Certified Public Accountant CPA Questions + Answers Part 20

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QUESTION 61
When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if:
A. Theeffectsoftheadversefinancialconditionslikelywillcauseabankruptcyfiling. B. Informationabouttheentity'sabilitytocontinueasagoingconcernisnotdisclosed. C. Management has no plans to reduce or delay future expenditures.
D. Negative trends and recurring operating losses appear to be irreversible.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In a situation where it is likely that an entity's operations will be discontinued, disclosure of information about the entity's ability to continue as a going concern is required by GAAP.
Failure to make such disclosure would be a departure from GAAP, resulting in either a qualified or adverse opinion.
Choice "a" is incorrect. As long as the going concern situation is adequately disclosed, the fact that there will be a bankruptcy filing would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "c" is incorrect. As long as the going concern situation is adequately disclosed, the fact that management does not intend to reduce or delay future expenditures would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report. Choice "d" is incorrect. As long as the going concern situation is adequately disclosed, the fact that negative trends and recurring operating loses appear to be irreversible would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
QUESTION 62
An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:
A. Repurchasetheentity'sstockatapricebelowitsbookvalue. B. Issuestockoptionstokeyexecutives.
C. Lease rather than purchase operating facilities.
D. Accelerate the due date of an existing mortgage.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation

Explanation/Reference:
Explanation:
Choice "c" is correct. Leasing rather than purchasing operating facilities results in reduced (or at least delayed) expenditures, which is a mitigating factor in a going concern situation. Choice "a" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Repurchasing stock is an outflow of cash that would reduce ownership equity; as such, it is not a mitigating factor. Choice "b" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Issuing stock options does not fall into any of these categories and would not be considered a mitigating factor. Choice "d" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Accelerating the due date of an existing mortgage would increase expenditures, and therefore would not be a mitigating factor.
QUESTION 63
Which of the following is true regarding the standard audit report for an issuer?
A. ReferenceshouldbemadeinthescopeparagraphtobothPCAOBstandardsandgenerallyacceptedauditingstandards.
B. PCAOBstandardsshouldnotbementionedatall,althoughtheiruseisimpliedinthestandardauditor'sreport.
C. Reference should be made in the scope paragraph to PCAOB standards, and in the opinion paragraph to generally accepted accounting principles. D. Reference may be made in the scope paragraph to either PCAOB standards or generally accepted auditing standards.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards, and should refer to GAAP in the opinion paragraph. Choice "a" is incorrect. An auditor reporting on the audit of financial statements of a nonissuer may (but is not required to) refer to both PCAOB standards and generally accepted auditing standards in the scope paragraph. Audit reports for audits of issuers refer only to PCAOB standards in the scope paragraph.
Choice "b" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed. Choice "d" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. Referring to generally accepted auditing standards instead is not an option, as audits of issuers must follow PCAOB standards.
QUESTION 64
Under which of the following circumstances would an auditor's expression of an unqualified opinion be inappropriate? A. Theauditorisunabletoobtaintheauditedfinancialstatementsofasignificantsubsidiary.

B. Thefinancialstatementsarepreparedontheentity'sincometaxbasis.
C. There are significant deficiencies in the design and operation of the entity's internal control.
D. Analytical procedures indicate that many year-end account balances are not comparable with the prior year's balances.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. If the auditor is unable to obtain the audited financial statements of a significant subsidiary, a scope limitation exists. Assuming the effect is material, the auditor would issue either a qualified opinion or a disclaimer of opinion. Choice "b" is incorrect. Financial statements prepared on an entity's income tax basis are "other comprehensive basis of accounting" (OCBOA) financial statements. The auditor may issue a special report, which can include an unqualified opinion, on OCBOA financial statements. Choice "c" is incorrect. Significant deficiencies in the design and operation of an entity's internal control do not preclude issuance of an unqualified opinion, although they do increase the risk of material misstatement and will likely result in modifications to the nature, timing, and extent of the auditor's testing.
Choice "d" is incorrect. An unqualified opinion may still be expressed when there are significant changes in year-end account balances as compared to prior year balances, as long as the auditor has obtained sufficient appropriate audit evidence about the current balances.
Reports on Comparative Financial Statements
QUESTION 65
Jewel, CPA, audited Infinite Co.'s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel's auditor's report, which expressed a qualified opinion. In drafting the current year's auditor's report, Crain, CPA, the successor auditor, should:
A. NotnameJewelasthepredecessorauditor.
II. Indicate the type of report issued by Jewel.
III. Indicate the substantive reasons for Jewel's qualification.
B. Ionly.
C. I and II only.
D. II and III only.
E. I,II,andIII.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:

Choice "d" is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in the introductory paragraph of the report 1) that the financial statements of the prior period were audited by another auditor, 2) the date of his report, 3) the type of report issued by the predecessor auditor, and 4) if the report was other than a standard unqualified report, the substantive reasons therefor. The successor auditor may name the predecessor auditor only if the predecessor auditor's practice was acquired by or merged with that of the successor auditor. Choices "a", "b", and "c" are incorrect, based on the above Explanation: .
QUESTION 66
A registration statement filed with the SEC contains the reports of two independent auditors on their audits of financial statements for different periods. The predecessor auditor who audited the prior-period financial statements generally should obtain a letter of representation from the:
A. Successorindependentauditor.
B. Client'sauditcommittee.
C. Principal underwriter.
D. Securities and Exchange Commission.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Before reissuing the prior year's audit report on the financial statements of a former client, the auditor should 1) read the financial statements of the current period, 2) compare the prior period information that the auditor reported on with the financial statements to be presented for comparative purposes, and 3) obtain letters of representation from management of the former client and from the successor auditor. The representation letter from management should indicate whether any of management's previous representations should be modified and whether there have been any subsequent events that would affect the previous financial statements. The representation letter from the successor auditor should state whether the successor auditor's audit disclosed any issues of a material nature that might affect the previous financial statements.
Choice "b" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the client's audit committee would not provide this confirmation. Choice "c" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the principal underwriter would not provide this confirmation. Choice "d" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the SEC would not provide this confirmation.
QUESTION 67
Before reissuing the prior year's auditor's report on the financial statements of a former client, the predecessor auditor should obtain letters of representation from the:
A. Formerclient'smanagementandtheboardofdirectors. B. Formerclient'sattorneyandmanagement.

C. Former client's board of directors and the successor auditor. D. Successor auditor and the former client's management.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Before reissuing the prior year's auditor's report on the financial statements of a former client, the auditor should 1) read the financial statements of the current period, 2) compare the prior-period information that the auditor reported on with the financial statements to be presented for comparative purposes, 3) obtain a letter of representation from the successor auditor, and 4) obtain a letter of representation from the former client's management. The representation letter from the successor auditor will state whether the successor's audit revealed any issues of a material nature that might affect the previous financial statements. The representation letter from the former client's management will indicate whether its previous representations are still accurate and whether there have been any subsequent events affecting the previous financial statements.
Choices "a", "b", and "c" are incorrect. The predecessor does not request representation letters from the former client's board of directors or attorney.
QUESTION 68
In May X4, an auditor reissues the auditor's report on the X2 financial statements at a continuing client's request. The X2 financial statements are not restated and the auditor does not revise the wording of the report. The auditor should:
A. Dualdatethereissuedreport.
B. Usethereleasedateofthereissuedreport.
C. Use the original report date on the reissued report.
D. Use the current-period auditor's report date on the reissued report.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If the auditor reissues the audit report at the client's request, the auditor should use the original report date on the reissued report. Use of a subsequent date implies that the auditor has done additional work.
Choice "a" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date.
Choice "b" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date.
Choice "d" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date.

QUESTION 69
An auditor expressed a qualified opinion on the prior year's financial statements because of a lack of adequate disclosure. These financial statements are properly restated in the current year and presented in comparative form with the current year's financial statements. The auditor's updated report on the prior year's financial statements should:
A. Beaccompaniedbytheauditor'soriginalreportontheprioryear'sfinancialstatements.
B. Continuetoexpressaqualifiedopinionontheprioryear'sfinancialstatements.
C. Make no reference to the type of opinion expressed on the prior year's financial statements. D. Express an unqualified opinion on the restated financial statements of the prior year.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If an auditor has previously qualified his or her opinion on financial statements of a prior period, and the prior period statements are restated to conform with GAAP, the auditor should express an unqualified opinion on the restated financial statements. In addition, the auditor would state the substantive reasons for the change in opinion in an explanatory paragraph preceding the opinion paragraph. Choice "a" is incorrect. The original report would not be presented. Choice "b" is incorrect. The auditor would change the opinion on the restated financial statements from that previously issued.
Choice "c" is incorrect. The auditor would state the substantive reasons for the change in opinion in an explanatory paragraph preceding the opinion paragraph.
QUESTION 70
Comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should:
A. Indicatethesubstantivereasonsforthequalificationinthepredecessorauditor'sopinion.
B. Requesttheclienttoreissuethepredecessor'sreportontheprioryear'sstatements.
C. Issue an updated comparative audit report indicating the division of responsibility.
D. Express an opinion only on the current year's statements and make no reference to the prior year's statements.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in the introductory paragraph of the audit report (1) that the financial statements of the prior period were audited by another auditor, (2) the type of

report issued, and (3) if the report was other than standard, the substantive reasons therefor.
Choice "b" is incorrect. The predecessor auditor, not the client, may reissue the previous year's audit report.
Choice "c" is incorrect. An audit report would indicate a division of responsibility when the principal auditor's opinion is based in part on the report of another auditor. Choice "d" is incorrect. If the prior year's financial statements are issued, the previous year's audit opinion must also be disclosed.
QUESTION 71
An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. The prior-period financial statements are restated in the current period to conform with generally accepted accounting principles.
The auditor's updated report on the prior-period financial statements should:
A. Expressanunqualifiedopinionconcerningtherestatedfinancialstatements.
B. Beaccompaniedbytheoriginalauditor'sreportonthepriorperiod.
C. Bear the same date as the original auditor's report on the prior period.
D. Qualify the opinion concerning the restated financial statements because of a change in accounting principle.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When prior-period financial statements are restated in the current period to conform with GAAP, the auditor's updated report on the prior- period financial statements should express an unqualified opinion concerning the restated financial statements. Choice "b" is incorrect. The original auditor's report on the prior period should not be presented. Choice "c" is incorrect. The original report date is used only if the original report is reissued unchanged.
Choice "d" is incorrect. A change in accounting principle that is properly accounted for does not result in a qualified opinion.
Events Occurring After Year-end
QUESTION 72
Which of the following statements is not true regarding the auditor's responsibility for subsequent events?
A. Theauditorhasanactiveresponsibilitytomakecontinuinginquiriesbetweenthedateoftheauditor'sreportandthedateonwhichthereportissubmitted.
B. Theauditorhasanactiveresponsibilitytomakecontinuinginquiriesbetweenthedateofthefinancialstatementsandthedateoftheauditor'sreport.
C. The auditor has an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained.
D. The auditor has no active responsibility to make continuing inquiries after the date of the auditor's report.
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 has no active responsibility to make continuing inquiries between the date of the auditor's report and the date on which the report is submitted. The auditor's active responsibility stops on the date of the auditor's report. Choice "b" is incorrect. The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date of the auditor's report. Choice "c" is incorrect. The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained.
Choice "d" is incorrect. The auditor has no active responsibility to make continuing inquiries after the date of the auditor's report.
QUESTION 73
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A. Confirmingasampleofmaterialaccountsreceivableestablishedafteryear-end.
B. Comparingthefinancialstatementsbeingreportedonwiththoseofthepriorperiod.
C. Investigating personnel changes in the accounting department occurring after year-end. D. Inquiring as to whether any unusual adjustments were made after year-end.
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 would most likely inquire as to whether any unusual adjustments were made after year-end that would require adjustment to and/or disclosure in the year-end financial statements.
Choice "a" is incorrect. Obtaining evidence about A/R that were established after year-end would not provide the auditor with information about subsequent events, since any information about these A/R would not require adjustment to or disclosure in the prior year financial statements. Choice "b" is incorrect. Comparing the financial statements being reported on with those of the prior period is not a very good source of subsequent event information. Choice "c" is incorrect. Changes in accounting personnel at any time would probably not result in any subsequent event financial statement adjustment or disclosure.
QUESTION 74
Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
A. Anuninsurednaturaldisasteroccursthatmayaffecttheentity'sabilitytocontinueasagoingconcern. B. Acontingencyisresolvedthathadbeendisclosedintheauditedfinancialstatements.
C. New information is discovered concerning undisclosed lease transactions of the audited period.

D. A subsidiary is sold that accounts for 25% of the entity's consolidated net income.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The question addresses the subsequent discovery of facts that may have existed at the balance sheet date. Such events will often require an adjustment to the financial statements. An example is new information discovered about undisclosed lease transactions of the audited period. As a result, the auditor should make further inquiry to determine whether the information is reliable and whether the facts existed at the date of the report. Choice "a" is incorrect. The natural disaster is an example of a subsequent event occurring after the date of the auditor's report that the auditor has no obligation to investigate. Choice "b" is incorrect. The resolution of a disclosed contingency is an example of a subsequent event occurring after the date of the auditor's report that the auditor has no obligation to investigate.
Choice "d" is incorrect. Sale of a subsidiary occurring after the date of the auditor's report is an example of a subsequent event that the auditor has no obligation to investigate.
QUESTION 75
An auditor is considering whether the omission of a substantive procedure considered necessary at the time of an audit may impair the auditor's present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if the:
A. Financialstatementsandauditor'sreportwerenotdistributedbeyondmanagementandtheboardofdirectors. B. Auditor'spreviouslyexpressedopinionwasqualifiedbecauseofadeparturefromGAAP.
C. Results of other procedures that were applied tend to compensate for the procedure omitted.
D. Omission is due to unreasonable delays by client personnel in providing data on a timely basis.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When the auditor concludes that an auditing procedure considered necessary at the time of the audit was omitted, the auditor should assess the importance of the procedure to the present ability to support the previously issued opinion. The results of other procedures that were applied may tend to compensate for the one omitted or make its omission less important.
Choice "a" is incorrect. If a procedure has been omitted, the auditor must consider whether other parties may be relying on the financial statements, even if the audit report had limited distribution.
Choice "b" is incorrect. The fact that the previous opinion was qualified does not negate the need to apply the omitted procedure. Choice "d" is incorrect. Delays by client personnel may extend audit work, but do not provide a reason for omitting a procedure.

QUESTION 76
Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
A. Determinewhethertherearepersonsrelyingorlikelytorelyonthefinancialstatementswhowouldattachimportancetotheinformation. B. Requestthatmanagementdisclosethenewlydiscoveredinformationbyissuingrevisedfinancialstatements.
C. Issue revised pro forma financial statements taking into consideration the newly discovered information.
D. Give public notice that the auditor is no longer associated with financial statements.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When subsequently discovered information is found both to be reliable and to have existed at the date of the auditor's report, the auditor should determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Choice "b" is incorrect. The auditor would request that management disclose the newly discovered information only after determining whether there are persons relying on the information.
Choice "c" is incorrect. Management, not the auditor, may issue revised financial statements. Choice "d" is incorrect. The auditor would give public notice that he/ she is no longer associated with the FS only after determining that there are persons relying on the information and only if the client refuses to issue revised FS.
QUESTION 77
On March 15, X4, Kent, CPA, issued an unqualified opinion on a client's audited financial statements for the year ended December 31, X3. On May 4, X4, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first:
A. AdvisemanagementtodisclosetothestockholdersthatKent'sunqualifiedopinionshouldnotbereliedon.
B. Undertaketoapplyalternativeproceduresthatwouldprovideasatisfactorybasisfortheunqualifiedopinion.
C. Reissue the auditor's report and add an explanatory paragraph describing the departure from generally accepted auditing standards. D. Compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:

Choice "b" is correct. In the event of omitted audit procedures, the auditor should first attempt to perform alternative procedures in order to ascertain whether the original opinion can be relied upon.
Choice "a" is incorrect. The auditor would only advise the client to notify all stockholders and other financial statement users that the unqualified opinion cannot be relied upon if the auditor cannot satisfy himself (with alternative procedures) as to the propriety of the original opinion. Choice "c" is incorrect. The auditor may need to reissue the audit report if the auditor is unable to satisfy himself using alternative procedures; the opinion issued should be qualified or disclaimed, due to the scope limitation.
Choice "d" is incorrect. Tests of controls are not appropriate alternative procedures.
QUESTION 78
Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
A. Atechnologicaldevelopmentthatcouldaffecttheentity'sfutureabilitytocontinueasagoingconcern.
B. Thediscoveryofinformationregardingacontingencythatexistedbeforethefinancialstatementswereissued. C. The entity's sale of a subsidiary that accounts for 30% of the entity's consolidated sales.
D. The final resolution of a lawsuit explained in a separate paragraph of the auditor's report.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. With respect to events occurring after the issuance of an auditor's report, the auditor is only responsible for information that existed at the audit report date. Choice "a" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry.
Choice "c" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry.
Choice "d" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry.
QUESTION 79
Wilson, CPA, obtained sufficient appropriate audit evidence to render an opinion on Abco's December 31, X1, financial statements on March 6, X2. A subsequent event requiring adjustment to the X1 financial statements occurred on April 10, X2, and came to Wilson's attention on April 24, X2. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated:
A. March6,X2.
B. April10,X2.
C. April24,X2.
D. Using dual dating.
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 financial statements were adjusted without disclosure of the event in the footnotes, Wilson's report should be dated as of March 6, X2, the date on which sufficient appropriate audit evidence was obtained.
Choice "b" is incorrect. An April 10, X2 report date would be used only if the event were disclosed and Wilson wanted to extend the responsibility for all significant events through April 10, X2.
Choice "c" is incorrect. An April 24, X2 report date would be used only if the event were disclosed and Wilson wanted to extend the responsibility for all significant events through April 24, X2.
Choice "d" is incorrect. Dual dating would only be used if the event were disclosed in the notes to the financial statements.
QUESTION 80
An auditor concludes that a substantive auditing procedure considered necessary during the prior period's audit was omitted. Which of the following factors would most likely cause the auditor promptly to apply the omitted procedure?
A. Therearenoalternativeproceduresavailabletoprovidethesameevidenceastheomittedprocedure.
B. Theomissionoftheprocedureimpairstheauditor'spresentabilitytosupportthepreviouslyexpressedopinion. C. The source documents needed to perform the omitted procedure are still available.
D. The auditor's opinion on the prior period's financial statements was unqualified.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The factor most likely to cause the auditor to promptly apply the omitted procedure would be if the omission impairs the auditor's present ability to support the previously expressed opinion.
Choice "a" is incorrect. The auditor would first need to determine whether the omission of the procedure impairs the ability to support the previously expressed opinion. It is possible that other procedures already performed tended to compensate for the omitted procedure, and therefore no further action would be necessary.
Choice "c" is incorrect. The availability of the source documents needed to perform the procedure has little bearing on whether the auditor determines that it is necessary to perform the procedure.
Choice "d" is incorrect. The rendering of a clean opinion has little importance. The issue is "support of the previously expressed opinion," not what the opinion was.
QUESTION 81
After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless:

A. Information,whichexistedatthereportdateandmayaffectthereport,comestotheauditor'sattention.
B. Managementoftheentityrequeststheauditortoreissuetheauditor'sreport.
C. Information about an event that occurred after the date of the auditor's report comes to the auditor's attention.
D. Final determinations or resolutions are made of contingencies that had been disclosed in the financial statements.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless information, which existed at the report date and may affect the report, comes to the auditor's attention. In this case the auditor would perform procedures to determine if the information affects the report and is important to the external users. Choice "b" is incorrect. The auditor has no obligation to perform other procedures if management of the entity requests the auditor to reissue the auditor's report (if no significant changes have occurred since the report date). Choice "c" is incorrect. The auditor has no obligation to perform other procedures if information about an event that occurred after the date of the auditor's report comes to the auditor's attention (and the auditor has not been asked to reissue the report). Choice "d" is incorrect. Most contingencies are eventually resolved; however, such resolution does not require the auditor to perform other procedures.
QUESTION 82
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
A. Examineasampleoftransactionsthatoccurredsincetheyear-endtoverifytheeffectivenessofcomputercontrols. B. Inquireofmanagementwhethertherehavebeensignificantchangesinworkingcapitalsincetheyear-end.
C. Recompute depreciation charges for plant assets sold for substantial gains since the year-end.
D. Reperform the tests of controls that indicated significant deficiencies in the operation of internal control.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In obtaining evidence about subsequent events, the auditor would most likely inquire of management whether there have been significant changes in working capital since year-end.
Such changes could be indicative of a going concern problem, which would require financial statement disclosure.
Choice "a" is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the

financial statements, that require adjustment to or disclosure in the financial statements. Reviewing a sample of transactions occurring after year-end to verify the effectiveness of computer controls would not be likely to provide information about subsequent events. Choice "c" is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Recomputing depreciation related to assets sold after year-end is not likely to provide information about subsequent events. Sales occurring after year-end are not considered to be subsequent events. Choice "d" is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Control deficiencies do not fall within this definition, so reperforming tests of controls would not provide evidence about subsequent events.
QUESTION 83
Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
A. Alawsuitisresolvedthatisexplainedinaseparateparagraphoftheprior-year'sauditor'sreport. B. Newinformationisdiscoveredconcerningundisclosedrelatedpartytransactionsoftheprioryear. C. A technological development occurs that affects the entity's ability to continue as a going concern. D. The entity sells a subsidiary that accounts for 35% of the entity's consolidated sales.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. If an auditor becomes aware of material information that existed at the date of the auditor's report, and which would have affected that report, the auditor needs to take appropriate action.
Since related party transactions should be disclosed in the financial statements, it is likely that the auditor would need to make further inquiries to determine whether the lack of disclosure will affect the previously issued report.
Choice "a" is incorrect. Resolution of a lawsuit that was disclosed in the prior year's audit report would not be likely to affect the audit report, as auditors are not required to update their reports for events occurring after the fact.
Choice "c" is incorrect. A technological development that affects the entity's ability to continue as a going concern would not be likely to affect the previous year's audit report, as auditors are not required to update their reports for events occurring after the fact. Choice "d" is incorrect. Sale of a subsidiary would not be likely to affect the previous year's audit report, as auditors are not required to update their reports for events occurring after the fact.
QUESTION 84
On February 9, Brown, CPA, expressed an unqualified opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first:
A. RequestWeb'spermissiontoperformsubstantiveproceduresthatwouldprovideasatisfactorybasisfortheopinion. B. InquireofWebwhethertherearepersonscurrentlyrelying,orlikelytorely,onthefinancialstatements.

C. Take no additional action because subsequent events have no effect on the financial statements that were reported on. D. Assess the importance of the omitted procedures to Brown's present ability to support the opinion.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If an omitted audit procedure is discovered, the auditor should assess the importance of the omitted procedure to the auditor's ability to support the opinion. It might be the case that other audit procedures tended to compensate for the omitted procedure, in which case no further action would be necessary.
Choice "a" is incorrect. The auditor would only request permission to perform substantive procedures if no other procedures compensated for the missing one, and if there were persons relying (or likely to rely) on the financial statements. Choice "b" is incorrect. The auditor would need to determine whether there were persons relying (or likely to rely) on the financial statements, but this would not be done unless it had already been determined that no other audit procedures compensated for the missing one. Choice "c" is incorrect. If the omitted audit procedure impairs the auditor's ability to support the opinion, no other procedures compensated for the missing one, and there were persons relying (or likely to rely) on the financial statements, the auditor would need to apply substantive procedures. Taking no action would not be an acceptable response.
Reporting on Other Information
QUESTION 85
Which of the following is not true regarding an engagement to provide a written report on the application of accounting principles?
A. Anaccountantisprohibitedfromprovidingareportontheapplicationofaccountingprinciplestoatransactionnotinvolvingthefactsandcircumstancesofa specific entity.
B. Theaccountant'swrittenreportontheapplicationofaccountingprinciplesshouldincludeanidentificationofthespecificentityinvolved.
C. An accountant is prohibited from providing a report on the application of accounting principles to a proposed future transaction involving the facts and circumstances of a specific entity.
D. The accountant's written report on the application of accounting principles should include a paragraph restricting the use of the report.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An accountant may report on the application of accounting principles to a proposed future transaction as long as the transaction involves the facts and circumstances of a specific entity.

Choice "a" is incorrect. An accountant is prohibited from providing a report on the application of accounting principles to "hypothetical transactions," which are defined as those not involving the facts and circumstances of a specific entity.
Choices "b" and "d" are incorrect. The accountant's written report on the application of accounting principles should include an identification of the specific entity involved, a description of the transaction(s), a statement of the relevant facts, circumstances, and assumptions (and a statement that any changes therein may change the report), a statement about the source of the information, a statement describing the appropriate accounting principles or type of opinion that may be rendered, the reasons for the accountant's conclusions, a statement regarding management's responsibility, and a restrictive use paragraph.
QUESTION 86
Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country's accounting principles, an auditor practicing in the U.S. should:
A. Understandtheaccountingprinciplesgenerallyacceptedintheothercountry.
B. Becertifiedbytheappropriateauditingoraccountancyboardoftheothercountry.
C. Notify management that the auditor is required to disclaim an opinion on the financial statements. D. Receive a waiver from the auditor's state board of accountancy to perform the engagement.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country's accounting principles, the auditor practicing in the U.S. should understand the accounting principles generally accepted in the other country. Choice "b" is incorrect. The auditor practicing in the U.S. would be able to report on the financial statements of the U.S. entity without obtaining certification in the other country. Choice "c" is incorrect. The auditor need not disclaim an opinion on the financial statements prepared in conformity with another country's accounting principles. Choice "d" is incorrect. A waiver to perform the engagement is not necessary.
QUESTION 87
In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of accounting principles to a specific transaction. The accountant's report should include a statement that:
A. Anydifferenceinthefacts,circumstances,orassumptionspresentedmaychangethereport.
B. TheengagementwasperformedinaccordancewithStatementsonStandardsforConsultingServices.
C. The guidance provided is for management use only and may not be communicated to the prior or continuing auditors.
D. Nothing came to the accountant's attention that caused the accountant to believe that the accounting principles violated GAAP.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation

Explanation/Reference:
Explanation:
Choice "a" is correct. The accountant's report on the application of accounting principles should include a statement that should any facts or circumstances differ from those presented to the accountant, the accountant's conclusions may change. Choice "b" is incorrect. The report should state that the engagement was performed in accordance with "AICPA Standards," not statements on Standards for Consulting Services. Choice "c" is incorrect. The report's use is restricted to "specified parties," which may include parties other than management (e.g., the board of directors). Also, the preparers of the financial statements and the reporting accountant should consult with the entity's continuing accountant. Choice "d" is incorrect. The report does not provide negative assurance with respect to GAAP; rather, it may describe the appropriate accounting principles to be applied.
QUESTION 88
Blue, CPA, has been asked to render an opinion on the application of accounting principles to a specific transaction by an entity that is audited by another CPA. Blue may accept this engagement, but should:
A. ConsultwiththecontinuingCPAtoobtaininformationrelevanttothetransaction.
B. Reporttheengagement'sfindingstotheentity'sauditcommittee,thecontinuingCPA,andmanagement.
C. Disclaim any opinion that the hypothetical application of accounting principles conforms with generally accepted accounting principles. D. Notify the entity that the report is for the general use of all interested parties.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When rendering an opinion on the application of accounting principles to a specific transaction, the reporting CPA should consult with the continuing CPA to obtain information relevant to the transaction.
Choice "b" is incorrect. The reporting CPA has no obligation to report the engagement's findings to the continuing CPA. Generally, the report would be addressed to the requesting party (e.g., management, the board of directors, etc.).
Choice "c" is incorrect. There is no disclaimer in the report; however, the CPA does state that the preparers of the financial statements are responsible for proper accounting treatment. Choice "d" is incorrect. Use of the report is restricted to specified parties.
QUESTION 89
The financial statements of KCP America, a U.S. entity, are prepared for inclusion in the consolidated financial statements of its non-U.S. parent. These financial statements are prepared in conformity with the accounting principles generally accepted in the parent's country and are for use only in that country.
How may KCP America's auditor report on these financial statements?
A. AU.S.-stylereport(unmodified).
II. A U.S.-style report modified to report on the accounting principles of the parent's country.

III. The report form of the parent's country.
B. Option A
C. Option B
D. Option C
E. OptionD
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. No - Yes - Yes. When financial statements are prepared in conformity with the accounting principles generally accepted in the parent's country and are for use only in that country, the auditor may report using either a U.S.-style report modified to report on the accounting principles of the parent's country or the report form of the parent's country. Choices "a", "b", and "c" are incorrect, per the above Explanation: .