Certified Public Accountant CPA Questions + Answers Part 21

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QUESTION 90
Which of the following is true regarding the auditor's responsibility to report on information accompanying the basic financial statements in a client-prepared document?
A. Theauditormayreportoninformationaccompanyingthebasicfinancialstatementsinaclientprepareddocumentonlyifheorshehasbeenspecifically engaged to do so.
B. Theauditorisrequiredtoexpressanopiniononwhetherinformationaccompanyingthebasicfinancialstatementsinaclient-prepareddocumentisfairlystated in all material respects in relation to the financial statements taken as a whole.
C. If an auditor chooses to report on information accompanying the basic financial statements in a clientprepared document, the report should include a description of the character of the audit work performed.
D. If an auditor chooses to report on information accompanying the basic financial statements in a clientprepared document, the report should include an opinion on the information but should not describe the character of the audit work performed.
Correct Answer: C

Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If an auditor chooses to report on information accompanying the basic financial statements in a client-prepared document, the report should include a description of both the character of the audit work performed and the degree of responsibility assumed. Choice "a" is incorrect. There is no requirement that the auditor be specifically engaged to report on such information. If auditing procedures have been applied to the information, the auditor is permitted to report thereon.
Choice "b" is incorrect. The auditor is permitted but not required to report on such information. Choice "d" is incorrect. If an auditor chooses to report on information accompanying the basic financial statements in a client-prepared document, the report should include an opinion on the information and a description of both the character of the audit work performed and the degree of responsibility assumed.
QUESTION 91
Which of the following reporting options is least likely with regard to supplementary information that is required by GAAP?
A. Theauditor'sreportonthefinancialstatementsmakesnoreferencetothesupplementaryinformation.
B. Adisclaimerofopinionisissuedonsupplementaryinformationthatisnotclearlydistinguishedfromthefinancialstatementsandisnotmarked"unaudited."
C. The auditor's report on the financial statements includes both an opinion on the supplementary information and a statement restricting the use of the report.
D. The auditor's report on the financial statements includes an opinion regarding whether the supplementary information is fairly stated in all material respects in relation to the financial statements taken as a whole.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. There is no requirement that the auditor's report on supplementary information required by GAAP be restricted.
Choice "a" is incorrect. An auditor is not required to audit supplementary information, and in such cases the auditor's report on the basic financial statements would not generally include a reference to such information.
Choice "b" is incorrect. When supplementary information that is not clearly distinguished from the financial statements is not marked "unaudited," the auditor would generally issue a disclaimer on that information.
Choice "d" is incorrect. When the auditor chooses to apply auditing procedures to the supplementary information, he or she may express an opinion regarding whether the supplementary information is fairly stated in all material respects in relation to the financial statements taken as a whole.
QUESTION 92
When an auditor submits a document containing audited financial statements to a client, and those financial statements include supplementary information required by GAAP, the auditor may choose any of the following options, except:

A. Expressanopinionontheinformation,ifheorshehasbeenengagedtoexaminesuchinformation.
B. Expressnegativeassuranceontheinformation,ifreviewprocedureshavebeenappropriatelyperformed.
C. Report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate auditing procedures have been applied. D. Disclaim an opinion on the information.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor would not perform a review or express negative assurance on supplementary information required by GAAP that is included in an auditor-submitted document.
Choice "a" is incorrect. The auditor may express an opinion on the information, if he or she has been engaged to examine it.
Choice "c" is incorrect. The auditor may report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate auditing procedures have been applied.
Choice "d" is incorrect. The auditor may disclaim an opinion on the information.
QUESTION 93
An auditor may report on condensed financial statements that are derived from complete financial statements if the:
A. Condensedfinancialstatementsaredistributedtostockholdersalongwiththecompletefinancialstatements.
B. Auditordescribestheadditionalproceduresperformedonthecondensedfinancialstatements.
C. Auditor indicates whether the information in the condensed financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived.
D. Condensed financial statements are presented in comparative form with the prior year's condensed financial statements.
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 may report on condensed financial statements that are derived from financial statements that he or she has audited, indicating (1) that he or she has audited and expressed an opinion on the complete financial statements, (2) the date of the auditor's report, (3) the type of opinion expressed, and (4) that the information contained in the condensed financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived.
Choice "a" is incorrect. The condensed financial statements do not have to be distributed to the stockholders.

Choice "b" is incorrect. The audit report on condensed financial statements does not require that additional procedures be described.
Choice "d" is incorrect. Condensed financial statements do not need to be presented in comparative form with the prior year's financial statements.
QUESTION 94
An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should:
A. Belimitedtodataderivedfromtheauditedfinancialstatements.
B. Bedistributedonlytoseniormanagementandtheboardofdirectors.
C. State that the presentation is a comprehensive basis of accounting other than GAAP. D. Indicate that the data are not fairly stated in all material respects.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An auditor's report on selected information included in a client-prepared document containing audited financial statements should be limited to data derived from audited financial statements.
Choice "b" is incorrect. It is not necessary to limit distribution of such a report. Choice "c" is incorrect. Selected financial data is not an "other comprehensive basis of accounting."
Choice "d" is incorrect. The auditor indicates whether the selected financial data is fairly stated, in all material respects, in relation to the financial statements from which it has been derived.
QUESTION 95
If information accompanying the basic financial statements in an auditor-submitted document has been subjected to auditing procedures, the auditor may include in the auditor's report on the financial statements an opinion that the accompanying information is fairly stated in:
A. Accordancewithgenerallyacceptedauditingstandards.
B. Conformitywithgenerallyacceptedaccountingprinciples.
C. All material respects in relation to the basic financial statements taken as a whole.
D. Accordance with attestation standards expressing a conclusion about management's assertions.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:

Explanation:
Choice "c" is correct. When an auditor submits a document that contains information in addition to the client's basic financial statements, and this information was subjected to auditing procedures, the auditor may include in the auditor's report an opinion that the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. This statement would follow the opinion paragraph in the standard report. Choice "a" is incorrect. Information in an ASD is not stated in an auditor's report to be in accordance with GAAS. Instead, the auditor would state that the "information has been subjected to the auditing procedures applied in the audit of the basic financial statements..." Choice "b" is incorrect. The auditor would not state that ASD information was fairly stated in accordance with GAAP. The information in an ASD is in addition to that required by GAAP. Choice "d" is incorrect. Reports on ASD are not "attest engagements."
QUESTION 96
An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. The auditor believes that the financial statements do not require revision, but the client is unwilling to revise or eliminate the material inconsistency in the other information. Under these circumstances, what action would the auditor most likely take?
A. Considerthesituationclosedbecausetheotherinformationisnotintheauditedfinancialstatements.
B. Issuean"exceptfor"qualifiedopinionafterdiscussingthematterwiththeclient'sauditcommittee.
C. Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory paragraph. D. Revise the auditor's report to include a separate explanatory paragraph describing the material inconsistency.
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 auditor discovers a material inconsistency in other information accompanying the audited financial statements, the financial statements do not require revision, and the client refuses to eliminate or revise the inconsistency, the auditor should consider 1) revising the report to include a separate paragraph describing the inconsistency, 2) withholding the report, or 3) withdrawing from the engagement.
Choice "a" is incorrect. Even though the auditor has no responsibility to audit or otherwise corroborate other information accompanying the financial statements, the auditor has a responsibility to read the other information accompanying the financial statements for consistency and to identify any material misstatements of fact included therein. Choice "b" is incorrect. A qualified opinion is generally not warranted because the financial statements are fairly stated.
Choice "c" is incorrect. A disclaimer of opinion is generally not warranted because there is no limitation on scope.
QUESTION 97
In the standard report on condensed financial statements that are derived from a public entity's audited financial statements, a CPA should indicate that the:
A. Condensedfinancialstatementsarepreparedinconformitywithanothercomprehensivebasisofaccounting. B. CPAhasauditedandexpressedanopiniononthecompletefinancialstatements.
C. Condensed financial statements are not fairly presented in all material respects.

D. CPA expresses limited assurance that the financial statements conform with GAAP.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor's report on condensed statements derived from audited statements should indicate (1) that the CPA audited and expressed an opinion on the complete financial statements,
(2) the date of the auditor's report on the complete financial statements, (3) the type of opinion expressed, and (4) whether, in the auditor's opinion, the information set forth in the condensed financial statements is fairly stated in all material respects in relation to the complete financial statements from which it was derived. Choice "a" is incorrect. Condensed financial statements are not prepared in conformity with a comprehensive basis of accounting other than GAAP.
Choice "c" is incorrect. The auditor's report on condensed financial statements does not indicate whether they are fairly presented in all material respects; rather, the report indicates whether they are fairly presented in relation to the complete financial statements. Choice "d" is incorrect. The auditor does not express an opinion (or provide any assurance) on whether condensed FS conform with GAAP; only whether such statements are fairly stated in relation to the complete FS.
QUESTION 98
Investment and property schedules are presented for purposes of additional analysis in an auditor submitted document. The schedules are not required parts of the basic financial statements, but accompany the basic financial statements. When reporting on such additional information, the measurement of materiality is the:

A. Sameasthatusedinforminganopiniononthebasicfinancialstatementstakenasawhole. B. Lesseroftheindividualscheduleofinvestmentsorscheduleofpropertytakenbyitself.
C. Greater of the individual schedule of investments or schedule of property taken by itself.
D. Combined total of both the individual schedules of investments and property taken as a whole.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:

Explanation:
Choice "a" is correct. When reporting on additional information accompanying the audited financial statements, the measure of materiality would be the same as that used in forming an opinion on the financial statements taken as a whole. Choices "b", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 99
What is an auditor's responsibility for supplementary information which is outside the basic financial statements, but required by the FASB?
A. Theauditorhasnoresponsibilityforrequiredsupplementaryinformationaslongasitisoutsidethebasicfinancialstatements.
B. Theauditor'sonlyresponsibilityforrequiredsupplementaryinformationistodeterminethatsuchinformationhasnotbeenomitted.
C. The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information.
D. The auditor should apply tests of details of transactions and balances to the required supplementary information, and report any material misstatements in such information.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. For additional supplementary information required by the FASB, the auditor should apply certain limited procedures to the information, and report deficiencies in or omissions of such information.
Choice "a" is incorrect. Required supplementary information is considered an essential part of financial reporting, and therefore certain limited procedures should be applied by the auditor. Choice "b" is incorrect. For additional supplementary information required by the FASB, the auditor should apply certain limited procedures to the information, and report deficiencies in or omissions of such information.
Choice "d" is incorrect. Certain limited procedures should be applied to required supplementary information, but this information need not be audited.
QUESTION 100
Which of the following best describes the auditor's reporting responsibility concerning information accompanying the basic financial statements in an auditor- submitted document?
A. Theauditorhasnoreportingresponsibilityconcerninginformationaccompanyingthebasicfinancialstatements.
B. Theauditorshouldreportontheinformationaccompanyingthebasicfinancialstatementsonlyiftheauditorparticipatedinitspreparation.
C. The auditor should report on the information accompanying the basic financial statements only if the auditor did not participate in its preparation. D. The auditor should report on all the information included in the document.
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 auditor submits a document containing audited financial statements to the client or others, the auditor has a responsibility to report on all the information included in the document.
Choice "a" is incorrect. The auditor does have additional reporting responsibilities concerning information that accompanies the basic financial statements in an auditor-submitted document. Choice "b" is incorrect. The auditor has responsibility to report on any additional information regardless of whether the auditor participated in the preparation of the information. Choice "c" is incorrect. The auditor has reporting responsibilities regardless of whether the auditor participated in the preparation of the information.
QUESTION 101
When audited financial statements are presented in a client's document containing other information, the auditor should:
A. Performinquiryandanalyticalprocedurestoascertainwhethertheotherinformationisreasonable.
B. Addanexplanatoryparagraphtotheauditor'sreportwithoutchangingtheopiniononthefinancialstatements. C. Perform the appropriate substantive auditing procedures to corroborate the other information.
D. Read the other information to determine that it is consistent with the audited financial statements.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor should read the "other information" in a client's document containing audited FS to determine that it is consistent with the audited FS. Choice "a" is incorrect. Performing analytical procedures or any other procedure is not necessary.
Choice "b" is incorrect. An explanatory paragraph is not required. Choice "c" is incorrect. The auditor has no obligation to perform any procedure to corroborate "other information" contained in a document such as an annual report.
QUESTION 102
An auditor may report on condensed financial statements that are derived from complete audited financial statements if the:
A. Auditorindicateswhethertheinformationinthecondensedfinancialstatementsisfairlystatedinallmaterialrespects.
B. Condensedfinancialstatementsarepresentedincomparativeformwiththeprioryear'scondensedfinancialstatements. C. Auditor describes the additional review procedures performed on the condensed financial statements.
D. Condensed financial statements are distributed only to management and the board of directors.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics

Explanation Explanation/Reference:
Explanation:
Choice "a" is correct. When reporting on condensed financial statements that are derived from complete audited financial statements, the auditor should indicate in his report whether the information in the condensed financial statements is fairly stated in all material respects (in relation to the basic financial statements taken as a whole). Choices "b" and "d" are incorrect. There is no requirement that the condensed financial statements be presented in comparative form, or that they be distributed only to management and the board of directors (i.e., distribution is not restricted). Choice "c" is incorrect. The auditor would not perform or describe additional review procedures related to the condensed financial statements.
QUESTION 103
If management (of a governmental body) declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(an):
A. Adverseopinion.
B. Qualifiedopinionwithanexplanatoryparagraph.
C. Unqualified opinion.
D. Unqualified opinion with an additional explanatory paragraph.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If management (of a governmental body) declines to present information required by the GASB, the auditor should issue an unqualified opinion with an additional explanatory paragraph.
Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 104
The objective of auditing procedures applied to segment information is to provide the auditor with a reasonable basis for concluding whether:
A. Theinformationisusefulforcomparingasegmentofoneenterprisewithasimilarsegmentofanotherenterprise. B. Sufficientauditevidencehasbeenobtainedtoallowtheauditortobeassociatedwiththesegmentinformation.
C. A separate opinion on the segment information is necessary due to inconsistent application of accounting principles. D. The information is presented in conformity with the FASB Statement on segment information.
Correct Answer: D

Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is Choice "a" is Choice "b" is auditor to be Choice "c" is
correct. The auditor's objective is to provide a reasonable basis for concluding whether segment information is presented in conformity with GAAP. incorrect. The auditor is not required to see that segment information included is comparable to other enterprises.
incorrect. Sufficient audit evidence must be obtained to ensure that segment information is presented in accordance with GAAP, not to allow the associated with such information.
QUESTION 105
incorrect. The inclusion of segment information is a GAAP requirement, and a separate opinion is not required.
Green, CPA, is requested to render an opinion on the application of accounting principles by an entity that is audited by another CPA. Green may:
A. Notacceptsuchanengagementbecausetodosowouldbeconsideredunethical.
B. NotacceptsuchanengagementbecauseGreenwouldlackthenecessaryinformationonwhichtobaseanopinionwithoutconductinganaudit. C. Accept the engagement but should form an independent opinion without consulting with the continuing CPA.
D. Accept the engagement but should consult with the continuing CPA to ascertain all the available facts relevant to forming a professional judgment.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A "reporting accountant" (an accountant in public practice who is requested to render an opinion on the application of GAAP by an entity audited by another CPA) may accept the engagement, but should consult with the "continuing CPA" to ascertain the available facts relevant to forming a professional judgment. Choices "a" and "b" are incorrect. A reporting CPA may accept an engagement to render an opinion on GAAP of an entity audited by another CPA. The reporting CPA should consult with the continuing CPA to obtain pertinent information.
Choice "c" is incorrect. The reporting accountant should consult with the continuing accountant to ascertain all the available, relevant facts.
QUESTION 106
In its annual report to shareholders, Lake Co. included a separate management report that contained additional information. Lake's auditor is expressing an unqualified opinion on Lake's financial statements but has not been engaged to examine and report on this additional information. What is the auditor's responsibility concerning such a report?
A. Theauditorshouldaddanexplanatoryparagraphtothereportonthefinancialstatementsdisclaiminganopinionontheadditionalinformation. B. Theauditorhasnoobligationtoreadthemanagementreportortoverifytheaccuracyorappropriatenessofitscontents.

C. The auditor should request Lake to place the management report in its annual report where it will not be misinterpreted to be the auditor's assertion. D. The auditor should read the management report and consider whether it contains a material misstatement of fact.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor should read other information accompanying the basic financial statements and consider whether it contains a material inconsistency or material misstatement of fact.
Choice "a" is incorrect. The auditor generally does not add a disclaimer paragraph in this situation.
Choice "b" is incorrect. The auditor should read other information accompanying the basic financial statements and consider whether it contains a material inconsistency or material misstatement of fact.
Choice "c" is incorrect. Even if the management report were included in the annual report, the auditor still has the same responsibility regarding both the management report and the annual report: the auditor should read the information and consider whether it contains a material inconsistency or material misstatement of fact.
QUESTION 107
An auditor is reporting on condensed financial statements for an annual period that are derived from the audited financial statements of a publicly-held entity. The auditor's opinion should indicate whether the information in the condensed financial statements is fairly stated in all material respects:
A. InconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica. B. Inrelationtothecompletefinancialstatements.
C. In conformity with an other comprehensive basis of accounting.
D. In relation to supplementary filings under federal security statutes.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived.
Choice "a" is incorrect. Condensed financial statements do not include all of the disclosures required by GAAP, and therefore would not typically be presented in conformity with GAAP. Choice "c" is incorrect. Condensed financial statements are presented in less detail than complete financial statements, but the fact pattern gives no indication that any comprehensive basis of accounting other than GAAP has been used.

Choice "d" is incorrect. The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived, not in relation to supplementary filings under federal security statutes.
QUESTION 108
An auditor determines that the entity is presenting certain supplementary financial disclosures of pension information that are required by the GASB. Under these circumstances, the auditor should:
A. Addanexplanatoryparagraphtotheauditor'sreportthatreferstotherequiredsupplementaryinformation.
B. Statethattheauditisnotbeingperformedinaccordancewithgenerallyacceptedauditingstandards.
C. Document in the working papers that the required supplementary information is presented, but should not apply any procedures to the information. D. Compare the required supplementary information for consistency with the audited financial statements.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor should perform certain limited procedures on supplementary information accompanying the financial statements, including evaluating whether the information is consistent with the audited financial statements. Choice "a" is incorrect. Generally, the auditor's report on the financial statements would not include a reference to required supplementary information unless there were a problem with it (e.g., it was omitted, inappropriately prepared, or the auditor was unable to satisfactorily complete required procedures).
Choice "b" is incorrect. An audit can and should be performed in accordance with generally accepted auditing standards even when required supplementary information is presented. Choice "c" is incorrect. The auditor should perform certain limited procedures on supplementary information accompanying the financial statements.
QUESTION 109
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. II only. If Pell is unable to review Smith's audit documentation, but inquiries indicate that Smith has an excellent reputation for professional competence and integrity, Pell should divide responsibility by making reference to Smith's audit. Choices "a", "c", and "d" are incorrect. Since the principal auditor in situation I reviews Smith's audit documentation and assumes responsibility for Smith's work, no mention of Smith should be made.
QUESTION 110
According to the profession's ethical standards, which of the following events may justify a departure from a Statement of Financial Accounting Standards?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Yes - Yes. Rule 203 of the code of professional conduct of the AICPA states that if the financial statements or data contain a GAAP departure, the departure may be justified if the CPA can demonstrate that due to unusual circumstances, such as new legislation or the evolution of a new form of business transaction, the FS would otherwise be misleading. Under these circumstances, the auditor's report should describe the departure, its approximate effects, if practicable, and the reasons why compliance with the generally accepted principle would result in a misleading statement.

Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 111
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. Cashflowsfromoperatingactivitiesarenegative. B. Researchanddevelopmentprojectsarepostponed. C. Significant related party transactions are pervasive. D. Stock dividends replace annual cash dividends.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Negative cash flows from operating activities most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Choices "b" and "d" are incorrect. Plans to reduce or delay cash expenditures are mitigating factors conserving cash (e.g., postponing R&D projects and replacing cash dividends with stock dividends). This would not ordinarily cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.
Choice "c" is incorrect. The existence of significant related party transactions should be disclosed but would not ordinarily cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.
QUESTION 112
For an entity that does not receive governmental financial assistance, an auditor's standard report on financial statements generally would not refer to:
A. Significantestimatesmadebymanagement.
B. Anassessmentoftheentity'saccountingprinciples.
C. Management's responsibility for the financial statements. D. The entity's internal control.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor's standard report generally does not make reference to the entity's internal control. Note that for an entity that does receive

governmental financial assistance, a written report on internal control is required. Also, note that an auditor may (but is not required to) expand his or her audit report to clarify that a GAAS audit does not require the level of testing and reporting on internal control that is required for issuers. Choices "a" and "b" are incorrect. The scope paragraph states that, "an audit also includes assessing the accounting principles used and significant estimates made by management." Choice "c" is incorrect. The introductory paragraph states that the "financial statements are the responsibility of the company's management."
QUESTION 113
Which of the following procedures should an auditor generally perform regarding subsequent events?
A. Comparethelatestavailableinterimfinancialstatementswiththefinancialstatementsbeingaudited.
B. Sendsecondrequeststotheclient'scustomerswhofailedtorespondtoinitialaccountsreceivableconfirmationrequests. C. Communicate material weaknesses in the internal control structure to those charged with governance.
D. Review the cut-off bank statements for several months after the year-end.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When performing procedures regarding subsequent events, the auditor generally will compare the latest available interim financial statements with the financial statements being audited to determine if any significant subsequent event occurred that would need to be reflected in the statements being audited. Choice "b" is incorrect. Sending second requests to the client's customers who failed to respond to initial A/R confirmation requests is a substantive procedure that provides evidence about receivables existing at year end, not about subsequent events. Choice "c" is incorrect. Internal control weaknesses should be communicated to those charged with governance, but this communication provides no evidence about subsequent events. Choice "d" is incorrect. Bank cut-off statements generally are reviewed for only a week to ten days subsequent to year-end. Reviewing them for a longer period such as "several months" would provide little additional audit evidence regarding the YE FS and thus would not be a cost beneficial procedure.
QUESTION 114
An auditor's report contains the following sentences:
We did not audit the financial statements of JK Co., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 17 percent and 19 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for JK Co., is based solely on the report of the other auditors.
These sentences:
A. Areanimproperformofreporting. B. Divideresponsibility.
C. Disclaim an opinion.
D. Qualifytheopinion.

Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The report indicates a division of responsibility. Choice "a" is incorrect. Words describing the percentages of revenues and assets audited by other auditors are proper in dividing responsibility.
Choice "c" is incorrect. Dividing responsibility does not affect the unqualified opinion, nor does it require a disclaimer of opinion.
Choice "d" is incorrect. Dividing responsibility does not affect the unqualified opinion, nor does it require a qualified opinion.
QUESTION 115
Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?
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. No - No.
A qualified opinion phrase is, "in our opinion, except for [Explanation: of problem] as discussed in the preceding paragraph . . ."
Choice "a" is incorrect, as "when read in conjunction with Note X" is not a phrase included in the opinion paragraph of a qualified opinion.

Choice "b" is incorrect, as "with the foregoing Explanation: " is not a phrase included in the opinion paragraph of a qualified opinion. Choice "c" is incorrect. Neither phrase is included in the opinion paragraph of a qualified opinion.
(This is why it's important to memorize the qualifying phrases as well as the standard independent auditor's report.)
QUESTION 116
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A. Recomputingasampleoflarge-dollartransactionsoccurringafteryear-endforarithmeticaccuracy.
B. Investigatingchangesinstockholders'equityoccurringafteryear-end.
C. Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after yearend. D. Confirming bank accounts established after year-end.
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 would most likely inquire of the entity's legal counsel concerning litigation, claims and assessments arising after year-end in order to obtain evidence about the occurrence of subsequent events. Claims arising after year-end might well impact the year-end financial statements.
Choice "a" is incorrect. Recomputing a sample of large-dollar transactions occurring after year- end for arithmetic accuracy would not provide evidence about year- end amounts. Choice "b" is incorrect. The auditor would inquire about changes in stockholders' equity occurring after year-end, but would not generally perform an investigation of such items. Choice "d" is incorrect. Confirming bank accounts established after year-end is generally not done (only those in existence at year-end are confirmed). Accounts established after year-end generally would not be relevant to year-end amounts.
QUESTION 117
What is an auditor's responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?
A. Labeltheinformationasunauditedandexpandtheauditor'sreporttoincludeadisclaimerontheinformation.
B. Addanexplanatoryparagraphtotheauditor'sreportandrefertotheinformationas"requiredsupplementaryinformation." C. Apply limited procedures to the information and report deficiencies in, or the omission of, the information.
D. Audittherequiredsupplementaryinformationinaccordancewithgenerallyacceptedgovernmentalauditingstandards.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:

Choice "c" is correct. With respect to supplementary information required by the GASB that is placed outside the basic financial statements, the auditor should apply limited procedures to the information (to determine that it is consistent with the basic audited financial statements) and report deficiencies in or the omission of the information (via an explanatory paragraph). Choice "a" is incorrect. If the information is labeled "unaudited," a disclaimer generally would not be necessary. Choice "b" is incorrect. The explanatory paragraph is only added if the supplemental information required by the GASB is deficient, omitted entirely, if the auditor cannot complete procedures, or if there is doubt about conformity with guidelines.
Choice "d" is incorrect. The supplementary information required by the GASB is not required to be audited since it is placed outside of the basic financial statements; however, an opinion is permitted.
QUESTION 118
An auditor's responsibility to express an opinion on the financial statements is:
A. Implicitlyrepresentedintheauditor'sstandardreport.
B. Explicitlyrepresentedintheopeningparagraphoftheauditor'sstandardreport. C. Explicitly represented in the scope paragraph of the auditor's standard report. D. Explicitly represented in the opinion paragraph of the auditor's standard report.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor's responsibility to express an opinion on the FS is explicitly represented in the last sentence of the opening paragraph: "Our responsibility is to express an opinion on these financial statements based on our audit." Choice "a" is incorrect. The responsibility to express an opinion is explicitly represented (i.e., clearly stated), not implicitly represented (i.e., assumed). Choice "c" is incorrect. There are no words in the scope paragraph that represent an auditor's responsibility to express an opinion.
Choice "d" is incorrect. The opinion paragraph includes the auditor's opinion, but does not specifically mention the auditor's responsibility to express an opinion.
QUESTION 119
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. Ascertainingwhetherthefinancialstatementsareinconformitywithgenerallyacceptedaccountingprinciples. B. Determiningwhethermanagementhaselectedtoomitsubstantiallyallrequireddisclosures.
C. Documenting that the internal control structure is not being relied on.
D. Reading the financial statements for obvious material misstatements.
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 independent CPA assists in preparing the FS of a publicly held entity, but has not "audited" or "reviewed" them, the CPA should issue a disclaimer of opinion and has only the responsibility to read the FS for obvious material misstatements. Choice "a" is incorrect. A disclaimer does not require ascertaining whether the FS are in conformity with GAAP.
Choice "b" is incorrect. A disclaimer does not require ascertaining whether management has elected to omit substantially all required disclosures. Choice "c" is incorrect. A disclaimer of opinion does not require ascertaining whether or not the internal control structure is being relied upon.
QUESTION 120
An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor's report. The auditor's responsibility for events occurring subsequent to the original date was:
A. Extendedtosubsequenteventsoccurringthroughthedateofreissuanceofthereport.
B. Extendedtoincludealleventsoccurringsincetheoriginaldateoftheauditor'sreport.
C. Limited to the specific event referenced.
D. Limited to include only events occurring up to the date of the last subsequent event referenced.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditor's report, the auditor's responsibility for events occurring subsequent to the original date of the auditor's report is limited to the specific event referenced.
Choices "a", "b", and "d" are incorrect. The auditor takes responsibility for only the specific event noted in the dual dating and for no other event occurring subsequent to the original date of the auditor's report.
QUESTION 121
An auditor most likely would issue a disclaimer of opinion because of:
A. Inadequatedisclosureofmaterialinformation.
B. Theomissionofthestatementofcashflows.
C. A material departure from generally accepted accounting principles. D. Management's refusal to furnish written representations.

Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Management's refusal to furnish written representations is a significant client imposed restriction on the scope of an audit, ordinarily warranting a disclaimer of opinion. Choice "a" is incorrect. Inadequate disclosure would result in a qualified or adverse opinion. Choice "b" is incorrect. A qualified report would be appropriate when a "statement of cash flows" is omitted and the scope of the audit is not restricted. Choice "c" is incorrect. A departure from GAAP would result in either a qualified or adverse opinion, depending on materiality.
QUESTION 122
When an auditor qualifies an opinion because of the inability to confirm accounts receivable by direct communication with debtors, the wording of the opinion paragraph of the auditor's report should indicate that the qualification pertains to the:
A. Limitationontheauditor'sscope.
B. Possibleeffectsonthefinancialstatements.
C. Lack of sufficient appropriate audit evidence.
D. Departure from generally accepted auditing standards.
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 qualifies his or her opinion because of a scope limitation, such as the inability to confirm A/R, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the FS and not to the scope limitation itself. The opinion paragraph should not refer to the scope limitation itself, the lack of evidence, or the departure from GAAS.
Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 123
The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the:
A. Abilitytoexpandoperationsintonewproductlinesinthefuture.
B. Feasibilityofplanstopurchaseleasedequipmentatlessthanmarketvalue.

C. Marketability of assets that management plans to sell.
D. Committed arrangements to convert preferred stock to long-term debt.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The adverse effects of events causing an auditor to believe there is a substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the marketability of assets that management plans to sell. By providing evidence that there is a ready market for assets that could be converted to cash, management has demonstrated that the company could remain in operation for a longer period of time, thereby mitigating the need for an explanatory paragraph describing the matter. Choices "a", "b", and "d" are incorrect. Evidence regarding the ability to expand operations into new product lines in the future, the feasibility of plans to purchase leased equipment at less than market value, or committed arrangements to convert preferred stock to long-term debt would not be sufficient to mitigate doubts about an entity's ability to continue as a going concern, unless it could also be demonstrated that the events would provide adequate cash flow to fund operations for at least the next year.
QUESTION 124
An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary. Between which of the following opinions should the entity's auditor choose?
A. Adverseandunqualifiedwithanexplanatoryparagraphadded. B. Disclaimerandunqualifiedwithanexplanatoryparagraphadded. C. Qualified and adverse.
D. Qualified and disclaimer.
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 auditor is unable to obtain audited financial statements or other evidence supporting an entity's investment in a subsidiary (foreign or domestic), the auditor should issue a qualified or disclaimer of opinion depending on the materiality of the investment in the subsidiary.
Choices "a", "b", and "c" are incorrect. An adverse opinion is only issued when the FS are not presented fairly in conformity with GAAP, and an unqualified opinion with an explanatory paragraph is not appropriate for a scope limitation.
QUESTION 125

Which of the following standards requires a critical review of the work done and the judgment exercised by those assisting in an audit at every level of supervision?
A. Proficiency. B. Auditrisk. C. Inspection. D. Due care.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The third general standard is: "The auditor must exercise due professional care in the planning and performance of the audit and the preparation of the report." This standard is interpreted to require a critical review of the work performed and the judgment exercised at every level of supervision. Choice "a" is incorrect. Proficiency relates to the first general standard (technical training and proficiency of an auditor).
Choice "b" is incorrect. Audit risk and materiality underlie the application of all the standards of fieldwork and reporting, but are not standards themselves. Choice "c" is incorrect. Inspection pertains to the audit evidence standard, which is the third standard of fieldwork.
QUESTION 126
Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances.
The auditor should first:
A. Requestthepermissionoftheclienttoundertaketheconfirmationofaccountsreceivable.
B. Performalternativeprocedurestoprovideasatisfactorybasisfortheunqualifiedopinion.
C. Assesstheimportanceoftheomittedprocedurestotheauditor'sabilitytosupportthepreviouslyexpressedopinion. D. Inquire whether there are persons currently relying, or likely to rely, on the unqualified opinion.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When an auditor discovers the omission of an audit procedure related to a previously issued report, the auditor should first assess the importance of the omitted procedure to the auditor's ability to support the previously expressed opinion. Choice "a" is incorrect. The auditor would request the permission of the client to undertake the confirmation of accounts receivable only after determining that the procedure was necessary to support the previously expressed opinion and no other alternative procedure had been performed. Choice "b" is incorrect. Alternative procedures would be performed only after the

auditor determined that the procedure was necessary to support the previously expressed opinion. Choice "d" is incorrect. The auditor needs to be able to support (or revise) the previously issued opinion regardless of whether or not there are persons currently relying on it.
QUESTION 127
Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?
A. Reviewthecut-offbankstatementsfortheperiodaftertheyear-end.
B. Inquireoftheclient'slegalcounselconcerninglitigation.
C. Investigate significant deficiencies in internal control previously communicated to the client. D. Analyzerelatedpartytransactionstodiscoverpossibleirregularities.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An auditor would most likely obtain a letter from the entity's legal counsel describing any pending litigation, unasserted claims, or loss contingencies, to obtain evidence that might impact the year-end financial statements. Choice "a" is incorrect. Reviewing cut-off bank statements for the period after year-end generally is performed to evaluate the year-end cash balance, not to identify subsequent events. Choice "c" is incorrect. Investigating significant deficiencies in internal control previously communicated to the client would be a procedure performed as part of the planning process and would provide the auditor with information regarding the internal control structure, not subsequent events.
Choice "d" is incorrect. Analyzing related party transactions to discover possible irregularities generally is performed to evaluate financial statement disclosure, not to identify subsequent events.