Auditing, Last 20 Questions Ch 17

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Auditing Quizzes & Trivia

This is the last 20 questions of ch 17. there hard as frozen shit.


Questions and Answers
  • 1. 

    . In which of the following circumstances would an auditor be most likely to express an adverse opinion?

    • A.

      The statements are not in conformity with the FASB Statements regarding the capitalization of leases

    • B.

      Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence.

    • C.

      The chief executive officer refuses the auditor access to minutes of board of directors' meetings

    • D.

      Tests of controls show that the entity's internal control is so poor that it can not be relied upon

    Correct Answer
    A. The statements are not in conformity with the FASB Statements regarding the capitalization of leases
    Explanation
    An adverse opinion is issued when the financial statements are not in conformity with the generally accepted accounting principles (GAAP). In this case, the auditor would express an adverse opinion if the statements are not in conformity with the FASB Statements regarding the capitalization of leases. This means that the company has not followed the required accounting standards for leases, which is a serious violation and can significantly impact the financial statements.

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  • 2. 

    An auditor's report on comparative financial statements should be dated as of the date of the

    • A.

      A) Issuance of the report.

    • B.

      B) Completion of the auditor's most recent field work.

    • C.

      C) Latest financial statements being reported on.

    • D.

      D) Last related-party transaction disclosed in the statements.

    Correct Answer
    B. B) Completion of the auditor's most recent field work.
    Explanation
    The correct answer is B) Completion of the auditor's most recent field work. This is because the auditor's report should be dated as of the date when the auditor has completed their field work, which includes gathering sufficient evidence and conducting necessary procedures to form an opinion on the financial statements. The date of completion of field work is important as it signifies the point at which the auditor has obtained enough information to support their opinion on the financial statements.

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  • 3. 

    Which of the following will result in explanatory language as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements?

    • A.

      A) A change in accounting estimate.

    • B.

      B) A change from an unacceptable accounting principle to a generally accepted one.

    • C.

      C) Correction of an error not involving a change in accounting principle.

    • D.

      D) A change in classification.

    Correct Answer
    B. B) A change from an unacceptable accounting principle to a generally accepted one.
  • 4. 

    64. If the principal auditor decides to make reference to the other auditor's audit, the introductory paragraph must specifically indicate the:

    • A.

      Magnitude of the portion of the financial statements examined by the other auditor.

    • B.

      B) Name of the other auditor.

    • C.

      C) Name of the consolidated subsidiary examined by the other auditor.

    • D.

      D) Type of opinion expressed by the other auditor.

    Correct Answer
    A. Magnitude of the portion of the financial statements examined by the other auditor.
    Explanation
    The correct answer is the magnitude of the portion of the financial statements examined by the other auditor. This is because when the principal auditor decides to make reference to the other auditor's audit, it is important to indicate the extent of the financial statements that were examined by the other auditor. This information helps provide transparency and clarity to the users of the financial statements regarding the involvement of multiple auditors in the audit process.

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  • 5. 

    When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(an):

    • A.

      A) "Subject to" qualified opinion.

    • B.

      B) Disclaimer of opinion.

    • C.

      C) Adverse opinion.

    • D.

      D) Unqualified opinion with a separate explanatory paragraph.

    Correct Answer
    B. B) Disclaimer of opinion.
    Explanation
    When the auditor is unable to determine the amounts associated with illegal acts of client personnel due to inadequate evidence, they should issue a disclaimer of opinion. This means that the auditor cannot express an opinion on the financial statements as a whole. A disclaimer of opinion is typically issued when the auditor is unable to obtain sufficient evidence to form an opinion or when there are significant uncertainties or limitations that prevent the auditor from expressing an opinion.

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  • 6. 

    An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor:

    • A.

      May accept the engagement because such engagements merely involve limited reporting objectives

    • B.

      May accept the engagement but should disclaim an opinion because of an inability to apply the procedures considered necessary

    • C.

      C) Should refuse the engagement because there is a client-imposed scope limitation.

    • D.

      Should refuse the engagement because of a departure from generally accepted auditing standards

    Correct Answer
    A. May accept the engagement because such engagements merely involve limited reporting objectives
    Explanation
    The auditor may accept the engagement because in this situation, they are only required to report on the balance sheet of Kane Company and not on the other basic financial statements. The auditor will still have access to all the information underlying the basic financial statements, so they can perform their duties within the limited reporting objectives.

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  • 7. 

    When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for:

    • A.

      A) Expressing dual dated opinions.

    • B.

      Updating the report on the previous financial statements only if there has not been a change in the opinion

    • C.

      Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist

    • D.

      Updating the report on the previous financial statements regardless of the opinion previously issued.

    Correct Answer
    D. Updating the report on the previous financial statements regardless of the opinion previously issued.
    Explanation
    The continuing auditor is responsible for updating the report on the previous financial statements regardless of the opinion previously issued when financial statements of a prior period are presented on a comparative basis with financial statements of the current period. This means that even if the previous report was qualified or had a different opinion, the auditor still needs to update the report to reflect any changes or updates in the financial statements.

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  • 8. 

    . If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be:

    • A.

      A) Referred to in the auditor's report for the current year.

    • B.

      B) Disclosed in the notes to the financial statements of the current year.

    • C.

      C) Disclosed in the notes to the financial statements and referred to in the auditor's

    • D.

      D) Treated as a subsequent event.

    Correct Answer
    B. B) Disclosed in the notes to the financial statements of the current year.
    Explanation
    If an accounting change has no material effect on the financial statements in the current year but is reasonably certain to have a material effect in later years, it should be disclosed in the notes to the financial statements of the current year. This allows users of the financial statements to be aware of the potential impact of the change in future periods and make informed decisions. It is important for transparency and to provide a complete and accurate representation of the financial position and performance of the company.

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  • 9. 

    When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report:

    • A.

      A) The reasons why the predecessor auditor's report is not presented.

    • B.

      B) The identity of the predecessor auditor who examined the financial statements of the prior year.

    • C.

      Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion.

    • D.

      D) The type of opinion expressed by the predecessor auditor.

    Correct Answer
    D. D) The type of opinion expressed by the predecessor auditor.
    Explanation
    The successor auditor should indicate in the report the type of opinion expressed by the predecessor auditor. This is important because it provides transparency and allows the users of the financial statements to understand the nature of the predecessor auditor's opinion and any potential impact it may have on the current year's financial statements. It helps to establish the credibility and reliability of the financial information presented.

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  • 10. 

    Morgan, CPA, is the principal auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan:

    • A.

      A) Must not refer to the audit of the other CPA.

    • B.

      B) Must refer to the audit of the other CPA.

    • C.

      C) May refer to the audit of the other CPA.

    • D.

      May refer to the audit of the other CPA, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the other CPA.

    Correct Answer
    C. C) May refer to the audit of the other CPA.
    Explanation
    Morgan, as the principal auditor, has the option to refer to the audit of the other CPA in their report on the consolidated financial statements. However, it is not mandatory for Morgan to do so. If Morgan does choose to refer to the other CPA's audit, they must include a qualified opinion in their report, indicating any reservations or limitations regarding the other auditor's work.

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  • 11. 

    The principal auditor is satisfied with the independence and professional reputation of the other auditor who has audited a subsidiary. To indicate the division of responsibility, the principal auditor should modify:

    • A.

      A) The introductory, scope, and opinion paragraphs of the report.

    • B.

      B) Only the scope paragraph of the report.

    • C.

      C) Only the opinion paragraph of the report.

    • D.

      D) Only the opinion paragraph of the report and include an explanatory paragraph.

    Correct Answer
    A. A) The introductory, scope, and opinion paragraphs of the report.
    Explanation
    The principal auditor should modify the introductory, scope, and opinion paragraphs of the report to indicate the division of responsibility. This is because the principal auditor is satisfied with the independence and professional reputation of the other auditor who audited a subsidiary. Modifying these paragraphs will provide transparency and clarity regarding the roles and responsibilities of each auditor in the audit process.

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  • 12. 

    The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent:

    • A.

      A) The CPA from reporting on one basic financial statement and not the others.

    • B.

      Misinterpretations regarding the degree of responsibility that the auditor is assuming.

    • C.

      The CPA from expressing different opinions on each of the basic financial statements

    • D.

      Management from reducing its final responsibility for the basic financial statements.

    Correct Answer
    B. Misinterpretations regarding the degree of responsibility that the auditor is assuming.
    Explanation
    The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. This standard aims to prevent misinterpretations regarding the degree of responsibility that the auditor is assuming. By requiring the auditor to either express an opinion or state that an opinion cannot be expressed, it ensures that stakeholders do not mistakenly assume a higher or lower level of responsibility on the part of the auditor. This helps maintain clarity and transparency in the reporting process.

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  • 13. 

    Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to gain satisfaction by applying alternative auditing procedures. Doe's audit report will probably contain

    • A.

      A) A standard unqualified opinion.

    • B.

      B) An unqualified opinion and an explanatory paragraph.

    • C.

      C) Either a qualified opinion or a disclaimer of opinion.

    • D.

      D) An "except for" qualification.

    Correct Answer
    A. A) A standard unqualified opinion.
    Explanation
    The auditor, Doe, was able to gain satisfaction by applying alternative auditing procedures, even though the inventory count was not observed and accounts receivable were not confirmed. This suggests that Doe was able to gather sufficient evidence to support the financial statements and did not identify any material misstatements. Therefore, Doe's audit report will likely contain a standard unqualified opinion, indicating that the financial statements are presented fairly in all material respects.

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  • 14. 

    . A limitation on the scope of the audit sufficient to preclude an unqualified opinion will always result when management

    • A.

      Asks the auditor to report on the balance sheet and not on the other basic financial statements.

    • B.

      B) Refuses to permit its lawyer to respond to the letter of audit inquiry.

    • C.

      Discloses material related party transactions in the notes to the financial statements

    • D.

      D) Knows that confirmation of accounts receivable is not feasible.

    Correct Answer
    B. B) Refuses to permit its lawyer to respond to the letter of audit inquiry.
  • 15. 

    An independent auditor has concluded that a substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an):

    • A.

      A) Unqualified opinion with an appropriate explanatory paragraph.

    • B.

      B) "Except for" qualified opinion.

    • C.

      C) Standard unqualified opinion.

    • D.

      D) Adverse opinion.

    Correct Answer
    A. A) Unqualified opinion with an appropriate explanatory paragraph.
    Explanation
    The auditor would issue an unqualified opinion with an appropriate explanatory paragraph because the client's financial statements have properly disclosed all of its solvency problems. This means that the auditor believes the financial statements are fairly presented, but wants to highlight the substantial doubt about the client's ability to continue as a going concern. The explanatory paragraph provides additional information to the users of the financial statements, ensuring that they are aware of the potential risks involved.

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  • 16. 

    52. In which of the following circumstances would an adverse opinion be appropriate?

    • A.

      A) The auditor is not independent with respect to the enterprise being audited.

    • B.

      B) The statements are not in conformity with generally accepted accounting

    • C.

      The statements are not in conformity with generally accepted accounting principles regarding pension plans

    • D.

      A client-imposed scope limitation prevents the auditor from complying with generally accepted auditing standards.

    Correct Answer
    C. The statements are not in conformity with generally accepted accounting principles regarding pension plans
    Explanation
    An adverse opinion would be appropriate when the statements are not in conformity with generally accepted accounting principles regarding pension plans. This means that the financial statements do not accurately represent the financial position and performance of the company in relation to its pension plans. An adverse opinion indicates a significant departure from the required accounting standards and raises doubts about the reliability and accuracy of the financial statements.

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  • 17. 

    For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected

    • A.

      A) Be appropriate in the circumstances for the particular entity.

    • B.

      Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.

    • C.

      Present information in the financial statements that is classified and summarized in a reasonable manner

    • D.

      D) Be applied on a basis consistent with those followed in the prior year.

    Correct Answer
    D. D) Be applied on a basis consistent with those followed in the prior year.
    Explanation
    The correct answer is D) Be applied on a basis consistent with those followed in the prior year. This means that the accounting principles used in the current financial statements should be consistent with those used in the previous year's financial statements. This consistency allows for comparability and helps users of the financial statements make informed decisions. However, it is not required that the principles be appropriate for the particular entity, reflect transactions within a range of acceptable limits, or present information in a reasonable manner.

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  • 18. 

    Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion on public company financial statements?

    • A.

      A) Explicitly Explicitly

    • B.

      B) Implicitly Implicitly

    • C.

      C) Implicitly Explicitly

    • D.

      D) Explicitly Implicitly

    Correct Answer
    D. D) Explicitly Implicitly
    Explanation
    When issuing an unqualified opinion on public company financial statements, an auditor explicitly states that they have conducted an audit in accordance with generally accepted auditing standards and that the financial statements present a true and fair view of the company's financial position. This is the explicit representation made by the auditor. Implicitly, the auditor is also stating that they have considered all relevant evidence, exercised professional judgment, and have not encountered any significant issues or limitations during the audit process. This implicit representation indicates that the auditor believes the financial statements are reliable and can be relied upon by users.

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  • 19. 

    For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to:

    • A.

      A) Only the current year under audit.

    • B.

      B) Either one or both years at the option of the auditors.

    • C.

      C) Each of the two years plus the preceding year.

    • D.

      D) Each of the years in the two-year period.

    Correct Answer
    D. D) Each of the years in the two-year period.
    Explanation
    When a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to each of the years in the two-year period. This means that the auditors' opinion would cover both the current year under audit as well as the preceding year. This is because the auditors need to provide their opinion on the financial statements for both years in order to give a complete and accurate assessment of the client's financial position and performance over the two-year period.

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  • 20. 

    . Which of the following will not result in qualification of the auditors' report due to a scope limitation?

    • A.

      A) Restrictions imposed by the client.

    • B.

      B) Reliance placed upon the report of other auditors.

    • C.

      C) Inability to obtain sufficient competent evidential matter.

    • D.

      D) Inadequacy in the accounting records.

    Correct Answer
    B. B) Reliance placed upon the report of other auditors.
    Explanation
    The correct answer is B) Reliance placed upon the report of other auditors. This option does not result in a scope limitation because relying on the report of other auditors is a common practice in auditing and does not restrict the auditor's ability to obtain sufficient evidence. Scope limitation occurs when there are restrictions imposed by the client, inability to obtain sufficient competent evidential matter, or inadequacy in the accounting records, which hinder the auditor's ability to perform necessary audit procedures.

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  • Current Version
  • Mar 16, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • May 03, 2010
    Quiz Created by
    Assman
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