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Auditing Chapter 3

53 Questions
Finance Quizzes & Trivia

Quiz based on Auditing and Assurance Services 14e by Arens

Questions and Answers
  • 1. 
    Auditing standards require that the audit report must be titled and that the title must:
    • A. 

      Include the word “independent.”

    • B. 

      Indicate if the auditor is a CPA

    • C. 

      Indicate if the auditor is a proprietorship, partnership, or incorporated.

    • D. 

      Indicate the type of audit opinion issued.

  • 2. 
    To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be:  
      Company Controller Shareholders Board of Directors
    • A. 

      No Yes Yes

    • B. 

      No No Yes

    • C. 

      Yes Yes No

    • D. 

      Yes No No

  • 3. 
    The purpose of the introductory paragraph in the standard unqualified report is:
    • A. 

      To identify that the type of opinion issued is unqualified.

    • B. 

      To identify the financial statements audited and the dates and time periods covered by the report.

    • C. 

      To indicate the CPA followed applicable audit standards.

    • D. 

      To indicate all the financial statements are in accordance with GAAP.

  • 4. 
    The scope paragraph of the standard unqualified audit report states that the audit is designed to:
    • A. 

      Discover all errors and/or irregularities.

    • B. 

      Discover material errors and/or irregularities.

    • C. 

      Conform to generally accepted accounting principles.

    • D. 

      Obtain reasonable assurance whether the statements are free of material misstatement.

  • 5. 
    The audit report date on a standard unqualified report indicates:
    • A. 

      The last day of the fiscal period.

    • B. 

      The date on which the financial statements were filed with the Securities and Exchange Commission.

    • C. 

      The last date on which users may institute a lawsuit against either client or auditor.

    • D. 

      The last day of the auditor’s responsibility for the review of significant events that occurred subsequent to the date of the financial statements.

  • 6. 
    As a result of management’s refusal to permit the auditor to physically examine inventory, the auditor has not accumulated sufficient appropriate evidence to conclude whether financial statements are stated in accordance with GAAP. The auditor must depart from the unqualified audit report because:
    • A. 

      The financial statements have not been prepared in accordance with GAAP.

    • B. 

      The scope of the audit has been restricted by circumstances beyond either the client’s or auditor’s control.

    • C. 

      The auditor has lost independence.

    • D. 

      The scope of the audit has been restricted.

  • 7. 
    An adverse opinion is issued when the auditor believes:
    • A. 

      Some parts of the financial statements are materially misstated or misleading.

    • B. 

      The financial statements would be found to be materially misstated if an investigation were performed.

    • C. 

      The auditor is not independent.

    • D. 

      The overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

  • 8. 
    If a misstatement is immaterial to the financial statements of the entity for the current period, but is expected to have a material effect in future periods, it is appropriate to issue a(n):
    • A. 

      Adverse opinion.

    • B. 

      Qualified opinion.

    • C. 

      Unqualified opinion.

    • D. 

      Disclaimer of opinion.

  • 9. 
    Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms?
    • A. 

      A combined report on financial statements and internal control over financial reporting.

    • B. 

      Separate reports on financial statements and internal control over financial reporting.

    • C. 

      Either a or b.

    • D. 

      Neither a nor b.

  • 10. 
    Examples of unqualified opinions which contain modified wording (without adding an explanatory paragraph) include:
    • A. 

      The use of other auditors.

    • B. 

      Material uncertainties.

    • C. 

      Substantial doubt about the audited company (or the entity) continuing as a going concern.

    • D. 

      Lack of consistent application of GAAP.

  • 11. 
    A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued.  Normally, such explanatory information is:
    • A. 

      Included in the scope paragraph.

    • B. 

      Included in the opinion paragraph.

    • C. 

      Included in a separate paragraph in the report.

    • D. 

      Included in the introductory paragraph.

  • 12. 
    An auditor who issues a qualified opinion because sufficient appropriate evidence was not obtained should describe the limitations in an explanatory paragraph. The auditor should also refer to the limitation in the:
           Scope                        Opinion                           Notes to the
        paragraph                   paragraph                   financial statements
    • A. 

      Yes No Yes

    • B. 

      No Yes Yes

    • C. 

      No Yes No

    • D. 

      Yes Yes No

  • 13. 
    Conditions requiring a departure from an unqualified audit report include all but which of the following?
    • A. 

      Management refused to allow the auditor to confirm significant accounts receivable for which there were no alternative procedures performed.

    • B. 

      Management decided not to allow the auditor to confirm significant accounts receivable, but the auditor obtained sufficient appropriate evidence by examining subsequent cash receipts.

    • C. 

      The audit partner’s dependent child received a gift of 100 shares of a client’s stock for her birthday from a grandparent.

    • D. 

      Management has determined that fixed assets should be reported in the balance sheet at their replacement values rather than historical costs. The auditors do not concur.

  • 14. 
    The introductory paragraph of the standard audit report states that the financial statements are:
    • A. 

      The responsibility of the auditor.

    • B. 

      The responsibility of management.

    • C. 

      The joint responsibility of management and the auditor.

    • D. 

      None of the above.

  • 15. 
    The introductory paragraph of the standard audit report states that the financial statements and the opinion expressed about those statements are:
    • A. 

      The responsibility of the auditor.

    • B. 

      The responsibility of management.

    • C. 

      The joint responsibility of management and the auditor.

    • D. 

      None of the above.

  • 16. 
    The audit report indicates that (1) management is responsible for the content of the financial statements and (2) the auditor is responsible for evaluating the appropriateness of the accounting principles chosen by management. Which paragraph contains those statements?
    • A. 

      Both are in the introductory paragraph.

    • B. 

      Both are in the scope paragraph.

    • C. 

      Both are in the opinion paragraph.

    • D. 

      None of the above are true.

  • 17. 
    If the balance sheet of a company is dated December 31, 2009, the audit report is dated February 8, 2010, and both are released on February 15, 2010, this indicates that the auditor has searched for subsequent events that occurred up to:
    • A. 

      December 31, 2009.

    • B. 

      January 1, 2010

    • C. 

      February 8, 2010

    • D. 

      February 15, 2010.

  • 18. 
    A combined report on financial statements and internal control over financial reporting includes all but which of the following types of paragraphs?
    • A. 

      Inherent limitations paragraph.

    • B. 

      Description paragraph.

    • C. 

      Opinion paragraph.

    • D. 

      Each of the above paragraphs is included.

  • 19. 
    Whenever an auditor issues a qualified opinion, the implication is that the auditor:
    • A. 

      Does not know if the financial statements are presented fairly.

    • B. 

      Does not believe the financial statements are presented fairly.

    • C. 

      Believes the financial statements are presented fairly.

    • D. 

      Believes the financial statements are presented fairly “except for” a specific aspect of them.

  • 20. 
    When the auditor determines the financial statements are fairly stated and then determines that the auditor lacks independence, the auditor should issue:
    • A. 

      An adverse opinion.

    • B. 

      A disclaimer of opinion.

    • C. 

      Either a qualified opinion or an adverse opinion.

    • D. 

      Either a qualified opinion or an unqualified opinion with modified wording.

  • 21. 
    If the auditor lacks independence, a disclaimer of opinion must be issued:
    • A. 

      If the client requests it.

    • B. 

      Only if it is highly material.

    • C. 

      Only if it is material but not highly material.

    • D. 

      In all cases.

  • 22. 
    Whenever there is a scope restriction, the appropriate response is to issue a(n):
    • A. 

      Disclaimer of opinion.

    • B. 

      Adverse opinion.

    • C. 

      Qualified opinion.

    • D. 

      Unqualified report, a qualification of scope and opinion, or a disclaimer, depending on materiality.

  • 23. 
    Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?
    • A. 

      A client’s lawsuit against another company which claims the other company has infringed on its patent.

    • B. 

      Loss of major customers

    • C. 

      Significant recurring operating losses.

    • D. 

      Working capital deficiencies.

  • 24. 
    The client has presented all required financial statements with the exception of the statement of cash flows. The auditor has completed the audit and is satisfied that all other statements are presented fairly. The auditor:
    • A. 

      May issue either an unqualified or a qualified opinion.

    • B. 

      Must issue an adverse opinion with “except for” in the opinion paragraph.

    • C. 

      May issue an unqualified opinion.

    • D. 

      Must issue a qualified opinion with “except for” in the opinion paragraph.

  • 25. 
    When a disclaimer is issued because the auditor lacks independence:
    • A. 

      No report title is included on the report.

    • B. 

      A one-paragraph audit report is issued.

    • C. 

      The only reason cited for issuing the disclaimer is the lack of independence.

    • D. 

      All of the above are correct.

  • 26. 
    When a client has not applied GAAP consistently from the prior year to the current year, the auditor does not concur with the appropriateness of the change, and the change in GAAP has a material effect on the financial statements, the auditor should issue a(n):
    • A. 

      Disclaimer.

    • B. 

      Adverse opinion.

    • C. 

      Unqualified opinion.

    • D. 

      Qualified opinion.

  • 27. 
    Which of the following is not a change that affects consistency and, therefore, does not require an explanatory paragraph?
    • A. 

      Change in accounting principle, such as a change from LIFO to FIFO.

    • B. 

      Change in reporting entity, such as the inclusion of an additional company in combined financial statements.

    • C. 

      Change in an estimate, such as a decrease in the life of an asset for depreciation purposes.

    • D. 

      Correction of errors by changing from non-GAAP to GAAP.

  • 28. 
    Items that materially affect the comparability of financial statements generally require disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue:
    • A. 

      A disclaimer.

    • B. 

      An unqualified opinion.

    • C. 

      A qualified opinion.

    • D. 

      An adverse opinion.

  • 29. 
    When there is uncertainty about a company’s ability to continue as a going concern, the auditor’s concern is the possibility that the client may not be able to continue its operations or meet its obligations for a “reasonable period of time.” For this purpose, a reasonable period of  time is considered not to exceed:
    • A. 

      Six months from the date of the financial statements.

    • B. 

      One year from the date of the financial statements.

    • C. 

      Six months from the date of the audit report.

    • D. 

      One year from the date of the audit report.

  • 30. 
    An auditor may not issue a qualified opinion when:
    • A. 

      A scope limitation prevents the auditor from completing an important audit procedure.

    • B. 

      The auditor’s report refers to the work of a specialist.

    • C. 

      The auditor lacks independence with respect to the audited entity.

    • D. 

      An accounting principle at variance with GAAP is used.

  • 31. 
    When a company’s financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in:
    • A. 

      The scope paragraph.

    • B. 

      An explanatory paragraph that appears before the opinion paragraph.

    • C. 

      The opinion paragraph.

    • D. 

      An explanatory paragraph after the opinion paragraph.

  • 32. 
    Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion?
    Conformity                   Adequacy of
    with GAAP                    disclosure
    • A. 

      Explicitly Explicitly

    • B. 

      Explicitly Implicitly

    • C. 

      Implicitly Explicitly

    • D. 

      Implicitly Implicitly

  • 33. 
    William Gregory, CPA, is the principal auditor for a multi-national corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor’s examination. With respect to his report on the consolidated financial statements, taken as a whole, Gregory:
    • A. 

      Must not refer to the examination of the other auditor.

    • B. 

      Must refer to the examination of the other auditor.

    • C. 

      May refer to the examination of the other auditor.

    • D. 

      May refer to the examination of the other auditor, in which case Gregory must include in the auditor’s report on the consolidated financial statements a qualified opinion with respect to the examination of the other auditor.

  • 34. 
    A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor’s report on the financial statements of the year of the change should include:
    • A. 

      No reference to consistency.

    • B. 

      A reference to a prior period adjustment in the opinion paragraph.

    • C. 

      An explanatory paragraph that justifies the change and explains the impact of the change on reported net income.

    • D. 

      An explanatory paragraph explaining the change.

  • 35. 
    Sarbanes-Oxley requires auditors of a public company to audit a company’s financial statements and attest to management’s report on the effectiveness of internal control over financial reporting. What type of assurance does the auditor provide in this report?
    • A. 

      Positive assurance on the financial statements and on the effectiveness of internal control over financial reporting.

    • B. 

      Positive assurance on the financial statements and negative assurance on the effectiveness of internal control over financial reporting.

    • C. 

      Limited assurance on the financial statements and on the effectiveness of internal control over financial reporting.

    • D. 

      There is no guidance on what level of assurance to provide.

  • 36. 
    Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned that management may be trying to prevent discovery of misstatements. In such cases, the auditor will likely issue a:
    • A. 

      Disclaimer of opinion in all cases.

    • B. 

      Qualification of both scope and opinion in all cases.

    • C. 

      Disclaimer of opinion whenever materiality is in question.

    • D. 

      Qualification of both scope and opinion whenever materiality is in question.

  • 37. 
    CPAs issue several types of “special audit reports.” Which of the following circumstances would not require the issuance of a special audit report?
    • A. 

      The client’s financial statements are prepared using the cash basis.

    • B. 

      The client’s financial statements are prepared using the accrual basis.

    • C. 

      The CPA has been retained to audit only the current assets.

    • D. 

      The CPA has been retained to review the internal control system, not the financial statements.

  • 38. 
    Which of the following is not a primary category of attestation report?
    • A. 

      Compilation report.

    • B. 

      Review report.

    • C. 

      Audit report.

    • D. 

      Special audit report based on a basis of accounting other than GAAP.

  • 39. 
    In which of the following situations would the auditor most likely issue an unqualified report?
    • A. 

      The client valued ending inventory by using the replacement cost method.

    • B. 

      The client valued ending inventory by using the Next-In-First-Out (NIFO) method.

    • C. 

      The client valued ending inventory at selling price rather than historical cost.

    • D. 

      The client valued ending inventory by using the First-In-First-Out (FIFO) method, but showed the replacement cost of inventory in the Notes to the Financial Statements.

  • 40. 
    Which of the following statements is true?
    • A. 

      The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty.

    • B. 

      The auditor is required to issue a disclaimer of opinion in the event of a going concern problem.

    • C. 

      The auditor is required to issue a disclaimer of opinion for a material uncertainty and for a going concern problem.

    • D. 

      The auditor has the option, but is not required, to issue a disclaimer of opinion for a material uncertainty or for a going concern problem.

  • 41. 
    The most common case in which conditions beyond the client’s and auditor’s control cause a scope restriction is an engagement:
    • A. 

      Agreed upon after the client’s balance sheet date.

    • B. 

      Where the client won’t allow the auditor to confirm receivables for fear of offending its customers

    • C. 

      Where the auditor doesn’t have enough staff to satisfactorily audit all of the client’s foreign subsidiaries.

    • D. 

      Where the client is going through Chapter 11 bankruptcy.

  • 42. 
    When the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to:
    • A. 

      Inform the reader that disclosure is not adequate, and to issue an adverse opinion.

    • B. 

      Inform the reader that disclosure is not adequate, and to issue a qualified opinion.

    • C. 

      Present the information in the audit report and issue an unqualified or qualified opinion.

    • D. 

      Present the information in the audit report and to issue a qualified or an adverse opinion.

  • 43. 
    The “unqualified report with explanatory paragraph” and the “unqualified report with modified wording”:
    • A. 

      Arise as a result of an incomplete audit.

    • B. 

      Arise when the financial statements are not “presented fairly.”

    • C. 

      Meet the criteria of a complete audit with satisfactory results.

    • D. 

      Meet the criteria of a complete audit but with unsatisfactory results.

  • 44. 
    Which of the following will not cause the auditor to issue a standard unqualified report with an explanatory paragraph or modified wording?
    • A. 

      Emphasis of a matter.

    • B. 

      Reports involving other auditors.

    • C. 

      Auditor disagrees with client’s departure from GAAP.

    • D. 

      Lack of consistent application of GAAP.

  • 45. 
    Which of the following is not one of the principal CPA firm’s alternatives when issuing a report if a different CPA firm performed part of the audit?
    • A. 

      Issue a joint report signed by both CPA firms.

    • B. 

      Make no reference to the other CPA firm in the audit report, and issue the standard unqualified opinion.

    • C. 

      Make reference to the other auditor in the report by using modified wording (a shared opinion or report)

    • D. 

      A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor.

  • 46. 
    Which of the following requires recognition in the auditor’s opinion as to consistency?
    • A. 

      The correction of an error in the prior year’s financial statements resulting from a mathematical mistake in capitalizing interest.

    • B. 

      A change in the estimate of provisions for warranty costs.

    • C. 

      The change from the cost method to the equity method of accounting for investments in common stock.

    • D. 

      A change in depreciation method which has no effect on current year’s financial statements but is certain to affect future years.

  • 47. 
    When an auditor encounters a situation involving more than one of the conditions requiring a departure from a standard unqualified report, the auditor should modify his or her opinion for each condition unless one has the effect of neutralizing the others. In which of the following situations would the auditor not include more than one modification in the report?
    • A. 

      There is a material scope limitation, and the auditor is not independent.

    • B. 

      There is a material GAAP violation, and the auditor is not independent.

    • C. 

      There is a material scope limitation, and there is substantial doubt about the company’s ability to continue as a going concern.

    • D. 

      There is a substantial doubt about the company’s ability to continue as a going concern, and information about the causes of the uncertainties is not adequately disclosed in a footnote.

  • 48. 
    Indicate which changes would require an explanatory paragraph in the audit report.
    Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable       Change from LIFO to FIFO
    • A. 

      Yes Yes

    • B. 

      No No

    • C. 

      Yes No

    • D. 

      No Yes

  • 49. 
    Indicate which changes would require an explanatory paragraph in the audit report.
      Change in the estimated life of an asset   Variation in the format of the financial statements
    • A. 

      Yes Yes

    • B. 

      No No

    • C. 

      Yes No

    • D. 

      No Yes

  • 50. 
    Indicate which changes would require an explanatory paragraph in the audit report.  
         
    The CPA concludes there is substantial doubt about the entity’s ability to continue as a going concern       Change from FIFO to LIFO
    • A. 

      Yes Yes

    • B. 

      No No

    • C. 

      Yes No

    • D. 

      No Yes

  • 51. 
    Indicate which changes would require an explanatory paragraph in the audit report.  
         
    A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion.   The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion.
    • A. 

      Yes Yes

    • B. 

      No No

    • C. 

      Yes No

    • D. 

      No Yes

  • 52. 
    Indicate which changes would require an explanatory paragraph in the audit report..
      The existence of related party transactions   Important events occurring subsequent to the balance sheet date
    • A. 

      Yes Yes

    • B. 

      No No

    • C. 

      Yes No

    • D. 

      No Yes

  • 53. 
    In which situation would the auditor be choosing between “except for” qualified opinion and an adverse opinion? 
    • A. 

      The auditor lacks independence

    • B. 

      A client-imposed scope restriction

    • C. 

      A circumstance-imposed scope restriction

    • D. 

      Lack of full disclosure required by footnotes