Test bank auditing and assurance principles by arens, elder beasley chapter 03

easy If a misstatement is immaterial to the financial statements of the entity for the current period,but is expected to have a material effect in future periods, it is appropriate to is

Chapter 3

Multiple-Choice Questions

1 Auditing standards require that the audit report must be titled and that the title must:

easy a include the word “independent.”

a b indicate if the auditor is a CPA

c indicate if the auditor is a proprietorship, partnership, or incorporated

d indicate the type of audit opinion issued

3 The purpose of the introductory paragraph in the standard unqualified report is:

easy a to identify that the type of opinion issued is unqualified

b b to identify the financial statements audited and the dates and time periods covered by the

report

c to indicate the CPA followed applicable audit standards

d to indicate all the financial statements are in accordance with GAAP

4 The scope paragraph of the standard unqualified audit report states that the audit is designed to:easy a discover all errors and/or irregularities

d b discover material errors and/or irregularities

c conform to generally accepted accounting principles

d obtain reasonable assurance whether the statements are free of material misstatement

5 The audit report date on a standard unqualified report indicates:

easy a the last day of the fiscal period

d b the date on which the financial statements were filed with the Securities and Exchange

Commission

c the last date on which users may institute a lawsuit against either client or auditor

d the last day of the auditor’s responsibility for the review of significant events that occurred subsequent to the date of the financial statements

a the financial statements have not been prepared in accordance with GAAP

b the scope of the audit has been restricted by circumstances beyond either the client’s orauditor’s control

c the auditor has lost independence

d the scope of the audit has been restricted

7 An adverse opinion is issued when the auditor believes:

easy a some parts of the financial statements are materially misstated or misleading

d b the financial statements would be found to be materially misstated if an investigation were

performed

c the auditor is not independent

d the overall financial statements are so materially misstated that they do not present fairlythe financial position or results of operations and cash flows in conformity with GAAP.8

easy If a misstatement is immaterial to the financial statements of the entity for the current period,but is expected to have a material effect in future periods, it is appropriate to issue a(n):

easy Whenever an auditor issues an audit report for a public company, the auditor can choose to issuea report in which of the following forms?

c a A combined report on financial statements and internal control over financial reporting

b Separate reports on financial statements and internal control over financial reporting

b Generally accepted auditing standards

c Standards issued by the PCAOB (U.S.)

d Any of the above standards

13

easy If an auditor performs an audit of a private company, the scope paragraph should makereference to which standards?

b U.S generally accepted auditing standards

c Standards issued by the PCAOB (U.S.)

d Any of the above standards

14

easy Examples of unqualified opinions which contain modified wording (without adding anexplanatory paragraph) include:

b material uncertainties

c substantial doubt about the audited company (or the entity) continuing as a going concern

d lack of consistent application of GAAP.

15 GAAP requires that changes in accounting principles be to a:

medium a more conservative principle

c b principle with equal authoritative support

c preferable principle

d principle detailed in a FASB pronouncement

16

easy A CPA may wish to emphasize specific matters regarding the financial statements even thoughan unqualified opinion will be issued Normally, such explanatory information is:

b included in the opinion paragraph

c included in a separate paragraph in the report

d included in the introductory paragraph

Scope Opinion Notes to the paragraph paragraph financial statements

b the current year effect of the change

c guidelines included in GAAS

d the effect on total assets

19

medium Conditions requiring a departure from an unqualified audit report include all but which of thefollowing?

b a Management refused to allow the auditor to confirm significant accounts receivable for

which there were no alternative procedures performed

b Management decided not to allow the auditor to confirm significant accounts receivable,but the auditor obtained sufficient appropriate evidence by examining subsequent cashreceipts

c The audit partner’s dependent child received a gift of 100 shares of a client’s stock for herbirthday from a grandparent

d Management has determined that fixed assets should be reported in the balance sheet attheir replacement values rather than historical costs The auditors do not concur

20 The introductory paragraph of the standard audit report states that the financial statements are:medium a the responsibility of the auditor

b b the responsibility of management

c the joint responsibility of management and the auditor

d none of the above

21

medium The introductory paragraph of the standard audit report states that the financial statements andthe opinion expressed about those statements are:

d a the responsibility of the auditor

b the responsibility of management

c the joint responsibility of management and the auditor.

d none of the above

22 The introductory paragraph of the standard audit report states that the auditor is:

medium a responsible for the financial statements and the opinion on them

c b responsible for the financial statements

c responsible for the opinion on the financial statements

d jointly responsible for the financial statements with management

23 (Public)

medium PCAOB Auditing Standard No 2 requires the audit of internal control over financial reportingto be integrated with:

a a the audit of the financial statements

b the quarterly review of financial information

c the review of annual financial statements

d none of the above

a Both are in the introductory paragraph

b Both are in the scope paragraph

c Both are in the opinion paragraph

d None of the above are true

medium A combined report on financial statements and internal control over financial reporting includesall but which of the following types of paragraphs?

b a Inherent limitations paragraph

b Description paragraph

c Opinion paragraph

d Each of the above paragraphs is included

27 Whenever an auditor issues a qualified opinion, the implication is that the auditor:

medium a does not know if the financial statements are presented fairly

d b does not believe the financial statements are presented fairly

c believes the financial statements are presented fairly

d believes the financial statements are presented fairly “except for” a specific aspect ofthem

28 The necessity to issue a disclaimer of opinion may arise because of:

medium a a severe limitation on the scope of the audit

c b a lack of independence between the auditor and client

c either a qualified opinion or an adverse opinion.

d either a qualified opinion or an unqualified opinion with modified wording

30 If the auditor lacks independence, a disclaimer of opinion must be issued:

medium a if the client requests it

d b only if it is highly material

c only if it is material but not highly material

b understatement of retained earnings caused by a miscalculation of dividends payable

c misclassification of notes payable as a long-term liability when it should be current

d misclassification of salary expense as a selling expense when it should be allocated equally to both selling and administrative expense

33

medium The dollar amount of some misstatements cannot be accurately measured For example, if theclient were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect

on:

b users of the financial statements

c the auditor’s exposure to lawsuits

d management’s future decisions

34 Whenever there is a scope restriction, the appropriate response is to issue a(n):

medium a disclaimer of opinion

medium Which of the following is least likely to cause uncertainty about the ability of an entity tocontinue as a going concern?

a a A client’s lawsuit against another company which claims the other company has infringed

on its patent

b Loss of major customers

c Significant recurring operating losses

d Working capital deficiencies

a may issue either an unqualified or a qualified opinion

b must issue an adverse opinion with “except for” in the opinion paragraph

c may issue an unqualified opinion

d must issue a qualified opinion with “except for” in the opinion paragraph

37 When a disclaimer is issued because the auditor lacks independence:

medium a no report title is included on the report

d b a one-paragraph audit report is issued

c the only reason cited for issuing the disclaimer is the lack of independence

d all of the above are correct

c a Change in accounting principle, such as a change from LIFO to FIFO

b Change in reporting entity, such as the inclusion of an additional company in combinedfinancial statements

c Change in an estimate, such as a decrease in the life of an asset for depreciation purposes

d Correction of errors by changing from non-GAAP to GAAP

a six months from the date of the financial statements

b one year from the date of the financial statements

c six months from the date of the audit report

d one year from the date of the audit report

43

medium When the auditor concludes that there is substantial doubt about the entity’s ability to continueas a going concern, the appropriate audit report would be:

d a an unqualified opinion with an explanatory paragraph

b a disclaimer of opinion

c neither a nor b

d either a or b

44 An auditor may not issue a qualified opinion when:

medium a a scope limitation prevents the auditor from completing an important audit procedure

c b the auditor’s report refers to the work of a specialist

c the auditor lacks independence with respect to the audited entity.

d an accounting principle at variance with GAAP is used

45

medium When a company’s financial statements contain a departure from GAAP with which the auditorconcurs, the departure should be explained in:

b an explanatory paragraph that appears before the opinion paragraph

c the opinion paragraph

d an explanatory paragraph after the opinion paragraph

medium

c

William Gregory, CPA, is the principal auditor for a multi-national corporation Another CPAhas examined and reported on the financial statements of a significant subsidiary of thecorporation Gregory is satisfied with the independence and professional reputation of the otherauditor, as well as the quality of the other auditor’s examination With respect to his report onthe consolidated financial statements, taken as a whole, Gregory:

a must not refer to the examination of the other auditor

b must refer to the examination of the other auditor

c may refer to the examination of the other auditor

d may refer to the examination of the other auditor, in which case Gregory must include inthe auditor’s report on the consolidated financial statements a qualified opinion withrespect to the examination of the other auditor

a no reference to consistency

b a reference to a prior period adjustment in the opinion paragraph

c an explanatory paragraph that justifies the change and explains the impact of the change

on reported net income

d an explanatory paragraph explaining the change

a Positive assurance on the financial statements and on the effectiveness of internal control over financial reporting

b Positive assurance on the financial statements and negative assurance on the effectiveness

of internal control over financial reporting

c Limited assurance on the financial statements and on the effectiveness of internal controlover financial reporting

d There is no guidance on what level of assurance to provide

a disclaimer of opinion in all cases

b qualification of both scope and opinion in all cases

c disclaimer of opinion whenever materiality is in question.

d qualification of both scope and opinion whenever materiality is in question

51

medium CPAs issue several types of “special audit reports.” Which of the following circumstanceswould not require the issuance of a special audit report?

b a The client’s financial statements are prepared using the cash basis

b The client’s financial statements are prepared using the accrual basis

c The CPA has been retained to audit only the current assets

d The CPA has been retained to review the internal control system, not the financialstatements

52 When a qualified or adverse opinion is issued, the qualifying paragraph is inserted:

medium a between the introductory and scope paragraphs

b b between the scope and opinion paragraphs

c after the opinion paragraph, as a fourth paragraph

d immediately after the address, as the first paragraph

53 For the report containing a disclaimer for lack of independence, the disclaimer is in the:

challenging a third or opinion paragraph

c first and only paragraph

d fourth or explanatory paragraph

54 Which of the following is not a primary category of attestation report?

challenging a Compilation report

c Audit report

d Special audit report based on a basis of accounting other than GAAP

55

challenging Most auditors believe that financial statements are “presented fairly” when the statements are inaccordance with GAAP, and that it is also necessary to:

b a determine that they are not in violation of FASB statements

b examine the substance of transactions and balances for possible misinformation

c review the statements using the accounting principles promulgated by the SEC

d assure investors that net income reported this year will be exceeded in the future

56 In which of the following situations would the auditor most likely issue an unqualified report?challenging a The client valued ending inventory by using the replacement cost method

d b The client valued ending inventory by using the Next-In-First-Out (NIFO) method

c The client valued ending inventory at selling price rather than historical cost

d The client valued ending inventory by using the First-In-First-Out (FIFO) method, but showed the replacement cost of inventory in the Notes to the Financial Statements

57 Which of the following statements is true?

challenging

d a. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty

b The auditor is required to issue a disclaimer of opinion in the event of a going concern problem

c The auditor is required to issue a disclaimer of opinion for a material uncertainty and for

a going concern problem

d The auditor has the option, but is not required, to issue a disclaimer of opinion for a material uncertainty or for a going concern problem

58

medium The most common case in which conditions beyond the client’s and auditor’s control cause ascope restriction is an engagement:

a a agreed upon after the client’s balance sheet date

b where the client won’t allow the auditor to confirm receivables for fear of offending its customers.

c where the auditor doesn’t have enough staff to satisfactorily audit all of the client’s foreign subsidiaries

d where the client is going through Chapter 11 bankruptcy

59

challenging When the auditor cannot perform procedures and the amounts are so material that a disclaimerof opinion rather than a qualified opinion is required, the:

d a opinion paragraph will state “does not present fairly.”

b opinion paragraph will state “presents fairly.”

c scope paragraph will be unchanged from the standard unqualified opinion

d scope paragraph will be deleted

challenging When the client fails to make adequate disclosure in the body of the statements or in the relatedfootnotes, it is the responsibility of the auditor to:

d a inform the reader that disclosure is not adequate, and to issue an adverse opinion

b inform the reader that disclosure is not adequate, and to issue a qualified opinion

c present the information in the audit report and issue an unqualified or qualified opinion

d present the information in the audit report and to issue a qualified or an adverse opinion.62

challenging

The “unqualified report with explanatory paragraph” and the “unqualified report with modifiedwording”:

c a arise as a result of an incomplete audit

b arise when the financial statements are not “presented fairly.”

c meet the criteria of a complete audit with satisfactory results

d meet the criteria of a complete audit but with unsatisfactory results

63

medium Which of the following will not cause the auditor to issue a standard unqualified report with anexplanatory paragraph or modified wording?

b Reports involving other auditors

c Auditor disagrees with client’s departure from GAAP

d Lack of consistent application of GAAP

64

challenging Which of the following is not one of the principal CPA firm’s alternatives when issuing a reportif a different CPA firm performed part of the audit?

a a Issue a joint report signed by both CPA firms

b Make no reference to the other CPA firm in the audit report, and issue the standard unqualified opinion

c Make reference to the other auditor in the report by using modified wording (a shared opinion or report)

d 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

65 Which of the following statements is not true?

challenging a A one-paragraph report is generally used when the auditor is not independent

c b A three-paragraph report ordinarily indicates there are no exceptions in the audit

c More than three paragraphs in the report indicates there must be some type of qualification in the audit

d An unqualified opinion with an explanation or modified wording would require more than three paragraphs.

b A change in the estimate of provisions for warranty costs.

c The change from the cost method to the equity method of accounting for investments in common stock

d A change in depreciation method which has no effect on current year’s financial statements but is certain to affect future years

a There is a material scope limitation, and the auditor is not independent

b There is a material GAAP violation, and the auditor is not independent

c There is a material scope limitation, and there is substantial doubt about the company’s ability to continue as a going concern

d There is a substantial doubt about the company’s ability to continue as a going concern, and information about the causes of the uncertainties is not adequately disclosed in a footnote

b

c

d

YesNoYesNo

YesNoNoYes70

Medium Indicate which changes would require an explanatory paragraph in the audit report

Challenging Indicate which changes would require an explanatory paragraph in the audit report.

c

A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion

The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion

Easy Indicate which changes would require an explanatory paragraph in the audit report

Challenging Indicate which changes would require an explanatory paragraph in the audit report

b

The existence of related party transactions

Important events occurring subsequent to the balance sheet date

Medium Which auditor report would require only one paragraph?

c

Disclaimer due to lack of independence

Adverse opinion due to departure from GAAP

Challenging Which auditor report must have at least four paragraphs?

Challenging Which auditor report must have at least four paragraphs?

Medium Which auditor report must have at least four paragraphs?

a

Qualified opinion due to departure from

Medium Which auditor report must have at least four paragraphs?

Medium A CPA would express an unqualified opinion with at least four paragraphs for:

Medium The reasons for expressing a qualified opinion due to a departure from GAAP are expressed

in a paragraph

b a preceding the scope paragraph

b following the scope paragraph

c following the opinion paragraph

d either preceding or following the opinion paragraph, depending on materiality

84

Medium In which situation would the auditor be choosing between “except for” qualified opinion

and an adverse opinion?

d a The auditor lacks independence

b A client-imposed scope restriction

c A circumstance-imposed scope restriction

d Lack of full disclosure required by footnotes

When determining the appropriate audit report to issue, the auditor considers three levels

of materiality for a given condition These three levels are (1) immaterial, (2) materialwithout overshadowing the financial statements as a whole, and (3) highly material Forconditions involving a GAAP violation, the materiality level of the violation influenceswhether an unqualified, qualified, or adverse opinion is issued For conditions involving ascope restriction, the materiality of the restriction influences whether an unqualifiedreport, a qualified scope and opinion report, or a disclaimer of opinion is issued