Reports 1] A major purpose of the auditor's report on financial statements is to Name Date: A. Assure investors of the complete accuracy of the financial statements. B. Clarity for the public the nature of the auditor's responsibility and C. Deter creditors from extending loans in high-risk situations D. Describe the specific auditing procedures undertaken to gather evidence for the opinion. performance. [2] The auditor's judgment conceming the overall faimess of the presentation of financial position, results of operations, and cash flows is applied within the framework of A. Quality control. B. Generally accepted auditing standards, which include the concept of materiality. C. The auditor's assessment of the risk of material misstatement. D. Generally accepted accounting principles. 3] Patentex developed a new secret formula that is of great value because it resulted in a virtual monopoly. Patentex has capitalized all research and development costs associated with this formula. Greene, CPA, who is auditing this account, will probably A. Confer with management regarding transfer of the amount from the balance sheet to the income statement. B. Confirm that the secret formula is registered and on file with the county clerk's office. C. Confer with management regarding a change in the title of the account to goodwill. D. Conter with management regarding ownership of the secret formula. 4] Which of the following statements is false regarding disclosure in a client's GAAP-based financial statements? A. Information essential for a fair presentation should be set forth in the financial statements. B. Omission of a statement of cash flows is considered inadequate disclosure. C. Inadequate disclosure normally results in the auditor including the required information in the report D.The auditor should never disclose information in the report that the client has not shown in t financial statements. 15) Which of the following is a source of authoritative accounting principles for nongovermmenta entities? A. The Auditing Standards Board. B. The Financial Accounting Standards Board. C. The Govemmental Accounting Standards Board. D. The AICPA. 181 A company hires an independent auditor to conduct a traditional audit in accordance with GAAS. The auditor's primary purpose is to eport on compliance with applicable laws and regulations. B. Attest to the presentation of the financial statements. C. Report on the effectiveness of an entity's internal control over financial reporting. D. A ssure management that accounting principles have been applied correctly. Without affecting the CPA's willingness to express an unmodified opinion on the client's U.S.- GAAP-based financial statements, corporate management may refuse a request to A. Authorize its attomey to confirm that a list of pending or threatened litigation prepared by management includes all items known to the attorney. B. Change its basis of accounting for inventories from FIFO to LIFO because, in the opinion of the CPA, the FIFO method fails to give adequate recognition to the extraordinary increases in prices of merchandise acquired and held by the company. C. Write down to salvage value certain equipment that is no longer useful. D. Allow the CPA to examine tax returns for years prior to that of the financial statements being audited. 18] Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of field work made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditors report most likely contained a(n) A. Unmodified opinion. B. Unmodified opinion with an emphasis-of-matter paragraph. C. Qualified opinion because of a scope limitation. D. Qualified opinion because of a departure from auditing standards. [91 A critical audit matter (CAM) was included in the auditor's report on an audit under the PCAOB's auditing standards. The users of the report can conclude all of the tollowing except that of the critical matter B. The matter addressed was communicated or required to be communicated to those charged with governance. C. The matter relates to accounts or disclosures that are material to the D. The matter involved especially challenging, al statements. subjective, or complex judgments by the auditor. [10] An auditor of the financial statements of an issuer has determined that a cri exists. This matter critical audit matter A. Must be of a kind required by PCAOB standards to be communicated to the audi B. May substitute for qualification of the opinion if described in the Critical A commitee. of the report. C. May substitute for an explanatory paragraph if the matter itself paragraph. D. Involves especially challenging, subjective, or complex auditor judgment Reports specific amounte xpresses a qualied opinion because of a material misstatement related to specific amounts in the financial statemenis. [161 An auditor e opinion paragraphacia tm. Which of the following phrases should be included When Read in Conjunction with Note X Yes No Yes No With the Foregoing Explanation" No Yes Yes No A. B. C. D. 17] Which of the following owing phrases will an auditor most likely include in the auditor's report on a nonissuer when expressing a qualified opinion because of inadequate an engagement for disclosure? A. Subject to the departure from generally accepted accounting principles, as described above B. With the foregoing explanation of these omitted disclosures. C. Except for the omission of the information. D. Does not present fairly in all material respects. [18] If the independent auditor has not become satisfied by means of other auditing procedures with respect to opening inventories, (s)he should A. Disclaim an opinion or qualify the opinion on the statements as a whole. B. Either disclaim an opinion on the statement of income or qualify the opinion, depending on materiality and the pervasiveness of the possible effects. C. Either disclaim an opinion or quality the opinion on the statement of income, regardless of the degree of materiality of the amounts involved. ss an adverse opinion on the statements as a whole when the amount in question is material Which of the following actions should be taken by a CPA who has been asked to a [19] financial statements of a company whose fiscal year has ended? udit the A. Discuss with the client the possibility of an adverse opinion because of date B. Ascertain whether circumstances are likely to permit the auditor to appropriate evidence and express an unmodified opinion. C. Inform the client of the need to express a qualifed opinion if the physical already been taken. D. Ascertain whether an understanding of internal control can material misstatement can be assessed after completion of the ngagement obtain sufficient inventory has be obtained and the risks of (20] An auditor's opinion reads as follows: "In our opinion, limitation on the scope of our audit... This is an example of an except for the above-mentioned A. Acceptable review opinion, B. Acceptable emphasis of a matter. C. Acceptable qualified opinion. D. Unacceptable reporting practice. [21] An auditor's client is required by a bond indenture to maintain a 2-to-1 current ratio otherwise, the bonds may be called immediately. The amount of the bonds is material, the client's ratio is only 1.4 to 1, and the bonds have not been reclassified. If management refuses to disclose the violation, the auditor will most likely express A. An unmodified opinion or disclaim an opinion B. An unmodified opinion. C. An adverse opinion or disclaim an opinion D. A qualified opinion. 122] A client that issues U.S. GAAP-based financial statements increased the carrying amounts of depreciable assets to reflect their fair values. The revised amounts were included in the financial statements, which are in the process of being audited amounts accurately measure the fair value of the assets. It the adjustments are material to the financial statements as a whole, the auditor should . The auditor believes that these A. Disclaim an opinion. B. Express an unmodified opinion. C. Express a qualified opinion or disclaim an opinion. D. Express a qualified opinion or an adverse opinion. [23] Which of the following is acceptable language in an audit report? A. "In our opinion, subject to the effects of such adjustments, if any, as might have beern determined to be necessary had we been able to examine evidence.... scope of our audit.... In our opinion, except for the effects of the matters described in the basis for qualified opinion paragraph.... D. "In our opi paragraph... nion, except for the limitation on the scope of our audit as indicated in the following alifed opinion results from a scope limitation of an audit of a nonissuer, the [24] When a qualified opinion results from a situation should be A. Described in an emphasis-of-matter paragraph that follows the opinion para B. Referred to in the introductory and opinion paragraphs. and referred to in the opinion paragraph but in an emphasis-of-matter paragraph not in the auditor's responsibility section, D. Referred to in the auditor's responsibility section and opinion introductory paragraph paragraph but not in the for may express a qualified opinion because of a(n) Inability to Obtain Sufficient Appropriate Material Any Change in Accounting Principles Misstatement of the Financial Statements Yes No Yes es Evidence A. Yes No No Yes No Yes No Yes . C. D. [26] An auditor expresses an adverse opinion if A. A B. A misstatement is material and pervasive. C. A qualified opinion cannot be expressed because the auditor lacks independence. D. The company's ability to continue as a going concem is subject to substantial doubt. severe scope limitation has been imposed by management 1271 Duning the year, the research staff of Demoplex, a nonissuer, devoted its entire efforts toward developing a skin cancer ointment. All costs that could be attributed directly to the projec were accounted for as deferred charges and classified on the balance sheet as an asset. If the amounts involved are material, the auditor should A. Express an unmodified opinion with an other-matter paragraph explaining the uncertainty of cost recovery. B. Disclaim an opinion. C. Express an adverse opinion. D. Express an unmodified opinion provided that the uncertainty about ultimate realization of the deferred charges is disclosed in the notes. ces would lt be approprlato tor the audibor to refer to the work [28] In which of the following insta of an appraiser in the auditor's report? and no additional paragraph is added, but the auditor A. An unmodified opinion is expressed wishes to disclose the use of an auditor's specialist B. A qualified opinion is expressed because of a matter unrelated to the work of the external specialist. C. An adverse opinion is expressed based on a diference of opinion between the client ane auditor's external specialist about the value of certain assets. D. A disclaimer of opinion is expressed owing to a scope limitation imposed on the auditor by the auditor's external specialist Reports 6 2, An expression of opinion on the fair presentation of a single financial statement after the expression of an adverse opinion on the statements as a whole is a(n) A. Qualified opinion. B. Permissible basis for reporting if the statement is not a major portion of the complete set of statements. C. "Subject to" opinion. D. Impermissible basis of reporting [30] When a scope limitation has precluded the auditor from obtaining sufficient appropriate evidence to determine whether certain client acts are illegal, (s)he would most likely express A. An unmodified opinion with a separate explanatory paragraph. B. Either a qualified opinion or an adverse opinion. C. Either a disclaimer of opinion or a qualified opinion D. Either an adverse opinion or a disclaimer of opinion. [31] A disclaimer of opinion on the financial statements that was issued because of a scope limitation on an audit in that limot difers fom a compilation report on the unaudited statements of a nonissuer A. A compilation report offers some assurances. A disclaimer offers none. B. A compilaton relates only to income statements and balance sheets. A disclaimer pertains to all financial statements presented. C. Any procedures applied in a compilation should be described in the report, but procedures applied when a disclaimer is issued should not be described. D. A compilation report states what service was performed. A disclaimer states what service was to be performed. [32] In which of the following circumstances would an auditor usually choose betweer expressing a qualified opinion or disclaiming an opinion? A. Material misstatement B. Inadequate disclosure of accounting policies. C. Inability to obtain sufficient appropriate audit evidence. D. Unreasonable justification for a change in accounting principle. 133] A CPA is sconcemed about a relationship with unaudited financial statements of an issuer because s may be misled regarding the degree of responsibility the CPA is accepting. cannot be charged ess the CPA is associated with financial statements r compliance with the requirement of due professional care. if the CPA is in any way related to the financial statements Reports 7 performed the audit of the Year 2 financial statements of Lanco, Inc., an issuer for comparataa statements were to be presented with the Year 2 financial 1341 Hamis, cGPA.pertrepared The unaudited Year 1 fina ancial state Thancial statementp ratve urposes. Harris prepared a report to accompany both sets of he presentation should not include presentation shoule siatements re ot to be presented in documents filed with the SEC. A. Marking the Year 1 columns as unaudited. B. A separate paragraph. C. The language "except for n the report that the Year 1 financial statements were not audited by Harris. a scope limitation, an auditor disclaimed an opinion on the financial statements as a 135] Due whole, balance sheet was fairly stated. The inclusion of this statement is to but the report included a statement that the current asset portion of the entity's A. Not appropriate because it may tend to overshadow the auditor's disclaimer of opinion. B. Not appropriate because the auditor is prohibited from reporting on only one basic financial statement. C. Appropriate, provided the auditor's responsibility section adequately describes the scope limitation. D. Appropriate, provided the statement is in the basis for disclaimer of opinion paragraph preceding the disclaimer of opinion paragraph (36] The auditor is most likely to disclaim an opinion because of A. Management's failure to present supplementary information required by the FASB B. Inadequate disclosure of material information. C. A management-imposed limitation. D. A significant number of changes in accounting principles. (37] Harry Bird, CPA, has been approached to audit Boneck Co. after Boneck's f Bird was able to become satisfied regarding the ending but not the material in amount. Thus, he beginning inventory, which is al statements. A. Must disclaim an opinion on all the financi m only a review or compilation of the statements. C. Will likely disclaim an opinion on the income statement. D. Will be able to express only an "except for opinion on the bala (38] An auditor of a nonissuer may express an unmodified opinion with paragraph in all the following circumstances except a(n) A. Substantial doubt about an entity's ability to contnue a B. A scope limitation resulting from inadequate client recoin-cnem. C. Emphasis of a mater D. Nonconformity with GAAP that is necessary for tair presentason in un Reports 8 Inc. (39] An opinion most likely is disclaimed when A. An uncertainty that is not reasonably estimable exists with regard to an immaterial contingency. B. The auditor used alternative audit procedures to become satisfied as to inventory. C. The financial statements contain a material misstatement D. Client-imposed scope limitations prevent the auditor from obtaining satisfaction about the accounts receivable balance. 40] When an independent CPA assists in preparing the financial statements of an issuer but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond A. Ascertaining whether the financial statements are in conformity with GAAP. B. Reading the financial statements for obvious material misstatements. C. Determining whether management has elected to omit substantially all required disclosures. D. Documenting that internal control is not being relied on