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AuditingTheoryLongQuizNo.5WrapupandAuditReport

Auditing Theory Long Quiz No. 5 - Wrap

up and Audit Report
* Required

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

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

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

A. The auditor is not independent with respect to the enterprise being audited.
B. The statements are not in conformity with generally accepted accounting principles because
they omit a statement of changes in financial position.
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.

16. An auditor of financial statements believes that there is substantial doubt about an
entity's ability to continue as a going concern for a reasonable period of time. In evaluating
the entity's plans for dealing with the adverse effects of future conditions and events, the
auditor most likely would consider, as a mitigating factor, the entity's plans to *
A. Repurchase the entity's stock at a price below its book value.
B. Issue stock options to key executives.
C. Lease rather than purchase operating facilities.
D. Accelerate the due date of an existing mortgage.

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

4. A public company's financial statements should be prepared following standards of the

Public Company Accounting Oversight Board. *
False
True

12. An explanatory paragraph relating to a scope limitation in the audit of the financial
statements of a nonpublic company 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.

21. 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.

19. CPA 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.
B. In such circumstances, when appropriate requirements have been met, Firm A should issue a
standard unqualified opinion on the financial statements.
C. 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.
D. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved
when another CPA firm is involved.

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

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

23. 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 on the financial
statements is: *
A. Standard unqualified.
B. Unqualified with explanatory language as to consistency.
C. Qualified for consistency.
D. Disclaimer.

17. Which of the following procedures most likely would assist an auditor in identifying
conditions and events that may indicate substantial doubt about an entity's ability to continue
as a going concern? *
A. Performing cutoff tests of sales transactions with customers with long-standing receivable
balances.
B. Evaluating the entity's procedures for identifying and recording related party transactions.
C. Inspecting title documents to verify whether any real property is pledged as collateral.
D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

26. 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.
D. Related party transaction.
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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. *
True
False

15. When an auditor of financial statements has substantial doubt about an entity's ability to
continue as a going concern because of the probable discontinuance of operations, the
auditor most likely would express a qualified opinion if *
A. The effects of the adverse financial conditions likely will cause a bankruptcy filing.
B. Information about the entity's ability to continue as a going concern is not disclosed.
C. Management has no plans to reduce or delay future expenditures.
D. Negative trends and recurring operating losses appear to be irreversible.

30. 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. Unqualified opinion with an appropriate explanatory paragraph.
B. "Except for" qualified opinion.
C. Standard unqualified opinion.
D. Adverse opinion.

3. When evaluating the results of audit tests, materiality depends upon both the dollar amount
and the nature of the item. *
True
False

10. GAAS governs the form and content of financial statements filed with the SEC. *
True
False

11. 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: *
A. Preparing prospective financial information to verify whether management's plans can be
effectively implemented.
B. Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1.
C. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the
possible effects on the financial statements.
D. Considering the adequacy of disclosure about the entity's possible inability to continue as a
going concern.

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

False
True

13. 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.

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. *
True
False

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

6. If financial statements contain a material departure from generally accepted accounting

principles, the auditors usually should not issue an unqualified opinion. *
True
False

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

False
True

22. 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.
C. A change from the straight line method of depreciation to an accelerated method for a class of
fixed assets.
D. A change in calculating bad debt expense from one percent to two percent of credit sales.
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25. The management of Edward Corporation has decided not to account for a material
transaction in accordance with the provisions of a recent statement of the IFRS. 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 on the financial statements will probably contain a(an): *
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.

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

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