Q&A Hero

Q: When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(n) A. "Subject to" qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Unqualified/unmodified opinion with a separate explanatory/emphasis-of-matter paragraph.

Q: An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph A. Is considered an "except for" qualification of the opinion. B. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. C. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." D. Is appropriate and would not negate the unqualified/unmodified opinion.

Q: An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a large foreign subsidiary. Between which of the following reports should the auditor choose? A. Adverse and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added. B. Disclaimer and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added. C. Qualified and adverse. D. Qualified and disclaimer.

Q: Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? A. Significant related party transactions are pervasive. B. Usual trade credit from suppliers is denied. C. Arrearages in preferred stock dividends are paid. D. Restrictions on the disposal of principal assets are present.

Q: Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? A. Cash flows from operating activities are negative. B. Research and development projects are postponed. C. Significant related party transactions are pervasive. D. Stock dividends replace annual cash dividends.

Q: Which of the following would be considered a change that affects consistency? A. Change in accounting estimate. B. Change in accounting principle. C. Change in classification and reclassification. D. All of the above.

Q: Which of the following auditing 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. Inspecting title documents to verify whether any assets are pledged as collateral. B. Confirming with third parties the details of arrangements to maintain financial support. C. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation. D. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

Q: The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the A. Ability to expand operations into new product lines in the future. B. Feasibility of plans to purchase leased equipment at less than market value. C. Marketability of assets that management plans to sell. D. Committed arrangements to convert preferred stock to long-term debt.

Q: When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the A. Possibility of purchasing certain assets rather than leasing them. B. Capability of extending the due dates of existing debt. C. Appropriateness of changing depreciation methods from double declining balance to straight line. D. Marketability of property and equipment that management plans to keep.

Q: If the principal auditor decides to make reference to the other auditor's examination, the introductory paragraph must specifically indicate the A. The portion of the financial statements examined by the other auditor. B. Name of the other auditor. C. Name of the consolidated subsidiary examined by the other auditor. D. Type of opinion expressed by the other auditor.

Q: In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose A. The name of the other CPA and the type of report issued by the other CPA. B. The portion of the financial statements examined by the other CPA. C. The nature of Frazier's review of the other CPA's work. D. In a footnote the portions of the financial statements that were covered by the examinations of both auditors.

Q: A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis: A. Read the financial statements of the current period. B. Read the financial statements of the past five years. C. Obtain a letter of representations from the current-year, successor auditor. D. Both a and c.

Q: When comparative financial statements are presented, the fourth standard of reporting, which refers to financial statements "taken as a whole," should be considered to apply to the financial statements of the A. Periods presented plus the one preceding period. B. Current period only. C. Current period and those of the other periods presented. D. Current and immediately preceding period only.

Q: If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n) A. "Except for" opinion. B. Adverse opinion. C. Unqualified/unmodified opinion. D. Disclaimer of opinion.

Q: For which of the following events would an auditor issue a report that does not include any reference to consistency? A. A change in the method of accounting for inventories. B. A change from an accounting principle that is not generally accepted to one that is generally accepted. C. A change in the service life used to calculate depreciation expense. D. A change in accounting principle without reasonable justification from management.

Q: Management believes and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(an) A. Qualified report due to a scope limitation. B. Qualified report due to a departure from GAAP. C. Unqualified/unmodified report with an explanatory/emphasis-of-matter paragraph. D. Unqualified/unmodified report in a standard auditor's report.

Q: When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover A. Both years. B. Only the current year. C. Only the current year, but the prior year's report should be presented. D. Only the current year, but the prior year's report should be referred to.

Q: Which of the following situations will not result in modification of the auditor's report because of a scope limitation? A. Restriction imposed by the client. B. Reliance placed on the report of another auditor. C. Inability to obtain sufficient appropriate evidential matter. D. Inadequacy in the accounting records.

Q: Which of the following parties is responsible for the fairness of the representations made in financial statements? A. Client's management. B. Independent auditor. C. Audit committee. D. AICPA.

Q: A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

Q: The choice of which audit report to issue depends on the condition and the materiality of any departure.

Q: An auditor must disclaim an opinion when the auditor lacks independence.

Q: An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements.

Q: Changes that do not affect consistency are normally disclosed in the footnotes but do not require an explanatory/emphasis-of-matter paragraph in the audit report.

Q: A change in reporting entity is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

Q: A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

Q: A basic assumption that underlies financial reporting is that an entity will continue as a going concern.

Q: An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified/unmodified audit report.

Q: A going concern issue requires a modification of the wording to the three-paragraph standard unqualified audit report (public company).

Q: The field work for the December 31, 2011 audit of Pumpkin Corporation ended on March 13, 2012. The financial statements and auditor's report were issued and mailed to stockholders on March 23, 2012. In each of the situations below, select from the list at the end of the problem the appropriate action to be taken by the auditor. Assume all situations are material. Situations:

Q: State the two primary purposes of the client letter of representation.

Q: What is the difference between a contingent liability and a commitment?

Q: What is an unasserted claim and why would an attorney and/or client be reluctant to disclose an unasserted claim in the financial statements?

Q: What information is typically requested in a legal letter to a client's attorney?

Q: From the list below, select the procedures that an auditor would use to test for contingent liabilities. a. Inquire of SEC officials regarding reported violations by the client that create claims. b. Read the client's contracts, loan agreements, leases, and other documents. c. Read the client's minutes of meetings of shareholders, directors, and committees. d. Request a representation letter from all the client's employees. e. Read the legal briefs of all suits filed against the client's competitors. f. Request the client's management to prepare a letter of inquiry to the client's attorney regarding pending litigation against the client.

Q: Your audit client, Pretty People Incorporated, is the defendant in a pending discrimination lawsuit. What information about the lawsuit would you, as an auditor, need to know to decide whether to disclose the litigation in the financial statements?

Q: Who generally signs the legal letter? A. The board of directors. B. The audit partner. C. The CEO of the entity being audited. D. The entity's attorneys.

Q: After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless A. A final resolution of a contingency that had resulted in a qualification of the auditor's report is made. B. A development occurs that may affect the client's ability to continue as a going concern. C. An investigation of the auditor's practice by a peer review committee ensues. D. New information is discovered concerning undisclosed related party transactions of the previously audited period.

Q: After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless A. New information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report. B. Material adverse events occur after the date of the auditor's report. C. Final determination or resolution was made on matters that had resulted in a qualification in the auditor's report. D. Final determination or resolution was made of a contingency that had been disclosed in the financial statements and no liability arose from the resolution.

Q: After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless A. A lawsuit in which risk of loss was considered remote is resolved in the company's favor. B. A development occurs that may affect the client's ability to continue as a going concern. C. A material fraud is initiated by an employee after the report is issued. D. Evidence of significant, non-arms-length, related party transactions that happened prior to year-end is discovered.

Q: Key Co. plans to present comparative financial statements for the years ended December 31, 2010 and 2011, respectively. Smith, CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, 2012. Key's current management team was not present until January 1, 2011. What period of time should be covered by Key's management representation letter? A. January 1, 2010 through December 31, 2011. B. January 1, 2010 through May 1, 2012. C. January 1, 2011 through December 31, 2011. D. January 1, 2011 through May 1, 2012.

Q: For which of the following matters should an auditor obtain written management representations? A. Management's cost-benefit justifications for not correcting internal control weaknesses. B. Management's knowledge of future plans that may affect the price of the entity's stock. C. Management's compliance with contractual agreements that may affect the financial statements. D. Management's acknowledgment of its responsibility for employees' violations of laws.

Q: Which of the following statements is correct concerning an auditor's required communication with those charged with governance? A. This communication is required to occur before the auditor's report on the financial statements is issued. B. This communication should include management changes in the application of significant accounting policies. C. Any significant matter communicated to those charged with governance also should be communicated to management. D. Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance.

Q: Which of the following statements is correct about an auditor's required communication with management and those charged with governance? A. Any matters communicated to those charged with governance are also required to be communicated to the entity's management. B. The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. C. The auditor does not have any requirement to communicate with anyone outside of management. D. Weaknesses in internal control previously reported to those charged with governance are required to be communicated to those charged with governance after each subsequent audit until the weaknesses are corrected.

Q: Which of the following statements ordinarily is included among the written client representations obtained by the auditor? A. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. B. Management acknowledges responsibility for illegal actions committed by employees. C. Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion. D. Management acknowledges that there are no material weaknesses in the account balances.

Q: A disclosure of a contingent liability in the footnotes is made rather than adjusting the financial statement accounts when A. The outcome of the event is judged to be reasonably possible and the loss can be reasonably estimated. B. The loss can be reasonably estimated, but the outcome is unknown. C. The outcome of the event is judged to be reasonably possible but the loss cannot be reasonably estimated. D. The outcome is unknown and the loss is reasonably estimable but the client does not want to book the loss.

Q: A Type I subsequent event usually requires A. An adjustment to the financial statements. B. No adjustment to the financial statements. C. Withdrawal from the engagement. D. None of the above.

Q: An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to A. Extend auditing procedures. B. Accept responsibility for all events between year-end and the audit report date. C. Permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report. D. Assume responsibility for events subsequent to the issuance of the auditor's report.

Q: Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? A. "I believe that the possible liability to the company is nominal in amount." B. "I believe that the action can be settled for less than the damages claimed." C. "I believe that the plaintiff's case against the company is without merit." D. "I believe that the company will be able to defend this action successfully."

Q: The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor with A. A description and evaluation of litigation, claims, and assessments that existed at the date of the balance sheet. B. An expert opinion as to whether a loss is possible, probable, or remote. C. The opportunity to examine the documentation concerning litigation, claims, and assessments. D. Corroboration of the information furnished by management concerning litigation, claims, and assessments.

Q: Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, and/or assessments. The primary reason for this request is to provide the auditor with A. An estimate of the dollar amount of the probable loss. B. An expert opinion as to whether a loss is possible, probable, or remote. C. Information concerning the progress of cases to date. D. Corroborative inquiries made of the client by the auditor.

Q: An auditor's client has violated a minor requirement of its bond indenture that could result in the trustee requiring immediate payment of the principal amount due. The client refuses to seek a waiver from the bond trustee. Request for immediate payment is not considered likely. Under these circumstances, the auditor must A. Require classification of bonds payable as a current liability. B. Contact the bond trustee directly. C. Disclose the situation in the auditor's report. D. Obtain an opinion from the company's attorney as to the likelihood of the trustee's enforcement of the requirement.

Q: After an audit report containing an unqualified opinion on a nonpublic client's financial statements is issued, the auditor learns that the client has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor should A. Determine whether the information is reliable and, if it is determined to be reliable, request that revised financial statements be issued. B. Notify the entity that the auditor's report may no longer be associated with the financial statements. C. Describe the effects of this subsequently discovered information in communications with persons known to be relying on the financial statements. D. Take no action because the auditor has no obligation to make any further inquiries.

Q: On February 25, a CPA issued an auditor's report expressing an unqualified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that, on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the ongoing deterioration of the financial condition of the entity's principal customer, which finally led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA's next course of action most likely would be to A. Notify the entity's creditors that the financial statements and the related auditor's report should no longer be relied upon. B. Notify each member of the entity's board of directors about management's refusal to adjust the financial statements. C. Issue revised financial statements and distribute them to each creditor known to be relying on the financial statements. D. Issue a revised auditor's report and distribute it to each creditor known to be relying on the financial statements.

Q: Which of the following events occurring after the issuance of a client's financial statements and the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements? A. An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern. B. A contingency is resolved that had been disclosed in the audited financial statements. C. New information is discovered concerning undisclosed lease transactions in the audited period. D. A subsidiary that accounts for 25 percent of the entity's consolidated net income is sold.

Q: Communications between the auditor and those charged with governance should include all of the following except: A. A summary of specific audit procedures used. B. Significant audit adjustments. C. Consultations with other accountants. D. Major issues discussed with management before the auditor was retained.

Q: A written representation from a client's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements should normally be signed by the A. Chief executive officer and the chief financial officer. B. Chief financial officer and the chairman of the board of directors. C. Chairman of the audit committee of the board of directors. D. Chief executive officer, the chairman of the board of directors and the client's lawyer.

Q: When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations A. Complement, but do not replace, substantive procedures designed to support the assertion. B. Constitute sufficient evidence to support the assertion when considered in combination with reliance on internal controls. C. Are not part of the evidential matter considered to support the assertion. D. Replace reliance on internal controls as evidence to support the assertion.

Q: "There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a A. Report on internal control. B. Special report. C. Management representation letter. D. Letter for underwriters.

Q: Which of the following matters is an auditor required to communicate to those charged with governance? A. The basis for assessing control risk below the maximum. B. The process used by management in formulating sensitive accounting estimates. C. The auditor's preliminary judgments about materiality levels. D. The justification for performing substantive procedures at interim dates.

Q: "There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a(an) A. Client engagement letter. B. Report on compliance with laws and regulations. C. Management representation letter. D. Attestation report on internal controls.

Q: Which of the following expressions is least likely to be included in a client's representation letter? A. No events have occurred subsequent to the balance sheet date that require adjustment to or disclosure in, the financial statements. B. The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance. C. Management acknowledges responsibility for illegal actions committed by its employees. D. Management has made available all financial statements and related data.

Q: As part of an audit, a CPA often requests a representation letter from the client. Which one of the following is not a valid purpose of such a letter? A. To provide audit evidence. B. To emphasize to the client their responsibility for the fairness of the financial statements. C. To satisfy himself or herself that a certain account balance is fairly stated when certain customary auditing procedures are not performed. D. To provide possible protection to the CPA against a charge of knowledge in cases where fraud is subsequently discovered to have existed in the accounts.

Q: Which of the following ratios is least likely to assist the auditor in determining whether the client is experiencing financial difficulties? A. Net worth/total liabilities. B. Cash/total assets. C. Total liabilities/total assets. D. Net income before taxes/net sales.

Q: In the course of the examination of financial statements for the purpose of expressing an opinion, the auditor normally prepares a schedule of unadjusted differences for which the auditor did not propose adjustments when they were discovered. What is the primary purpose of this schedule? A. To point out to the responsible client officials the errors made by various company personnel. B. To summarize the adjustments that must be made before the company can prepare and submit its federal tax return. C. To identify the potential financial statement effects of errors or disputed items that were considered immaterial when discovered. D. To summarize the errors made by the company so that corrections can be made after the audited financial statements are released.

Q: After field work audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up review of the working papers. This second review usually focuses on A. The audit report, financial statements, and footnotes for consistency. B. Irregularities involving the client's management and its employees. C. The materiality of the adjusting entries proposed by the audit staff. D. The communication of internal control weaknesses to those charged with governance.

Q: A Type II subsequent event usually requires A. An adjustment to the financial statements and the footnotes. B. An adjustment to the financial statements but no special disclosure is required. C. Disclosure in the footnotes. D. Neither an adjustment to the financial statements nor disclosure in the footnotes.

Q: Harvey, CPA is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with generally accepted accounting principles. Which one of the following procedures would be least appropriate for this purpose? A. Confirm, as of the completion of field work, accounts receivable that have increased significantly from the year-end date. B. Read the minutes of the board of directors. C. Inquire of management concerning events that may have occurred. D. Obtain a lawyer's letter as of the completion of field work.

Q: If an auditor dates the auditor's report on financial statements for the year ended December 31, 2011, as of February 10, 2012, except for Note J, as to which the date is March 3, 2012, the auditor is acknowledging responsibility to actively search for and ensure proper handling by management of A. All subsequent events occurring through March 3, 2012. B. All subsequent events occurring through February 10, 2012. C. All subsequent events occurring through February 10, 2012 and the specific subsequent event referred to in Note J through March 3, 2012. D. Only the specific subsequent event referred to in Note J as of March 3, 2012.

Q: A major customer of an audit client suffers a fire after year-end, but just prior to completion of audit field work. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should A. Advise management to disclose the event in the notes to the financial statements. B. Disclose the event in the auditor's report. C. Withhold submission of the auditor's report until the extent of the direct effect on the financial statements is known. D. Advise management to adjust the financial statements.

Q: An auditor is concerned with completing various phases of the examination after the balance sheet date. This "subsequent period" involving formal audit procedures extends to the date of the A. Auditor's report. B. Final review of the audit working papers. C. Public issuance of the financial statements. D. Delivery of the auditor's report to the client.

Q: Subsequent events for which the auditor has a responsibility to actively search are defined as events that occur subsequent to the A. Balance sheet date. B. Date of the auditor's report. C. Balance sheet date but prior to the date of the auditor's report. D. Date of the auditor's report and concern contingencies that are not reflected in the financial statements.

Q: Which of the following subsequent events will be least likely to result in an adjustment to the financial statements? A. Culmination of events affecting the realization of accounts receivable owned as of the balance sheet date. B. Culmination of events affecting the realization of inventories owned as of the balance sheet date. C. Material changes in the settlement of liabilities that were estimated as of the balance sheet date. D. Material changes in the quoted market prices of listed investment securities since the balance sheet date.

Q: Which of the following is generally requested in a legal letter? A. A request that the attorney comment on unasserted claims where his or her views differ from management's evaluation. B. A list of all attorneys that performed any work for the entity during the year. C. A statement indicating that the attorney is responsible for the fair presentation of unasserted claims in the entity's financial statements. D. A request that the attorney provide a copy of all invoices given to the client during the year.

Q: An attorney is responding to an independent auditor as a result of the audit client's letter of inquiry. The attorney may appropriately limit the response to A. Asserted claims and litigation. B. Matters to which the attorney has given substantive attention in the form of legal consultation or representation. C. Asserted, overtly threatened, or pending claims and litigation. D. Items that have an extremely high probability of being resolved to the client's detriment.

Q: Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation, claims, and assessments? A. Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments. B. Obtain from management a description and evaluation of litigation, claims, and assessments that existed at the balance sheet date. C. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are likely to be asserted and must be disclosed. D. Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.

Q: Which of the following procedures would an auditor ordinarily perform during the review of subsequent events? A. An analysis of related party transactions for the discovery of possible irregularities. B. A review of the cut-off bank statements for the period after the year-end. C. An inquiry of the client's legal counsel concerning litigation. D. An investigation of material weaknesses in internal control previously communicated to the client.

Q: Which of the following procedures would an auditor most likely perform to obtain evidence about an entity's subsequent events? A. Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting records. B. Obtain a letter from the entity's attorney describing any pending litigation, unasserted claims, and loss contingencies. C. Review the treasurer's monthly reports on temporary investments owned, purchased, and sold. D. Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date.

Q: Generally, loss contingencies that are judged to be remote A. Should be disclosed in the footnotes. B. Should be recorded in the financial statements. C. Should not be disclosed in the footnotes. D. Should be recorded in the financial statements and the footnotes.

Q: Ajax, Inc., is an affiliate of the audit client and is audited by another audit firm. Which of the following is most likely to be used by the auditor to obtain assurance that all guarantees by the client of the affiliate's indebtedness have been detected? A. Send the standard bank confirmation request to all the client's lender banks. B. Review client minutes and obtain a representation letter. C. Examine supporting documents for all entries in intercompany accounts. D. Obtain written confirmation of indebtedness from the auditor of the affiliate.