqualified opinion. Choice "c" is incorrect. Omission of supplemental information required by GAAP does result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
QUESTION 11
An auditor would express an unqualified opinion with an explanatory paragraph added to the auditor's report for:
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. An unjustified accounting change may cause the auditor to issue a qualified or adverse opinion. A material weakness must be reported to management and those charged with governance, but would not be disclosed in an explanatory paragraph appended to an otherwise unqualified opinion. Choices "a", "b", and "c" are incorrect, as per the above Explanation: .
QUESTION 12
Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an:
A. Unqualifiedopinion.
B. Opinionqualifiedbecauseofalackofconsistency. C. Opinion qualified because of a departure from GAAP. D. Adverse opinion.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. GAAP allows a company to use different methods for costing different inventories as long as the methods are disclosed. Thus, the audit report would be unqualified; there is no departure from GAAP.
Choice "b" is incorrect. The consistency standard refers to changes in application of accounting practices between periods, affecting the comparability of financial statements. There is no indication Digit made any change in methods.
Choice "c" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in a qualification of the auditor's report. Choice "d" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in an adverse report.
QUESTION 13
In which of the following circumstances would an auditor not express an unqualified opinion?
A. Therehasbeenamaterialchangebetweenperiodsinaccountingprinciples.
B. QuarterlyfinancialdatarequiredbytheSEChasbeenomitted.
C. The auditor wishes to emphasize an unusually important subsequent event.
D. The auditor is unable to obtain audited financial statements of a consolidated investee.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation

Explanation/Reference:
Explanation:
Choice "d" is correct. The inability to obtain audited financial statements of a consolidated investee represents a scope limitation which may result in either a qualified opinion or a disclaimer of opinion.
Choice "a" is incorrect. A material change in accounting principles between periods is disclosed in an explanatory paragraph added to an otherwise unqualified opinion. Choice "b" is incorrect. Omission of selected quarterly data required by SEC regulations is disclosed in an explanatory paragraph added to an otherwise unqualified opinion. Choice "c" is incorrect. Emphasis of a matter is disclosed in an explanatory paragraph added to an otherwise unqualified opinion.
QUESTION 14
Management of Edgington Industries plans to disclose an uncertainty as follows:
The Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. The auditor is satisfied that sufficient audit evidence supports management's assertions about the nature and disclosure of the uncertainty. What type of opinion should the auditor express under these circumstances?
A. Unqualifiedwithoutanexplanatoryparagraph. B. "Subjectto"qualified.
C. "Except for" qualified.
D. Disclaimer of opinion.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The note presented describes an uncertainty that is properly discloseD. An explanatory paragraph is not required in the unqualified opinion. Choice "b" is incorrect. A "subject to" qualified opinion should never be issued. Choice "c" is incorrect. Since the auditor is satisfied that the assertion and disclosure are supported by the existing evidence, a qualified opinion is not required. Choice "d" is incorrect. Since the auditor is satisfied that the assertion and disclosure are supported by the existing evidence, there is no need for the auditor to disclaim an opinion.
QUESTION 15
Kane, CPA, concludes that there is substantial doubt about Lima Co.'s ability to continue as a going concern for a reasonable period of time. If Lima's financial statements adequately disclose its financial difficulties, Kane's auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s):

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. 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 (following the opinion paragraph) to reflect that conclusion. This conclusion should be expressed through the use of the phrase "substantial doubt about its (the entity's) ability to continue as a going concern" [or similar wording that includes the terms "substantial doubt" and "going concern"]. The "reasonable period...not to exceed one year" is inherent in the definition of going concern and is not explicitly stated in the audit report. The phrase "possible discontinuation of operations" may be included in the going concern disclosure but is not specifically required.
Choices "a", "b", and "c" are incorrect, as per the above Explanation: .
QUESTION 16
Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when reporting on Tech's audited financial statements for the year ended June 30, 19X4. That doubt has been removed in 19X5. What is Mead's reporting responsibility if Tech is presenting its financial statements for the year ended June 30, 19X5, on a comparative basis with those of 19X4?
A. Theexplanatoryparagraphincludedinthe19X4auditor'sreportshouldnotberepeated.
B. Theexplanatoryparagraphincludedinthe19X4auditor'sreportshouldberepeatedinitsentirety.
C. A different explanatory paragraph describing Mead's reasons for the removal of doubt should be included. D. A different explanatory paragraph describing Tech's plans for financial recovery should be included.

Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. If substantial doubt about the entity's ability to continue as a going concern has been removed in the current period, the explanatory paragraph included in the prior period auditor's report should not be repeated, and no description of the reasons or plans for recovery need be included. Choice "b" is incorrect. If doubt about the going concern assumption has been removed in the current period, it is not appropriate to include the explanatory paragraph from the prior year in the auditor's report for the current year.
Choice "c" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The auditor does not have to explain the reason for the change. Choice "d" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The entity does not have to describe its plans for the future.
QUESTION 17
March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to:
A. MondayCorp.,theclientthatengagedMarch. B. WallCorp.,theentityauditedbyMarch.
C. 1st Federal Bank.
D. Both Monday Corp. and 1st Federal Bank.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday.
Choice "b" is incorrect. Wall Corp. did not engage the auditors and thus the report should not be addressed to them.
Choices "c" and "d" are incorrect. Even though the bank will be relying on the audited financial statements in determining whether to make the loan, the bank did not directly engage the auditing firm and accordingly, the report should not be addressed to them.
QUESTION 18

An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor's report but before issuance of the related financial statements. The auditor's responsibility for events occurring subsequent to the original report date was:
A. Limitedtoincludeonlyeventsoccurringuptothedateofthelastsubsequenteventreferenced. B. Limitedtothespecificeventreferenced.
C. Extended to subsequent events occurring through the later date.
D. Extended to include all events occurring since the original report date.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditor's report, but before issuance of the related financial statements, the auditor's responsibility for events occurring subsequent to the original report date is limited to the specific event referenced.
Choices "a", "c", and "d" are incorrect. The auditor takes responsibility for only the specific event noted in the dual dating and no other event occurring subsequent to the original report date.
QUESTION 19
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. RegulationS-Xexemption.
B. Reportonproformafinancialstatements. C. Unaudited association report.
D. Disclaimer of opinion.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When an accountant is associated with the financial statements of a public entity, but has not audited or reviewed such statements, the accountant must issue a report disclaiming any opinion on the statements.
Choices "a", "b", and "c" are incorrect since a disclaimer is required in this case.

QUESTION 20
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?
A. Inspectingtitledocumentstoverifywhetheranyassetsarepledgedascollateral.
B. Confirmingwiththirdpartiesthedetailsofarrangementstomaintainfinancialsupport.
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.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Confirming with third parties the details of arrangements to provide or "maintain (needed) financial support" is an audit procedure that may identify doubts about an entity's ability to continue as a going concern.
Choice "a" is incorrect. Inspecting title documents provides evidence of ownership of assets but would not necessarily identify conditions affecting an entity's ability to continue as a going concern.
Choice "c" is incorrect. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation provides evidence of completeness and valuation, but would not necessarily identify conditions affecting an entity's ability to continue as a going concern. Choice "d" is incorrect. Comparing an entity's policies to other entities in the industry would not necessarily identify conditions affecting an entity's ability to continue as a going concern.
QUESTION 21
When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond:

A. Documentingthatinternalcontrolisnotbeingreliedon.
B. Readingthefinancialstatementsforobviousmaterialmisstatements.
C. AscertainingwhetherthefinancialstatementsareinconformitywithGAAP.

D. Determining whether management has elected to omit substantially all required disclosures.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The accountant is only required to read the financial statements for obvious material misstatements.
Choice "a" is incorrect. The accountant need not document that internal control is not being relied on.
Choices "c" and "d" are incorrect. The accountant is not required to evaluate conformity with GAAP, but any known departures (including inadequate disclosure) should be described in the disclaimer.
QUESTION 22
When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to:
A. Issueaqualifiedoradverseopinion,dependinguponmateriality,duetothepossibleeffectsonthefinancialstatements.
B. Considertheadequacyofdisclosureabouttheclient'spossibleinabilitytocontinueasagoingconcern.
C. Report to the client's audit committee that management's accounting estimates may need to be adjusted.
D. Reissue the prior year's auditor's report and add an explanatory paragraph that specifically refers to "substantial doubt" and "going concern."
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. 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 consider the adequacy of disclosure about the entity's possible inability to continue as a going concern and include an explanatory paragraph in the audit report. Choice "a" is incorrect. The auditor would include an explanatory paragraph following the unqualified opinion, or disclaim an opinion due to a material uncertainty. A qualified or adverse opinion is not appropriate for doubt about an entity's ability to continue as a going concern. Choice "c" is incorrect. Management's accounting estimates are unrelated to going concern issues.
Choice "d" is incorrect. Going concern issues are considered prospectively. It is not appropriate to reissue a prior audit report if doubt arises about an entity's ability to continue in a future period.