Auditing: Chapter 3

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1. 1) Which of the following is a correct statement regarding the A) The scope paragraph includes a statement that the auditor
standard unmodified opinion audit report? considers internal controls when designing the audit
A) The scope paragraph includes a statement that the auditor procedures performed
considers internal controls when designing the audit procedures
performed.
B) The auditorʹs responsibility paragraph includes a statement that
the auditors are responsible for selecting the appropriate
accounting principles.
C) The format of the audit report for public and nonpublic entities
are identical.
D) The audit report includes the name of the lead partner on the
audit.
2. 2) Auditing standards require that the audit report must be titled B) include the word ʺindependent.ʺ
and that the title must
A) indicate if the auditor is a CPA.
B) include the word ʺindependent.ʺ
C) indicate the type of audit opinion issued.
D) indicate if the auditor is a proprietorship, partnership, or
corporation.
3. 3) To emphasize the fact that the auditor is independent, a typical B) Company Controller Shareholders Board of Directors
addressee of the audit report could be No Yes Yes
A) Company Controller Shareholders Board of Directors
No No Yes
B) Company Controller Shareholders Board of Directors
No Yes Yes
C) Company Controller Shareholders Board of Directors
Yes Yes No
D) Company Controller Shareholders Board of Directors
Yes No No
4. 4) The auditorʹs responsibility section of the standard unmodified B) obtain reasonable assurance whether the statements are
opinion audit report states that the audit is designed to free of material misstatement.
A) discover all errors and/or irregularities.
B) obtain reasonable assurance whether the statements are free of
material misstatement.
C) conform to generally accepted accounting principles.
D) discover material errors and/or irregularities.
5. 5) The audit report date on a standard unmodified opinion audit C) the last day of the auditorʹs responsibility for the review of
report indicates significant events that occurred after the date of the financial
A) the last day of the fiscal period. statements.
B) the date on which the financial statements were filed with the
Securities and Exchange Commission.
C) the last day of the auditorʹs responsibility for the review of
significant events that occurred after the date of the financial
statements.
D) the last date on which users may institute a lawsuit against
either the client or the auditor.
6. 6) The standard audit report for nonpublic entities refers to GAAS and GAAP in which C) GAAS GAAP
sections? Auditorʹs responsibility
A) GAAS GAAP Managementʹs responsibility and
Auditorʹs responsibility Auditorʹs responsibility Opinion paragraph
B) GAAS GAAP
Managementʹs responsibility and Opinion paragraph
Managementʹs responsibility and Introductory paragraph
C) GAAS GAAP
Auditorʹs responsibility
Managementʹs responsibility and Opinion paragraph
D) GAAS GAAP
Auditorʹs responsibility Introductory paragraph
7. 7) Which of the following is not explicitly stated in the standard unmodified opinion C) The audit was conducted in
audit report? accordance with generally accepted
A) The financial statements are the responsibility of management. accounting principles.
B) The auditors believe that the audit evidence provides a reasonable basis for their
opinion.
C) The audit was conducted in accordance with generally accepted accounting
principles.
D) An audit includes assessing the accounting estimates used.
8. 8) The standard unmodified opinion audit report for a nonpublic entity must D) be dated.
A) include an explanatory paragraph.
B) have a report title that includes the word ʺCPA.ʺ
C) be addressed to the companyʹs stockholders and creditors.
D) be dated.
9. 9) The managementʹs responsibility section of the standard unmodified opinion audit A) the responsibility of management.
report for a nonpublic company states that the financial statements are
A) the responsibility of management.
B) the responsibility of the auditor.
C) the joint responsibility of management and the auditor.
D) none of the above.
10. 10) The introductory paragraph of the standard unmodified opinion audit report for a A) I and II
nonpublic company performs which functions?
I. It states the CPA has performed an audit.
II. It lists the financial statements being audited.
III. It states the financial statements are the responsibility of the auditor.
A) I and II B) I and III C) II and III D) I, II and III
11. 11) Which of the following statements are true for the standard unmodified opinion B) II only
audit report
of a nonpublic entity?
I. The introductory paragraph states that management is responsible for the
preparation and content of the financial statements.
II. The scope paragraph states that the auditor evaluates the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates
made by management.
A) I only B) II only C) I and II D) Neither I nor II
12. 12) The auditorʹs responsibility section of the standard unmodified opinion audit report D) responsible for the opinion on the
states that the auditor is financial statements.
A) responsible for the financial statements and the opinion on them.
B) jointly responsible for the financial statements with management.
C) responsible for the financial statements.
D) responsible for the opinion on the financial statements.
13. 13) If the balance sheet of a private company is dated December 31, 2016, the audit B) February 8, 2017.
report is dated February 8, 2017, and both are released on February 15, 2017, this
indicates that the auditor has searched for subsequent events that occurred up to
A) February 15, 2017. B) February 8, 2017.
C) January 1, 2017. D) December 31, 2016.
14. 14) The appropriate audit report date for a standard unmodified opinion audit report A) the date the auditor completed the
for a auditing procedures in the field.
nonpublic entity should be
A) the date the auditor completed the auditing procedures in the field.
B) the date of the financial statements.
C) 60 days after the date of the financial statements as required by the SEC.
D) the date the financial statements are given to the Board of Directors.
15. 15) Most auditors believe that financial statements are ʺpresented fairlyʺ when the B) examine the substance of transactions
statements are in accordance with GAAP, and that it is also necessary to and balances for possible misinformation.
A) review the statements using the accounting principles promulgated by the SEC.
B) examine the substance of transactions and balances for possible misinformation.
C) determine that they are not in violation of FASB statements.
D) assure investors that net income reported this year will be exceeded in the future.
16. 16) What category of audit report will be issued if the auditor concludes that the D) adverse
financial statements are not fairly presented?
A) disclaimer B) standard unmodified opinion
C) qualified D) adverse
17. 17) The standard unmodified audit report C) is sometimes called a clean opinion.
A) can be issued if only a balance sheet and income statement are included in the
financial statements.
B) is sometimes called a disclaimer report.
C) is sometimes called a clean opinion.
D) can be issued only with an explanatory paragraph.
18. 18) An audit of historical financial statements most commonly includes the B) balance sheet, income statement,
A) balance sheet, statement of retained earnings, and the statement of cash flows. statement of cash flows, and the
B) balance sheet, income statement, statement of cash flows, and the statement of statement of changes in stockholdersʹ
changes in stockholdersʹ equity. equity.
C) income statement, the statement of cash flows, and the statement of net working
capital.
D) statement of cash flows, balance sheet, and the statement of retained earnings.
19. 19) When analyzing the various types of audit reports, C) companies will generally make the
A) management is more concerned about a qualified report than a disclaimer report. appropriate changes to their accounting
B) an adverse report is issued when the auditor is unable to form an opinion on the records to avoid a qualification by the
financial statements. auditor.
C) companies will generally make the appropriate changes to their accounting
records to avoid a qualification by the auditor.
D) the unmodified opinion with an emphasis-of-matter paragraph is the most
common type of report.
20. 20) Whenever an auditor issues an audit report for a public company, the auditor can C) either I or II
choose to issue a report in which of the following forms?
I. A combined report on financial statements and internal control over financial
reporting
II. Separate reports on financial statements and internal control over financial
reporting
A) I only B) II only C) either I or II D) neither I nor II
21. 21) The unqualified opinion audit report for public entities includes the following three D) introductory, scope and opinion.
paragraphs:
A) scope, fieldwork and conclusion.
B) introductory, scope and managementʹs responsibility.
C) materiality, scope and report.
D) introductory, scope and opinion.
22. 22) Auditing standards for public companies are established by the D) PCAOB.
A) IRS. B) FASB. C) SEC. D) PCAOB.
23. 23) Under PCAOB standards B) the standard unmodified opinion
A) internal controls of a public company must be audited every five years. audit report is referred to as an
B) the standard unmodified opinion audit report is referred to as an unqualified opinion unqualified opinion
audit report. audit report.
C) the scope paragraph states that the financial statements are the responsibility of
management.
D) the scope paragraph is the same as the scope paragraph for private companies.
24. 24) The separate report on internal control over financial reporting D) includes a paragraph that addresses
A) includes a scope paragraph which refers to the framework used to evaluate internal the inherent limitations of internal
controls. controls.
B) cannot contain a cross-reference to the auditorʹs report on the financial
statements.
C) is addressed to the PCAOB.
D) includes a paragraph that addresses the inherent limitations of internal controls.
25. 25) Examples of unmodified opinions which contain modified wording (without adding D) the use of other auditors.
an explanatory paragraph) include
A) the lack of consistent application of generally accepted accounting principles.
B) substantial doubt about the audited company (or the entity) continuing as a going
concern.
C) lack of consistent application of GAAP.
D) the use of other auditors.
26. 26) A CPA may wish to emphasize specific matters regarding the financial statements D) included in a separate paragraph in
even though an unqualified opinion will be issued. Normally, such explanatory the report.
information is
A) included in the opinion paragraph.
B) included in the scope paragraph.
C) included in the introductory paragraph.
D) included in a separate paragraph in the report.
27. 27) All of the following are causes for the addition of an explanatory paragraph under D) reports involving other auditors
both AICPA and PCAOB standards except for
A) emphasis of a matter.
B) lack of consistent application of generally accepted accounting principles.
C) auditor agrees with a departure from promulgated accounting principles.
D) reports involving other auditors.
28. 28) The term ʺexplanatory paragraphʺ was replaced in the AICPA auditing standards B) emphasis-of-matter paragraph.
with
A) consistency paragraph. B) emphasis-of-matter paragraph.
C) going concern paragraph. D) departure from principles paragraph.
29. 29) Which of the following are changes that affect the comparability of financial D) all of the above
statements but not the consistency and therefore, do not have to be included in the
auditorʹs report?
A) changes in accounting estimates
B) variations in the format and presentation of financial information
C) error corrections not involving principles
D) all of the above
30. 30) Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a B) The entity is
going concern? suing a
A) The entity has lost a major customer. competitor for a
B) The entity is suing a competitor for a minor patent infringement. minor patent
C) The entity has working capital deficiencies. infringement.
D) The entity has significant recurring operating losses.
31. 31) When there is uncertainty about a companyʹs ability to continue as a going concern, the auditorʹs C) one year from
concern is the possibility that the client may not be able to continue its operations or meet its obligations the date of the
for a ʺreasonable period of time.ʺ For this purpose, a reasonable period of time is considered not to exceed financial
A) six months from the date of the financial statements. statements.
B) six months from the date of the audit report.
C) one year from the date of the financial statements.
D) one year from the date of the audit report.
32. 32) When the auditor concludes that there is substantial doubt about the entityʹs ability to C) I or II
continue as a going concern, the appropriate audit report could be
I. an unmodified opinion audit report with an explanatory paragraph.
II. a disclaimer of opinion.
A) I only B) II only C) I or II D) Neither I nor II
33. 33) When a companyʹs financial statements contain a departure from GAAP with which the B) a separate
auditor concurs, the departure should be explained in paragraph.
A) an introductory paragraph. B) a separate paragraph.
C) the opinion paragraph. D) the scope paragraph.
34. 34) William Gregory, CPA, is the principal auditor for an international corporation. Another CPA has D) may refer to
examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is the examination
satisfied with the independence and professional reputation of the other auditor, as well as the quality of of the other
the other auditorʹs examination. With respect to his auditor.
report on the consolidated financial statements, taken as a whole, Gregory
A) must refer to the examination of the other auditors along with the percentage of consolidated assets and
revenue that they audited.
B) must not refer to the examination of the other auditor.
C) must refer to the examination of the other auditor.
D) may refer to the examination of the other auditor.
35. 35) A company has changed its method of inventory valuation from an unacceptable one to one in B) an explanatory
conformity with generally accepted accounting principles. The auditorʹs report on the financial statements paragraph
of the year of the change should include explaining the
A) no reference to consistency. change.
B) an explanatory paragraph explaining the change.
C) a reference to a prior period adjustment in the opinion paragraph.
D) an explanatory paragraph that justifies the change and explains the impact of the change on reported net
income.
36. 36) Which of the following modifications of the auditorʹs report does not include an explanatory paragraph? C) A principal
A) There is a very material scope limitation. auditor accepts
B) The report includes an emphasis of a matter. the work of an
C) A principal auditor accepts the work of an other auditor. other auditor.
D) A qualified report is due to a GAAP departure.
37. 37) No reference is made in the auditorʹs report to other auditors who perform a portion of the audit when D) I, II and III
I. The other auditor audited an immaterial portion of the audit.
II. The other auditor is well known or closely supervised by the principle auditor.
III. The principle auditor has thoroughly reviewed the work of the other auditor.
A) I and II B) I and III C) II and III D) I, II and III
38. 38) When an auditor is trying to determine how changes can affect A) changes that affect consistency require an
consistency and and/or explanatory paragraph if they are material.
comparability, he should keep in mind that
A) changes that affect consistency require an explanatory paragraph if they
are material.
B) items that materially affect the comparability of financial statements
requires a disclaimer of opinion.
C) changes that involve either comparability or consistency only need to be
mentioned in the footnotes.
D) changes that affect comparability but not consistency require an
explanatory paragraph.
39. 39) All of the following would require an emphasis of matter paragraph except C) the lack of auditor independence.
for
A) material uncertainties disclosed in the footnotes.
B) the existence of material related party transactions.
C) the lack of auditor independence.
D) important events occurring subsequent to the balance sheet date.
40. 40) Under AICPA auditing standards, the primary auditor issuing the opinion on A) group engagement partner.
the financial statements is called the
A) group engagement partner. B) component auditor.
C) principal auditor. D) majority auditor.
41. 41) Which of the following is false concerning the principal CPA firmʹs D) Issue a joint report signed by both CPA firms.
alternatives when issuing a
report when another CPA firm performs part of the audit?
A) Make reference to the other auditor in the report by using modified
wording (a shared opinion or report ).
B) Make no reference to the other CPA firm in the audit report, and issue the
standard unqualified opinion.
C) A qualified opinion or disclaimer, depending on materiality, is required if the
principal auditor is not willing to assume any responsibility for the work of the
other auditor.
D) Issue a joint report signed by both CPA firms.
42. 42) Which of the following requires recognition in the auditorʹs opinion as to C) The change from the cost method to the
consistency? equity method of accounting for investments in
A) The correction of an error in the prior yearʹs financial statements resulting common stock.
from a mathematical mistake in capitalizing interest.
B) A change in depreciation method which has no effect on current yearʹs
financial statements but is certain to affect future years.
C) The change from the cost method to the equity method of accounting for
investments in common stock.
D) A change in the estimate of provisions for warranty costs.
43. 43) Indicate which changes would require an explanatory C) Correction of an error by changing from an accounting
paragraph in the audit report. principle that is not generally acceptable to one that is
A) Correction of an error by changing from anaccounting generally acceptable
principle that is not generally acceptable to one that is Change from LIFO to FIFO
generallyacceptable Yes Yes
Change from LIFO to FIFO
No No
B) Correction of an error by changing from an accounting
principle that is not generally acceptable to one that is
generally acceptable
Change from LIFO to FIFO
No Yes
C) Correction of an error by changing from an accounting
principle that is not generally acceptable to one that is
generally acceptable
Change from LIFO to FIFO
Yes Yes
D) Correction of an error by changing from an accounting
principle that is not generally acceptable to one that is
generally acceptable
Change from LIFO to FIFO
Yes No
44. 44) Indicate which changes would require an explanatory A) Change in the estimated life of an asset
paragraph in the audit report. Variation in the format of the financial statements
A) Change in the estimated life of an asset No No
Variation in the format of the financial statements
No No
B) Change in the estimated life of an asset
Variation in the format of the financial statements
Yes No
C) Change in the estimated life of an asset
Variation in the format of the financial statements
Yes Yes
D) Change in the estimated life of an asset
Variation in the format of the financial statements
No Yes
45. 45) Indicate which changes would require an explanatory A) The CPA concludes there is substantial doubt about the
paragraph in the audit report. entityʹs ability to continue as a going concern.
A) The CPA concludes there is substantial doubt about the Change from FIFO to LIFO
entityʹs ability to continue as a going concern. Yes Yes
Change from FIFO to LIFO
Yes Yes
B) The CPA concludes there is substantial doubt about the
entityʹs ability to continue as a going concern.
Change from FIFO to LIFO
No No
C) The CPA concludes there is substantial doubt about the
entityʹs ability to continue as a going concern.
Change from FIFO to LIFO
No Yes
D) The CPA concludes there is substantial doubt about the
entityʹs ability to continue as a going concern.
Change from FIFO to LIFO
Yes No
46. 46) Indicate which changes would require an explanatory C) Changes in reporting entities, such as the inclusion of an
paragraph in the audit report. additional company in the combined financial statements
A) Changes in reporting entities, such as the inclusion of an The CPA makes reference to the work of another auditor to
additional company in the combined financial statements indicate shared responsibility in an unqualified opinion.
The CPA makes reference to the work of another auditor to Yes No
indicate shared responsibility in an unqualified opinion.
No Yes
B) Changes in reporting entities, such as the inclusion of an
additional company in the combined financial statements
The CPA makes reference to the work of another auditor to
indicate shared responsibility in an unqualified opinion.
Yes Yes
C) Changes in reporting entities, such as the inclusion of an
additional company in the combined financial statements
The CPA makes reference to the work of another auditor to
indicate shared responsibility in an unqualified opinion.
Yes No
D) Changes in reporting entities, such as the inclusion of an
additional company in the combined financial statements
The CPA makes reference to the work of another auditor to
indicate shared responsibility in an unqualified opinion.
No No
47. 47) When there is a lack of consistent application in accounting D) all of the above.
principles
A) the materiality of the change is evaluated based on the
current year effect of the change.
B) the nature and impact of the change should be adequately
disclosed.
C) the auditor should discuss the nature of the change and point
the reader to the footnote that discusses the change.
D) all of the above.
48. 48) As a result of managementʹs refusal to permit the auditor to B) the scope of the audit has been restricted.
physically examine inventory, the auditor must depart from the
unmodified opinion audit report because
A) the financial statements have not been audited in accordance
with GAAS.
B) the scope of the audit has been restricted.
C) the financial statements have not been prepared in
accordance with GAAP.
D) the scope of the audit has been restricted by circumstances
beyond either the clientʹs or auditorʹs control.
49. 49) An adverse opinion is issued when the auditor believes C) the overall financial statements are so materially misstated
A) the auditor is not independent. that they do not present fairly the financial position or results of
B) some parts of the financial statements are materially operations and cash flows in conformity with GAAP.
misstated or misleading.
C) the overall financial statements are so materially misstated
that they do not present fairly the financial position or results of
operations and cash flows in conformity with GAAP.
D) the financial statements would be found to be materially
misstated if an investigation were performed.
50. 50) An auditor can express a qualified opinion due to a A) Departure from
A) Departure from GAAP GAAP
Lack of Consistency Lack of Consistency
Lack of Sufficient Evidence Lack of Sufficient
Yes No Yes Evidence
B) Departure from GAAP Yes No Yes
Lack of Consistency
Lack of Sufficient Evidence
Yes No No
C) Departure from GAAP
Lack of Consistency
Lack of Sufficient Evidence
No Yes No
D) Departure from GAAP
Lack of Consistency
Lack of Sufficient Evidence
Yes Yes Yes
51. 51) An auditor determines the financial statements include at least a material departure from GAAP. C) Disclaimer Qualified
Which type of opinion may be issued? Adverse
A) Disclaimer Qualified Adverse No Yes Yes
Yes No Yes
B) Disclaimer Qualified Adverse
No Yes No
C) Disclaimer Qualified Adverse
No Yes Yes
D) Disclaimer Qualified Adverse
Yes No No
52. 52) A qualified opinion can be issued for which of the following? B) I and III
I. When a limitation on the scope of the audit has occurred
II. When the auditor lacks independence
III. When generally accepted accounting principles have not been used
A) I and II B) I and III C) II and III D) I, II and III
53. 53) In which situation would the auditor be choosing between ʺexcept forʺ qualified opinion and an C) Lack of full
adverse opinion? disclosure within the
A) A circumstance-imposed scope limitation footnotes
B) The auditor lacks independence.
C) Lack of full disclosure within the footnotes
D) A client-imposed scope limitation
54. 54) When the auditor determines that the financial statements are fairly stated, but there is a B) a disclaimer of
nonindependent relationship between the auditor and the client, the auditor should issue opinion.
A) an adverse opinion.
B) a disclaimer of opinion.
C) either a qualified opinion or an adverse opinion.
D) either a qualified opinion or an unqualified opinion with modified wording.
55. 55) If the auditor lacks independence, a disclaimer of opinion must be issued A) in all cases.
A) in all cases.
B) only if it is highly material.
C) only if it is material but not pervasive.
D) if the client requests it.
56. 56) If the phrase ʺexcept forʺ is present in the opinion paragraph of the audit report, the auditor has C) qualified opinion.
issued a(n)
A) disclaimer of opinion. B) adverse opinion.
C) qualified opinion. D) unqualified opinion.
57. 57) When analyzing the various types of opinions that the auditor can issue, B) a qualified opinion report can be used only
A) a disclaimer of opinion can be issued for material or immaterial misstatements. when the auditor concludes that the overall
B) a qualified opinion report can be used only when the auditor concludes that financial statements are fairly stated.
the overall financial statements are fairly stated.
C) an adverse opinion must contain the phrase ʺexcept forʺ in the opinion
paragraph.
D) an adverse opinion can only be issued when there is a lack of knowledge by
the auditor.
58. 58) Items that materially affect the comparability of financial statements D) a qualified opinion.
generally require
disclosure in the footnotes. If the client refuses to properly disclose the item, the
auditor will most likely issue
A) an unqualified opinion. B) an adverse opinion.
C) a disclaimer. D) a qualified opinion.
59. 59) Which of the following scenarios does not result in a qualified opinion? A) The auditor lacks independence with
A) The auditor lacks independence with respect to the audited entity. respect to the audited entity.
B) A scope limitation prevents the auditor from completing an important audit
procedure.
C) Circumstances exist that prevent the auditor from conducting a complete
audit.
D) An accounting principle at variance with GAAP is used.
60. 60) Whenever the client imposes restrictions on the scope of the audit, the D) disclaimer of opinion whenever materiality
auditor should be concerned that management may be trying to prevent is in question.
discovery of misstatements. In such cases, the auditor will likely issue a
A) qualification of both scope and opinion whenever materiality is in question.
B) qualification of both scope and opinion in all cases.
C) disclaimer of opinion in all cases.
D) disclaimer of opinion whenever materiality is in question.
61. 61) In which of the following circumstances would an auditor most likely express B) The financial statements are not in
an adverse opinion? conformity with the FASB statement on loss
A) Information comes to the auditorʹs attention that raises substantial doubt contingencies
about the ability for the client to continue as a going concern.
B) The financial statements are not in conformity with the FASB statement on
loss contingencies.
C) The CEO refuses to let the auditor have access to the board of director
meeting minutes.
D) Tests of controls show that the internal control structure is so poor that the
auditor has to assess control risk at the maximum.
62. 62) Which of the following statements is true? D) Neither I nor II
I. The auditor is required to issue a disclaimer of opinion in the event of a material
uncertainty.
II. The auditor is required to issue a disclaimer of opinion in the event of a going
concern problem.
A) I only B) II only C) I and II D) Neither I nor II
63. 63) The most common case in which conditions beyond the clientʹs and auditorʹs C) auditor is not appointed until after the
control cause a scope restriction in an engagement is when the clientʹs year-end.
A) auditor doesnʹt have enough staff to satisfactorily audit all of the clientʹs
foreign subsidiaries.
B) client wonʹt allow the auditor to confirm receivables for fear of offending its
customers.
C) auditor is not appointed until after the clientʹs year-end.
D) client is going through Chapter 11 bankruptcy.
64. 64) When the client fails to make adequate disclosure in the body of the statements or B) present the information in the audit
in the related footnotes, it is the responsibility of the auditor to report and to issue a qualified or an
A) inform the reader that disclosure is not adequate, and to issue a qualified opinion. adverse opinion.
B) present the information in the audit report and to issue a qualified or an adverse
opinion.
C) present the information in the audit report and issue an unqualified or qualified
opinion.
D) inform the reader that disclosure is not adequate, and to issue an adverse opinion.
65. 65) A misstatement in the financial statements can be considered material if B) a reasonable user of the financial
knowledge of the misstatement will affect a decision of statements.
A) an accountant.
B) a reasonable user of the financial statements.
C) the SEC.
D) the PCAOB.
66. 66) Misstatements must be compared with some measurement base before a decision D) all of the above.
can be made about materiality. A commonly accepted measurement base includes
A) total assets.
B) net income.
C) working capital.
D) all of the above.
67. 67) When comparing misstatements with a measurement base, the auditor must D) understatement of inventory.
consider the pervasiveness of the misstatement. Of the following examples, the most
pervasive misstatement is a(n)
A) understatement of retained earnings caused by a miscalculation of dividends
payable.
B) misclassification of notes payable as a long-term liability when it should be current.
C) misclassification of salary expense as a selling expense.
D) understatement of inventory.
68. 68) The dollar amount of some misstatements cannot be accurately measured. For C) users of the financial statements.
example, if the client were unwilling to disclose an existing lawsuit, the auditor must
estimate the likely effect on
A) managementʹs future decisions.
B) net income.
C) users of the financial statements.
D) the auditorʹs exposure to lawsuits.
69. 69) If most or all usersʹ decisions that are based on the financial statements are likely A) pervasive.
to be significantly affected, the materiality level is
A) pervasive.
B) unrestricted.
C) material.
D) risky.
70. 70) When a client fails to follow GAAP, the audit report can be unmodified, qualified, or D) All the above are factors an auditor
adverse should consider regarding materiality.
depending on the materiality. What factors affect materiality that an auditor should
consider?
A) the nature of the item
B) if the misstatement can be measured
C) the dollar amount in comparison to a base
D) All the above are factors an auditor should consider regarding materiality.
71. 71) Which of the following is a correct statement regarding materiality? B) Misstatements must be compared with some
A) There are well-defined guidelines that enable auditors to determine benchmark before a decision can be made about the
if something is material. materiality level of the failure of a company to follow
B) Misstatements must be compared with some benchmark before a GAAP.
decision can be made about the materiality level of the failure of a
company to follow GAAP.
C) To evaluate overall materiality, the auditor does not combine all
unadjusted
misstatements.
D) Pervasiveness is not considered when comparing potential
misstatements with a base or benchmark.
72. 72) Management has recorded prepaid insurance as an asset in the D) a standard unmodified opinion audit report is issued.
previous year. This year, to reduce record-keeping costs, it expenses
insurance. If the amount is immaterial to the financial statements,
A) a a qualified opinion is issued.
B) no audit report can be issued.
C) a disclaimer opinion is issued.
D) a standard unmodified opinion audit report is issued.
73. 73) The highest level of materiality exists when D) users are likely to make incorrect decisions if they
A) amounts are material but do not overshadow the financial rely on the overall financial statements.
statements as a whole.
B) there has been a departure from GAAP.
C) a scope limitation has been imposed.
D) users are likely to make incorrect decisions if they rely on the
overall financial statements.
74. 74) A restriction on the scope of the auditorʹs examination requires B) a qualifying paragraph preceding the opinion
A) a disclaimer opinion. paragraph.
B) a qualifying paragraph preceding the opinion paragraph.
C) a basis for a qualified opinion paragraph.
D) a qualifying paragraph to be included in the introduction.
75. 75) An auditor who issues a qualified opinion because sufficient B) Scope paragraph
appropriate evidence was not obtained should describe the limitations Opinion paragraph
in an explanatory paragraph. The auditor should also modify the Notes to the financial statements
A) Scope paragraph Yes Yes No
Opinion paragraph
Notes to the financial statements
No Yes No
B) Scope paragraph
Opinion paragraph
Notes to the financial statements
Yes Yes No
C) Scope paragraph
Opinion paragraph
Notes to the financial statements
Yes No Yes
D) Scope paragraph
Opinion paragraph
Notes to the financial statements
No Yes Yes
76. 76) When an auditor issues a qualified report due to a scope limitation an B) Introductory Scope Opinion
explanatory paragraph is normally added. Which, if any, of the following No Yes Yes
paragraphs are also modified?
A) Introductory Scope Opinion
Yes Yes No
B) Introductory Scope Opinion
No Yes Yes
C) Introductory Scope Opinion
No Yes No
D) Introductory Scope Opinion
Yes Yes Yes
77. 77) When a qualified or adverse opinion is issued, the qualifying paragraph is C) between the scope and opinion paragraphs.
inserted
A) between the introductory and scope paragraphs.
B) immediately after the address, as the first paragraph.
C) between the scope and opinion paragraphs.
D) after the opinion paragraph, as a fourth paragraph.
78. 78) When the client fails to include information that is necessary for the fair D) all of the above
presentation of financial statements in the body of the statements or in the
footnotes,
A) the qualification is put in an added paragraph preceding the opinion.
B) the auditor should issue a qualified or an adverse opinion.
C) it is the auditorʹs responsibility to present the information in the audit report.
D) all of the above
79. 79) If the financial statements include an income statement and a balance sheet B) should issue a qualified opinion due to the
but exclude the statement of cash flows, the auditors departure from GAAP.
A) can issue an unqualified report.
B) should issue a qualified opinion due to the departure from GAAP.
C) should include the statement of cash flows, modify the report and issue an
unqualified opinion.
D) should issue a qualified opinion because the missing statement of cash flows
constitutes a scope limitation.
80. 80) Which of the following is incorrect concerning scope limitations? B) The most common circumstance imposed
A) If client imposed, the auditor should be concerned about the client trying to scope restriction is due to the client changing
prevent discovery of a material misstatement. their auditors.
B) The most common circumstance imposed scope restriction is due to the client
changing their auditors.
C) An unqualified opinion can result if auditors can perform alternative
procedures and are satisfied that the information is fairly stated.
D) The most common circumstance imposed scope limitation is when the auditor
is appointed after the balance sheet date.
81. 81) When dealing with materiality and scope limitation conditions, C) a unqualified opinion may still be issued
A) scope limitations imposed by the client are always considered material. depending on the materiality of the scope
B) it is easier to evaluate the materiality of potential misstatements resulting limitation.
from a scope limitation than for failure to follow GAAP.
C) a unqualified opinion may still be issued depending on the materiality of the
scope limitation.
D) a disclaimer of opinion must be issued.
82. 82) When a pervasive scope limitation exists, D) all of the
A) a disclaimer of opinion rather than a qualified opinion is generally required. above
B) sections of the auditorʹs responsibility paragraph are eliminated to avoid stating anything that might lead
readers to believe that other parts of the financial statements might be fairly stated.
C) the auditorʹs responsibility paragraph is modified to indicate that the auditor was not able to obtain
sufficient appropriate evidence to express an audit opinion.
D) all of the above
83. 83) When there is a scope restriction, what type of audit report can be issued? D) any of the
A) unmodified opinion above
B) disclaimer of opinion
C) qualification of scope and opinion
D) any of the above
84. 84) Subsequent to the close of Spacely Sprockets fiscal year ending October 31, 2016, a major debtor has C) qualified
declared bankruptcy due to a series of events. The receivable is significantly material in relation to the due to a
financial statements, and recovery is doubtful. The debtor had confirmed the full amount due to Spacely GAAP
Sprocket at the balance sheet date. Because the departure
account was confirmed at the balance sheet date, Spacely refuses to disclose any information in relation to
this subsequent event. The CPA believes that all other accounts were stated fairly at the balance sheet date. In
addition, Spacely changed their method of inventory valuation from FIFO to LIFO. This change was disclosed in
Note X to the financial statements. Accordingly, what type of opinion should be expressed?
A) unqualified with an explanatory paragraph
B) qualified due to a scope limitation
C) qualified due to a GAAP departure
D) a combination of B and C
85. 85) For the report containing a disclaimer for lack of independence, the disclaimer is in the B) first and
A) fourth or explanatory paragraph. only
B) first and only paragraph. paragraph.
C) second or scope paragraph.
D) third or opinion paragraph.
86. 86) When an adverse opinion is issued, a scope paragraph would be D) unchanged.
A) deleted.
B) qualified.
C) expanded to identify the additional procedures which the auditor performed.
D) unchanged.
87. 87) After the balance sheet date but prior to issuance of the auditorʹs report the auditor learns that the clientʹs A) provide the
facility in a foreign country has been expropriated. Management refuses to disclose this information in a information in
financial statement footnote or present pro-forma data as to the effect of the report and
the event. The auditor should modify the
A) provide the information in the report and modify the opinion. opinion.
B) disclaim an opinion due to the client imposed scope limitation.
C) add a footnote to the financial statements.
D) issue an unqualified opinion but provide the information in the auditor report.
88. 88) When accounting principles are not consistently applied, and the materiality level is immaterial, the auditor D) standard
will issue a(n) unmodified
A) disclaimer opinion. opinion.
B) unmodified opinion with an explanatory paragraph.
C) adverse opinion.
D) standard unmodified opinion.
89. 89) The first step to be followed when deciding the appropriate audit report in a A) determine whether any conditions exists
given set of circumstances is to requiring a departure from a standard
A) determine whether any conditions exists requiring a departure from a unmodified opinion audit report.
standard unmodified opinion audit report.
B) decide the appropriate type of report for the condition.
C) decide the materiality for each condition.
D) write the report.
90. 90) In most audits, the auditor issues a(n) D) standard unmodified opinion audit report.
A) scope limited audit report.
B) adverse audit report.
C) modified opinion audit report.
D) standard unmodified opinion audit report.
91. 91) More than one modification should be included in the audit report when D) all of the above
A) there is a scope limitation and there is substantial doubt about the companyʹs
ability to continue as a going concern.
B) there is substantial doubt about the going concern of the company and
information about the causes of the uncertainties is not adequately disclosed in
the footnotes.
C) the auditor is not independent and the auditor knows that the company has
not followed generally accepted accounting principles.
D) all of the above
92. 92) When there is a justified departure from GAAP which is considered material, C) unmodified opinion with an explanatory
the auditor should issue a(n) paragraph.
A) disclaimer of opinion.
B) adverse opinion.
C) unmodified opinion with an explanatory paragraph.
D) standard unmodified opinion.
93. 93) If there is a deviation in the statementsʹ preparation in accordance with B) more than one modification should be
GAAP and another accounting principle was applied on a basis that was not included in the report.
consistent with that of the preceding
year,
A) only the most material modification can be disclosed.
B) more than one modification should be included in the report.
C) the auditor must choose which modification to include in the audit report.
D) none of the above.
94. 94) After the auditor determines whether any conditions exist which require a D) decide the materiality for each condition.
departure from a standard unmodified opinion audit report, the next step in the
decision process is to
A) write the report.
B) discuss the report with management.
C) decide the appropriate type of report for the condition.
D) decide the materiality for each condition.
95. 95) For departures from GAAP or scope restrictions, the auditor must decide if D) any of the above.
the potential effect on the financial statements is
A) highly material.
B) material.
C) immaterial.
D) any of the above.
96. 96) If the scope restriction imposed by the client is so material that the C) disclaimer of opinion.
overall fairness of the financial statements is in question, the auditor
should issue a(n)
A) standard unmodified opinion.
B) unmodified opinion with revised wording in the scope paragraph.
C) disclaimer of opinion.
D) adverse opinion.
97. 97) Which of the following is correct regarding IFRS? C) Recent developments suggest that the SEC may be
A) Companies that are required to file their financial statements with the slowing down its efforts towards adopting IFRS any
SEC must follow IFRS starting in 2015. time soon.
B) The introductory paragraph of the audit report is modified to indicate
that the audit was conducted in accordance with International Standards
on Auditing.
C) Recent developments suggest that the SEC may be slowing down its
efforts towards adopting IFRS any time soon.
D) When an auditor is engaged to report on financial statements
prepared in accordance with IFRS, they must issue a qualified opinion.