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Free AICPA CPA-Auditing Exam Questions (page: 11)

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PDF with 1026 Questions

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?

  1. Performing cutoff tests of sales transactions with customers with long-standing receivable balances.
  2. Evaluating the entity's procedures for identifying and recording related party transactions.
  3. Inspecting title documents to verify whether any real property is pledged as collateral.
  4. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

Answer(s): D

Explanation:

Choice "d" is correct. If a liability is significant enough, it may give rise to a situation in which there is substantial doubt about an entity's ability to continue as a going concern. Inquiring of an entity's legal counsel about litigation, claims, and assessments is one way to determine whether such a liability exists.
Choice "a" is incorrect. Cutoff tests are used to determine whether sales are recorded in the proper period. Applying such tests to customer accounts with long-standing receivable balances would not provide information about the entity's ability to continue a as a going concern. Choice "b" is incorrect. Evaluating the entity's procedures for identifying and recording related party transactions is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues. Choice "c" is incorrect. Identifying situations in which real property is pledged as collateral is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues.



A CPA's standard report on audited financial statements would be inappropriate if it referred to:

  1. Management's responsibility for the financial statements.
  2. An assessment of the entity's accounting principles.
  3. Significant estimates made by management.
  4. The CPA's assessment of sampling risk factors.

Answer(s): D

Explanation:

Choice "d" is correct. The CPA's standard report on audited financial statements does not include matters related to the auditor's assessment of specific risk factors. Choice "a" is incorrect. The CPA's standard report on audited financial statements states that, "These financial statements are the responsibility of the Company's management." Choices "b" and "c" are incorrect. The CPA's standard report on audited financial statements states that, "An audit also includes assessing the accounting principles used and significant estimates made by management."



When an auditor 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:

  1. The effects of the adverse financial conditions likely will cause a bankruptcy filing.
  2. Information about the entity's ability to continue as a going concern is not disclosed.
  3. Management has no plans to reduce or delay future expenditures.
  4. Negative trends and recurring operating losses appear to be irreversible.

Answer(s): B

Explanation:

Choice "b" is correct. In a situation where it is likely that an entity's operations will be discontinued, disclosure of information about the entity's ability to continue as a going concern is required by GAAP.
Failure to make such disclosure would be a departure from GAAP, resulting in either a qualified or adverse opinion.
Choice "a" is incorrect. As long as the going concern situation is adequately disclosed, the fact that there will be a bankruptcy filing would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "c" is incorrect. As long as the going concern situation is adequately disclosed, the fact that management does not intend to reduce or delay future expenditures would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "d" is incorrect. As long as the going concern situation is adequately disclosed, the fact that negative trends and recurring operating loses appear to be irreversible would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.



An auditor 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:

  1. Repurchase the entity's stock at a price below its book value.
  2. Issue stock options to key executives.
  3. Lease rather than purchase operating facilities.
  4. Accelerate the due date of an existing mortgage.

Answer(s): C

Explanation:

Choice "c" is correct. Leasing rather than purchasing operating facilities results in reduced (or at least delayed) expenditures, which is a mitigating factor in a going concern situation. Choice "a" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Repurchasing stock is an outflow of cash that would reduce ownership equity; as such, it is not a mitigating factor.
Choice "b" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Issuing stock options does not fall into any of these categories and would not be considered a mitigating factor.
Choice "d" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Accelerating the due date of an existing mortgage would increase expenditures, and therefore would not be a mitigating factor.



Which of the following is true regarding the standard audit report for an issuer?

  1. Reference should be made in the scope paragraph to both PCAOB standards and generally accepted auditing standards.
  2. PCAOB standards should not be mentioned at all, although their use is implied in the standard auditor's report.
  3. Reference should be made in the scope paragraph to PCAOB standards, and in the opinion paragraph to generally accepted accounting principles.
  4. Reference may be made in the scope paragraph to either PCAOB standards or generally accepted auditing standards.

Answer(s): C

Explanation:

Choice "c" is correct. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards, and should refer to GAAP in the opinion paragraph. Choice "a" is incorrect. An auditor reporting on the audit of financial statements of a nonissuer may (but is not required to) refer to both PCAOB standards and generally accepted auditing standards in the scope paragraph. Audit reports for audits of issuers refer only to PCAOB standards in the scope paragraph.
Choice "b" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed. Choice "d" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. Referring to generally accepted auditing standards instead is not an option, as audits of issuers must follow PCAOB standards.



Under which of the following circumstances would an auditor's expression of an unqualified opinion be inappropriate?

  1. The auditor is unable to obtain the audited financial statements of a significant subsidiary.
  2. The financial statements are prepared on the entity's income tax basis.
  3. There are significant deficiencies in the design and operation of the entity's internal control.
  4. Analytical procedures indicate that many year-end account balances are not comparable with the prior year's balances.

Answer(s): A

Explanation:

Choice "a" is correct. If the auditor is unable to obtain the audited financial statements of a significant subsidiary, a scope limitation exists. Assuming the effect is material, the auditor would issue either a qualified opinion or a disclaimer of opinion. Choice "b" is incorrect. Financial statements prepared on an entity's income tax basis are "other comprehensive basis of accounting" (OCBOA) financial statements. The auditor may issue a special report, which can include an unqualified opinion, on OCBOA financial statements. Choice "c" is incorrect. Significant deficiencies in the design and operation of an entity's internal control do not preclude issuance of an unqualified opinion, although they do increase the risk of material misstatement and will likely result in modifications to the nature, timing, and extent of the auditor's testing.
Choice "d" is incorrect. An unqualified opinion may still be expressed when there are significant changes in year-end account balances as compared to prior year balances, as long as the auditor has obtained sufficient appropriate audit evidence about the current balances.
Reports on Comparative Financial Statements



Jewel, CPA, audited Infinite Co.'s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel's auditor's report, which expressed a qualified opinion. In drafting the current year's auditor's report, Crain, CPA, the successor auditor, should:

I). Not name Jewel as the predecessor auditor.
II). Indicate the type of report issued by Jewel.
III). Indicate the substantive reasons for Jewel's qualification.

  1. I only.
  2. I and II only.
  3. II and III only.
  4. I, II, and III.

Answer(s): D

Explanation:

Choice "d" is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in the introductory paragraph of the report 1) that the financial statements of the prior period were audited by another auditor, 2) the date of his report, 3) the type of report issued by the predecessor auditor, and 4) if the report was other than a standard unqualified report, the substantive reasons therefor. The successor auditor may name the predecessor auditor only if the predecessor auditor's practice was acquired by or merged with that of the successor auditor.
Choices "a", "b", and "c" are incorrect, based on the above Explanation.



A registration statement filed with the SEC contains the reports of two independent auditors on their audits of financial statements for different periods. The predecessor auditor who audited the prior- period financial statements generally should obtain a letter of representation from the:

  1. Successor independent auditor.
  2. Client's audit committee.
  3. Principal underwriter.
  4. Securities and Exchange Commission.

Answer(s): A

Explanation:

Choice "a" is correct. Before reissuing the prior year's audit report on the financial statements of a former client, the auditor should 1) read the financial statements of the current period, 2) compare the prior period information that the auditor reported on with the financial statements to be presented for comparative purposes, and 3) obtain letters of representation from management of the former client and from the successor auditor. The representation letter from management should indicate whether any of management's previous representations should be modified and whether there have been any subsequent events that would affect the previous financial statements. The representation letter from the successor auditor should state whether the successor auditor's audit disclosed any issues of a material nature that might affect the previous financial statements. Choice "b" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the client's audit committee would not provide this confirmation. Choice "c" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the principal underwriter would not provide this confirmation. Choice "d" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the SEC would not provide this confirmation.



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