Auditing Final Part 2

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1. Audit reports should be dated the date on which the financial statements are issued.
- T
- F

About This Quiz

This is for chapter 17 the final part of the auditing segment.

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2.

When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unqualified, but include an additional explanatory paragraph in the report.
- T
- F
Correct Answer

A. F

Explanation

The statement is false. When auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is qualified, not unqualified. A qualified opinion indicates that there are limitations or exceptions to the audit, while an unqualified opinion means that the audit was conducted in accordance with the standards and no significant issues were found. Therefore, the statement is incorrect.

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3.

When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item
- T
- F
Correct Answer

A. T

Explanation

Materiality refers to the significance or importance of an item or amount in the financial statements. When evaluating the results of audit tests, materiality is determined based on both the dollar amount and the nature of the item. This means that not only the monetary value of an item is considered, but also its impact on the financial statements and the overall financial health of the company. Therefore, the statement that materiality depends upon both the dollar amount and the nature of the item is true.

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4.

. A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board
- T
- F
Correct Answer

A. F

Explanation

Public companies' financial statements should be prepared following standards of the Financial Accounting Standards Board (FASB), not the Public Company Accounting Oversight Board (PCAOB). The PCAOB is responsible for overseeing the audits of public companies, while the FASB is responsible for establishing accounting standards for all entities, including public companies. Therefore, the correct answer is false.

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5.

If financial statements fail to disclose a material fact, the auditors may disclose the information in an explanatory paragraph and issue an unqualified opinion on the statements.
- T
- F
Correct Answer

A. F

Explanation

The statement is false. If financial statements fail to disclose a material fact, auditors are required to issue a qualified or adverse opinion, not an unqualified opinion. A qualified opinion means that there is a limitation in the scope of the audit or a disagreement with management, while an adverse opinion means that the financial statements are not presented fairly.

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6.

If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should not issue an unqualified opinion
- T
- F
Correct Answer

A. T

Explanation

If financial statements contain a material departure from generally accepted accounting principles, it indicates that there is a significant deviation from the standard accounting practices. In such cases, auditors should not issue an unqualified opinion, which is a statement that the financial statements are presented fairly and in accordance with the generally accepted accounting principles. Instead, auditors should issue a qualified opinion or an adverse opinion to indicate the departure from the standard accounting principles.

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7.

A "very material" change from one generally accepted accounting principle to another generally accepted accounting principle usually results in an adverse opinion by the auditors.
- T
- F
Correct Answer

A. F

Explanation

A "very material" change from one generally accepted accounting principle to another does not necessarily result in an adverse opinion by the auditors. The auditors may provide a qualified opinion or an explanatory paragraph in their report to address the change, but it does not automatically lead to an adverse opinion.

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8.

When there is a significant question about a company's ability to remain a going concern, the report issued is usually unqualified with an explanatory paragraph.
- T
- F
Correct Answer

A. T

Explanation

When there is a significant question about a company's ability to remain a going concern, it means that there are doubts about the company's ability to continue its operations and meet its financial obligations in the future. In such cases, the report issued by auditors is usually unqualified, meaning that the financial statements are presented fairly in all material respects. However, there is an explanatory paragraph added to the report to provide additional information about the doubts and uncertainties surrounding the company's ability to continue as a going concern.

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9.

9. A client imposed scope limitation will generally result in a disclaimer of opinion.
- T
- F
Correct Answer

A. T

Explanation

A client imposed scope limitation refers to a situation where the client restricts the auditor's access to certain information or areas of the audit. This limitation can prevent the auditor from obtaining sufficient evidence to form an opinion on the financial statements. As a result, the auditor may issue a disclaimer of opinion, stating that they are unable to express an opinion on the financial statements due to the scope limitation imposed by the client. Therefore, the statement is true.

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10.

Regulation S-X governs the form and content of financial statements filed with the SEC.
- T
- F
Correct Answer

A. T

Explanation

Regulation S-X is a set of rules and regulations established by the Securities and Exchange Commission (SEC) that governs the form and content of financial statements filed with the SEC. These regulations ensure that financial statements are accurate, transparent, and provide relevant information to investors and the public. Therefore, the statement is true.

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11.

11. Which of the following is not explicitly included in an audit report? .
- A statement that he auditor believes that his or her audit provides a reasonable basis for expressing negative assurance.
- A statement that the auditor's responsibility is to express an opinion on the financial statements
- C) A statement that the financial statements in the report are the responsibility of management.
- D) A title with the word "independent."
Correct Answer

A. A statement that he auditor believes that his or her audit provides a reasonable basis for expressing negative assurance.

Explanation

The correct answer is a statement that the auditor believes that his or her audit provides a reasonable basis for expressing negative assurance. This statement is not explicitly included in an audit report. The other options are all commonly included in an audit report. The auditor's responsibility to express an opinion on the financial statements is a key aspect of the report. The statement that the financial statements are the responsibility of management is also typically included to clarify the division of responsibilities. Finally, the inclusion of the word "independent" in the title is important to highlight the auditor's impartiality.

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12.

When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes
- Preparing prospective financial information to verify whether management's plans can be effectively implemented
- Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1.
- Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements
- Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern
Correct Answer

A. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern

Explanation

When an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern, their responsibility includes considering the adequacy of disclosure about this possibility. This means that the auditor needs to assess whether the financial statements adequately inform users about the entity's potential inability to continue operating in the future. This is important because it allows users of the financial statements to make informed decisions based on the entity's financial health and sustainability.

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13.

When an auditor issues an adverse opinion an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified?
- A) Yes No Yes
- B) No Yes Yes
- C) No No Yes
- D) No No No
Correct Answer

A. C) No No Yes

Explanation

When an auditor issues an adverse opinion, it means that they believe the financial statements of a company are not presented fairly and do not comply with generally accepted accounting principles. In such cases, an explanatory paragraph is added to the auditor's report to explain the reasons for the adverse opinion. However, the other paragraphs in the report, such as the opinion paragraph and the basis for opinion paragraph, are not modified. Therefore, the correct answer is C) No No Yes.

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14.

When an auditor issues a qualified report due to a scope limitation an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? Introductory Scope Opinion
- A) Yes Yes Yes
- B) Yes No Yes
- C) No Yes Yes
- D) No Yes No
Correct Answer

A. C) No Yes Yes

Explanation

When an auditor issues a qualified report due to a scope limitation, the report will include an explanatory paragraph to provide an explanation for the limitation. In addition to the explanatory paragraph, the auditor will also modify the scope paragraph and the opinion paragraph in the report. Therefore, the correct answer is C) No Yes Yes.

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15.

When an auditor issues an unqualified report, but adds an emphasis of a matter paragraph to the report, which, if any, paragraphs to the report are modified? Introductory Scope Opinion
- When an auditor issues an unqualified report, but adds an emphasis of a matter paragraph to the report, which, if any, paragraphs to the report are modified? Introductory Scope Opinion
- B) No Yes Yes
- C) No No Yes
- D) No No No
Correct Answer

A. D) No No No
16.

16. An explanatory paragraph relating to a scope limitation should be placed.
- A) After the opinion paragraph.
- B) Prior to the opinion paragraph.
- C) Either before or after the opinion paragraph.
- D) An audit report modified for a scope limitation does not include an explanatory paragraph
Correct Answer

A. B) Prior to the opinion paragraph.

Explanation

In an audit report, when there is a scope limitation, an explanatory paragraph should be included prior to the opinion paragraph. This is because the explanatory paragraph provides important information about the limitation that may affect the overall opinion of the auditor. By placing it before the opinion paragraph, the reader can understand the context and potential impact of the limitation before reading the auditor's opinion.

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17.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:
- A) Increase current dividend distributions.
- B) Reduce existing lines of credit.
- C) Increase ownership equity.
- D) Purchase assets formerly leased.
Correct Answer

A. C) Increase ownership equity.

Explanation

When an auditor has substantial doubt about an entity's ability to continue as a going concern, they would consider management's plans for dealing with the adverse effects of the negative trends and financial difficulties. Increasing ownership equity would be a logical plan as it would provide the entity with additional financial resources and strengthen its financial position. This could be achieved through issuing new shares or attracting new investors. Increasing ownership equity can help improve the entity's financial stability and increase its chances of continuing as a going concern.

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18.

When a CPA does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should:
- Issue an unqualified opinion, but disclose elsewhere in the report this departure from a customary procedure.
- Issue an unqualified opinion with no reference to this omission but be prepared to defend the action
- Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables
- D) Issue an adverse opinion.
Correct Answer

A. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action

Explanation

When a CPA does not confirm material accounts receivable but is satisfied by the application of alternative auditing procedures, she would issue an unqualified opinion with no reference to this omission but be prepared to defend the action. This means that the CPA is confident in the accuracy and completeness of the accounts receivable despite not using the customary procedure of confirmation. The CPA believes that the alternative procedures used are sufficient to provide reasonable assurance about the accounts receivable. However, the CPA should be prepared to explain and justify this departure from the normal procedure if questioned.

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19.

When a client declines to disclose essential information in the financial statements or notes, the CPA should:
- ) Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit.
- Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.
- Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure.
- Issue an unqualified opinion, but inform the reader by including the omitted information in the audit report
Correct Answer

A. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

Explanation

If a client declines to disclose essential information in the financial statements or notes, the CPA should provide the information in the audit report, if possible, and qualify the opinion because of a departure from GAAP. This means that the CPA should include the omitted information in the audit report, but also make it clear that the client's failure to disclose the information is a departure from generally accepted accounting principles (GAAP). By qualifying the opinion, the CPA is indicating that the financial statements may not be fully reliable due to the client's lack of disclosure.

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20.

Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct?
- A) Such assumption of responsibility violates the profession's standards.
- In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements
- In such circumstances, when appropriate requirements have been met, Firm A should issue an unqualified opinion on the financial statements but should make appropriate reference to Firm B in the audit report.
- CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved
Correct Answer

A. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements

Explanation

According to the given information, Firm A has performed most of the audit work and qualifies as the principal auditor. Firm A wishes to assume full responsibility for Firm B's work. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements. This means that Firm A can take responsibility for the work done by Firm B and provide an unqualified opinion without making any reference to Firm B in the audit report.

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21.

Which of the following is most accurate with respect to a CPA's responsibility in considering a going concern question on audits?
- Perform analytical procedures aimed particularly at assessing whether bankruptcy is probable.
- B) Issue a report with a "going concern" modification when failure is at least reasonably probable.
- Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern.
- Determine that related uncertainties are properly disclosed and make no mention in the audit report
Correct Answer

A. Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern.

Explanation

A CPA's responsibility in considering a going concern question on audits is to assess whether there is substantial doubt about the entity's ability to continue as a going concern based on the audit procedures performed. This means that the CPA should analyze the financial statements, evaluate the entity's financial condition, and consider any potential risks or uncertainties that may affect its ability to continue operating. If there is substantial doubt, the CPA should disclose this in the audit report.

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22.

The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should:
- Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion
- Express an unqualified opinion with an explanatory paragraph and disclose the accounting change from 20X3 and its effect on the financial statements
- C) Disclaim an opinion and explain all of the reasons therefore.
- Express an adverse opinion regarding the 20X4 financial statements, without an explanatory paragraph disclosing the reason therefore since it will be included in the notes to the statements.
Correct Answer

A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion

Explanation

The auditor should express an adverse opinion with an explanatory paragraph disclosing the reason for the opinion. This is because the auditor believes that the new accounting principles followed in 20X4 are not in conformity with GAAP, which means that the financial statements are misleading. The auditor should disclose the accounting change in the explanatory paragraph to provide transparency and clarity to the users of the financial statements.

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23.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should:
- A) Issue an unqualified report with an explanatory paragraph.
- B) Withdraw from the engagement.
- C) Issue an "except for" qualification or an adverse opinion.
- D) Issue an "except for" qualification or a disclaimer of opinion.
Correct Answer

A. C) Issue an "except for" qualification or an adverse opinion.

Explanation

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should issue an "except for" qualification or an adverse opinion. This means that they should express their opinion that the financial statements are fairly presented except for the specific departure from accounting principles. This helps to inform users of the financial statements about the deviation and its potential impact on the overall reliability of the information provided. It is important for auditors to disclose such departures to maintain transparency and ensure that users of the financial statements are aware of any potential issues.

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24.

. Which of the following accounting changes requires explanatory language regarding consistency in the auditors' report?
- A) A change in the estimated useful lives of a class of fixed assets.
- B) A write-off of a patent because future benefits do not appear to exist.
- A change from the straight line method of depreciation to an accelerated method for a class of fixed assets.
- A change in calculating bad debt expense from one percent to two percent of credit sales
Correct Answer

A. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets.

Explanation

A change from the straight line method of depreciation to an accelerated method for a class of fixed assets requires explanatory language regarding consistency in the auditors' report because it represents a change in accounting policy. The straight line method and the accelerated method are two different methods of calculating depreciation, and a change from one method to another can have a significant impact on the financial statements. Therefore, the auditors need to explain this change and provide additional information to ensure consistency and transparency in the reporting.

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25.

25. The first paragraph of a standard unqualified audit report is referred to as the:
- A) Introductory paragraph.
- B) Scope paragraph.
- C) Opinion paragraph.
- D) Explanatory paragraph.
Correct Answer

A. A) Introductory paragraph.

Explanation

The first paragraph of a standard unqualified audit report is referred to as the introductory paragraph. This paragraph typically includes the identification of the financial statements being audited, the responsibilities of management and the auditor, and the objective of the audit. It serves as an introduction to the audit report and provides important contextual information for the reader.

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26.

26. A scope restriction is least likely to result in a(an):
- A) Qualified opinion.
- B) Disclaimer of opinion.
- C) Adverse opinion.
- D) Standard unqualified opinion.
Correct Answer

A. C) Adverse opinion.

Explanation

A scope restriction refers to a limitation imposed on an auditor's ability to gather sufficient evidence or perform necessary procedures. This restriction may be due to circumstances beyond the auditor's control. An adverse opinion is the most severe type of audit opinion and is issued when the auditor concludes that the financial statements are materially misstated and do not present a true and fair view. Since a scope restriction limits the auditor's ability to gather evidence, it is least likely to result in an adverse opinion.

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27.

Which of the following is least likely to result in explanatory language being added to an unqualified auditor's report on a client that sells jewelry through a retail store?
- A decision by the auditor to emphasize that the client is a part of a larger organization
- B) Reliance placed upon a specialist to evaluate the diamonds.
- C) A change from FIFO to specific identification accounting for inventory.
- D) A question as to whether the client will be able to remain a going concern.
Correct Answer

A. B) Reliance placed upon a specialist to evaluate the diamonds.

Explanation

The least likely option to result in explanatory language being added to an unqualified auditor's report on a client that sells jewelry through a retail store is option B) Reliance placed upon a specialist to evaluate the diamonds. This is because relying on a specialist to evaluate the diamonds is a common practice in the jewelry industry and does not typically require explanatory language in the auditor's report.

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28.

28. Which of the following statements is correct with respect to explanatory paragraphs?
- A) They always precede the opinion paragraph.
- B) They always follow the opinion paragraph.
- C) Sometimes they precede and sometimes they follow the opinion paragraph.
- D) They always precede the scope paragraph.
Correct Answer

A. C) Sometimes they precede and sometimes they follow the opinion paragraph.

Explanation

Explanatory paragraphs can either precede or follow the opinion paragraph. This means that there is no fixed rule regarding the placement of explanatory paragraphs in relation to the opinion paragraph. The positioning of explanatory paragraphs can vary depending on the context and purpose of the writing. Therefore, option C is correct as it acknowledges that there is flexibility in the placement of explanatory paragraphs.

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29.

A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report is:
- A) Standard unqualified.
- B) Unqualified with explanatory language as to consistency.
- C) Qualified for consistency.
- D) Disclaimer.
Correct Answer

A. A) Standard unqualified.

Explanation

The auditors believe that the client's changed salvage values for its fixed assets are realistic. This means that the client's financial statements are fairly presented and in accordance with the applicable financial reporting framework. Therefore, the appropriate report is a standard unqualified report, indicating that the auditors have no reservations about the financial statements.

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30.

Which of the following would be most likely to be an appropriate addressee for an audit report?
- A) The shareholders of the corporation whose financial statements were examined.
- B) A third party who requested that a copy of the audit report be sent to her.
- C) The president of the corporation whose financial statements were examined.
- D) The chief financial officer.
Correct Answer

A. A) The shareholders of the corporation whose financial statements were examined.

Explanation

The audit report is a formal document that provides an independent opinion on the financial statements of a corporation. The primary purpose of the audit report is to provide assurance to the shareholders of the corporation regarding the accuracy and fairness of the financial statements. Therefore, the shareholders would be the most appropriate addressee for the audit report as they are the primary stakeholders with a direct interest in the financial statements. The audit report helps them make informed decisions about their investment in the corporation.

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31.

31. The term "except for" in an audit report is:
- A) Used in an adverse opinion.
- B) No longer considered appropriate.
- C) Used in a qualified opinion
- D) Used for an unqualified opinion when an explanatory paragraph is added.
Correct Answer

A. C) Used in a qualified opinion

Explanation

The term "except for" in an audit report is used in a qualified opinion. A qualified opinion is issued when the auditor concludes that there is a limitation of scope or a departure from generally accepted accounting principles (GAAP) in the financial statements, but the overall financial statements are fairly presented. The term "except for" is used to indicate that the opinion is qualified due to certain exceptions or limitations identified by the auditor.

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32.

The unqualified standard audit report of a nonpublic company does not explicitly state that:
- A) The financial statements are the responsibility of the company's management.
- The audit was conducted in accordance with accounting principles generally accepted in the United States of America
- C) The auditors believe that the audit provides a reasonable basis for their opinion.
- D) An audit includes assessing the accounting principles used.
Correct Answer

A. The audit was conducted in accordance with accounting principles generally accepted in the United States of America

Explanation

The unqualified standard audit report of a nonpublic company explicitly states that the audit was conducted in accordance with accounting principles generally accepted in the United States of America. Therefore, this statement is not something that the report does not explicitly state.

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33.

Which of the following is not a difference between the audit report of a nonpublic and public company
- A) The nonpublic company report includes the word “Registered” in the title.
- B) The nonpublic company report refers to standards of the PCAOB.
- The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures
- The nonpublic company report must include the city and state in which the report has been issued
Correct Answer

A. The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures

Explanation

The correct answer is that the nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures. This means that the audit report for a nonpublic company includes a specific section discussing the client's measures and policies in place to prevent fraud. This is a difference compared to the audit report for a public company, which may not have this specific paragraph.

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34.

. If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows:
- A) The auditors may still issue an unqualified opinion.
- The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles.
- The auditors should issue an opinion "subject to" the information that would have been contained in the statement of cash flows.
- The auditors should refuse to issue an opinion on only the two financial statements.
Correct Answer

A. The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles.

Explanation

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows, the auditors should issue an "except for" qualification for the departure from generally accepted accounting principles. This means that while the auditors can still issue an unqualified opinion for the balance sheet and income statement, they must disclose the omission of the statement of cash flows and qualify their opinion accordingly. This departure from accounting principles could potentially impact the overall assessment of the financial statements.

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35.

Which of the following circumstances generally results in the issuance of a report that is other than unqualified
- A) Circumstances have significantly limited the scope of the auditors' procedures.
- The principal auditors for the engagement are relying on the work of other auditors.
- The financial statements depart from a standard established by the FASB because the auditors have concluded that application of the standard would result in materially misleading financial statements.
- The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions
Correct Answer

A. A) Circumstances have significantly limited the scope of the auditors' procedures.

Explanation

The issuance of a report that is other than unqualified generally occurs when circumstances have significantly limited the scope of the auditors' procedures. This means that the auditors were unable to obtain sufficient evidence or perform all necessary procedures to express an unqualified opinion on the financial statements. This limitation could be due to factors such as restricted access to information, limitations on the time or resources available for the audit, or significant uncertainties or limitations in the accounting records.

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36.

Which of the following modifications of the auditors' report does not include an additional paragraph
- A) The report is qualified because the financial statements contain a material departure from generally accepted accounting principles
- The report includes an emphasis of a matter
- C) The audit report indicates a division of responsibility between two CPA firms.
- D) The report is qualified because the scope of the auditors' work was restricted.
Correct Answer

A. C) The audit report indicates a division of responsibility between two CPA firms.

Explanation

The correct answer is C) The audit report indicates a division of responsibility between two CPA firms. This modification does not require an additional paragraph because it is already included in the main body of the auditors' report. The division of responsibility is typically disclosed in the auditors' opinion section, rather than as a separate paragraph.

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37.

If the predecessor auditors fail to reissue their audit report on comparative financial statements the successor auditors should
- Express a qualified opinion on the comparative financial statements audited by the predecessor auditors.
- ) Reproduce the predecessor auditors' report and include it with the new set of financial statements
- Have the client omit the comparative financial statements
- D) Refer to the report of the predecessor auditors.
Correct Answer

A. D) Refer to the report of the predecessor auditors.

Explanation

If the predecessor auditors fail to reissue their audit report on comparative financial statements, the successor auditors should refer to the report of the predecessor auditors. This means that the successor auditors should review and consider the findings and conclusions made by the previous auditors in their report. This is important because it provides continuity and allows the successor auditors to understand any issues or concerns raised by the predecessor auditors. By referring to the report, the successor auditors can appropriately assess the reliability and accuracy of the comparative financial statements.

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38.

An audit client has refused to allow the auditors to perform a generally accepted auditing procedure. The circumstance would normally result in the issuance of:
- A) A disclaimer of opinion.
- B) An adverse opinion.
- C) An "except for" qualification of the report.
- D) An unqualified report with explanatory language.
Correct Answer

A. A) A disclaimer of opinion.

Explanation

When an audit client refuses to allow auditors to perform a generally accepted auditing procedure, it means that the auditors are unable to obtain sufficient evidence to form an opinion on the financial statements. In such cases, auditors issue a disclaimer of opinion, stating that they are unable to express an opinion on the financial statements due to the limitation imposed by the client. This is the appropriate response as it reflects the auditors' inability to provide assurance on the financial statements.

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39.

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public
- A) Form 8-K.
- B) Form S-1.
- C) Form 10-Q.
- D) Form 10-K.
Correct Answer

A. B) Form S-1.

Explanation

Form S-1 is a registration statement that is filed with the SEC by a company planning to issue securities to the public. This form provides detailed information about the company, its business operations, financial statements, and the securities being offered. It is required by the SEC to ensure transparency and protect investors by providing them with all the necessary information to make informed investment decisions. Form 8-K is used to report important events or changes that occur after a company has already gone public, while Form 10-Q and Form 10-K are used for regular quarterly and annual financial reporting, respectively.

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40.

If principal auditors make no reference to other auditors whose work they have relied on as a part of the basis for their report, the principal auditors
- A) Are not required to investigate the professional reputation of the other auditors.
- B) Are issuing an inappropriate report.
- C) Are assuming full responsibility for the work of the other auditors.
- D) Are issuing a qualified opinion.
Correct Answer

A. C) Are assuming full responsibility for the work of the other auditors.

Explanation

When principal auditors make no reference to other auditors whose work they have relied on, it means that they are not acknowledging or disclosing the involvement of these other auditors in their report. By not referencing the other auditors, the principal auditors are assuming full responsibility for the work of the other auditors. This implies that they are taking ownership of the accuracy and reliability of the work performed by the other auditors, and are willing to be held accountable for any issues or errors that may arise from that work.

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41.

After performing all necessary procedures the predecessor auditors reissue a priorperiod report on financial statements at the request of the client without revising the original wording. The predecessor auditors should
- A) Delete the date of the report.
- B) Dual-date the report.
- C) Use the reissue date.
- D) Use the date of the previous report.
Correct Answer

A. D) Use the date of the previous report.

Explanation

When the predecessor auditors reissue a prior-period report without revising the original wording, they should use the date of the previous report. This means that the report will reflect the date when it was originally issued, rather than the current date or any other date. This ensures that the report accurately represents the financial statements as they were at the time of the original report.

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42.

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:
- A) A note to the financial statements which discusses the basis for the opinion.
- B) The scope paragraph which discusses the basis for the opinion rendered.
- C) A separate paragraph which discusses the basis for the opinion rendered.
- D) The consistency in the application of generally accepted accounting principles.
Correct Answer

A. C) A separate paragraph which discusses the basis for the opinion rendered.

Explanation

The correct answer is C) A separate paragraph which discusses the basis for the opinion rendered. When an adverse opinion is expressed, it is important to provide a clear and separate paragraph that explains the reasons and basis for the opinion. This allows the reader to understand the specific issues or concerns that led to the adverse opinion. It provides transparency and accountability in the reporting process. Option A is incorrect because a note to the financial statements may provide additional information but it does not specifically address the basis for the opinion. Option B is incorrect because the scope paragraph discusses the extent of the audit, not the basis for the opinion. Option D is incorrect because consistency in the application of accounting principles is a general requirement, but it does not directly address the basis for the opinion.

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43.

Under which of the following set of circumstances might the auditors disclaim an opinion?
- The financial statements contain a departure from generally accepted accounting principles, the effect of which is material.
- The principal auditors decide to make reference to the report of another auditor who audited a subsidiary.
- There has been a material change between periods in the method of application of accounting principles
- D) There are significant scope limitations on the audit.
Correct Answer

A. D) There are significant scope limitations on the audit.

Explanation

The auditors may disclaim an opinion if there are significant scope limitations on the audit. This means that the auditors were unable to obtain sufficient and appropriate audit evidence to form an opinion on the financial statements. These limitations could be due to factors such as the client's refusal to provide necessary information, restrictions imposed by management, or circumstances beyond the auditors' control. Disclaiming an opinion indicates that the auditors are unable to express an opinion on the fairness of the financial statements.

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44.

The management of Stanley Corporation has decided not to account for a material transaction in accordance with the provisions of a recent statement of the FASB. They have set forth their reasons in note "B" of the financial statements, which clearly demonstrates that due to unusual circumstances the financial statements would otherwise have been misleading. The auditors' report will probably contain a(a
- A) Qualified opinion and an explanatory paragraph with a reference to note "B".
- B) Unqualified opinion and an explanatory paragraph.
- C) Adverse opinion and an explanatory paragraph.
- D) "Except for" opinion and an explanatory paragraph.
Correct Answer

A. B) Unqualified opinion and an explanatory paragraph.

Explanation

The management of Stanley Corporation has made a decision not to account for a material transaction according to the FASB's recent statement. They have provided their reasons in note "B" of the financial statements, which clearly explains that the financial statements would have been misleading due to unusual circumstances. In this situation, the auditors are likely to issue an unqualified opinion, indicating that the financial statements are fairly presented, but they will also include an explanatory paragraph to provide additional information about the decision made by the management.

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45.

The auditors include explanatory language in an otherwise unqualified report in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this explanatory language
- A) Is appropriate and would not negate the unqualified opinion.
- B) Is considered a qualification of the report.
- C) Adverse opinion and an explanatory paragraph.
- Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
Correct Answer

A. A) Is appropriate and would not negate the unqualified opinion.

Explanation

The inclusion of explanatory language in an otherwise unqualified report to emphasize that the entity being reported upon is a subsidiary of another business enterprise is considered appropriate and would not negate the unqualified opinion. This means that the auditors can provide additional information about the relationship between the entity and its parent company without affecting the overall opinion that the financial statements are fairly presented.

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46.

. It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an
- A) Change in accounting principle.
- B) Limitation in the scope of the audit.
- C) Uncertainty.
Correct Answer

A. B) Limitation in the scope of the audit.

Explanation

The auditors' report should provide a clear and concise summary of the audit findings and conclusions. Referring the reader to a financial statement note for details regarding a limitation in the scope of the audit would not be appropriate because it would not provide sufficient information about the nature and impact of the limitation. The auditors' report should directly address any limitations in the scope of the audit and provide the necessary explanation and disclosure to ensure the reader understands the implications of the limitation.

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47.

Which of the following best describes the reference to the expression "taken as a whole" in the fourth generally accepted auditing standard of reporting
- It applies equally to a complete set of financial statements and to each individual financial statement
- B) It applies only to a complete set of financial statements.
- C) It applies equally to each item in each financial statement.
- D) It applies equally to each material item in each financial statement.
Correct Answer

A. It applies equally to a complete set of financial statements and to each individual financial statement

Explanation

The expression "taken as a whole" in the fourth generally accepted auditing standard of reporting applies to both a complete set of financial statements and each individual financial statement. This means that auditors should consider the overall presentation and accuracy of the complete set of financial statements, as well as the presentation and accuracy of each individual financial statement.

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Auditing Final Part 2

1. Audit reports should be dated the date on which the financial statements are issued.

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When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unqualified, but include an additional explanatory paragraph in the report.

When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item

. A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board

If financial statements fail to disclose a material fact, the auditors may disclose the information in an explanatory paragraph and issue an unqualified opinion on the statements.

If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should not issue an unqualified opinion

A "very material" change from one generally accepted accounting principle to another generally accepted accounting principle usually results in an adverse opinion by the auditors.

When there is a significant question about a company's ability to remain a going concern, the report issued is usually unqualified with an explanatory paragraph.

9. A client imposed scope limitation will generally result in a disclaimer of opinion.

Regulation S-X governs the form and content of financial statements filed with the SEC.

11. Which of the following is not explicitly included in an audit report? .

When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes

When an auditor issues an adverse opinion an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified?

When an auditor issues a qualified report due to a scope limitation an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? Introductory Scope Opinion

When an auditor issues an unqualified report, but adds an emphasis of a matter paragraph to the report, which, if any, paragraphs to the report are modified? Introductory Scope Opinion

16. An explanatory paragraph relating to a scope limitation should be placed.

When a CPA does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should:

When a client declines to disclose essential information in the financial statements or notes, the CPA should:

Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct?

Which of the following is most accurate with respect to a CPA's responsibility in considering a going concern question on audits?

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should:

. Which of the following accounting changes requires explanatory language regarding consistency in the auditors' report?

25. The first paragraph of a standard unqualified audit report is referred to as the:

26. A scope restriction is least likely to result in a(an):

Which of the following is least likely to result in explanatory language being added to an unqualified auditor's report on a client that sells jewelry through a retail store?

28. Which of the following statements is correct with respect to explanatory paragraphs?

A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report is:

Which of the following would be most likely to be an appropriate addressee for an audit report?

31. The term "except for" in an audit report is:

The unqualified standard audit report of a nonpublic company does not explicitly state that:

Which of the following is not a difference between the audit report of a nonpublic and public company

. If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows:

Which of the following circumstances generally results in the issuance of a report that is other than unqualified

Which of the following modifications of the auditors' report does not include an additional paragraph

If the predecessor auditors fail to reissue their audit report on comparative financial statements the successor auditors should

An audit client has refused to allow the auditors to perform a generally accepted auditing procedure. The circumstance would normally result in the issuance of:

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public

If principal auditors make no reference to other auditors whose work they have relied on as a part of the basis for their report, the principal auditors

After performing all necessary procedures the predecessor auditors reissue a priorperiod report on financial statements at the request of the client without revising the original wording. The predecessor auditors should

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:

Under which of the following set of circumstances might the auditors disclaim an opinion?

The auditors include explanatory language in an otherwise unqualified report in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this explanatory language

. It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an

Which of the following best describes the reference to the expression "taken as a whole" in the fourth generally accepted auditing standard of reporting