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AICPA CPA-Auditing Exam
CPA Auditing and Attestation (AUD) (Page 11 )

Updated On: 9-Feb-2026
Page 11 of 207
PDF with 1026 Questions

An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(an):

  1. "Except for" qualified opinion.
  2. Explanatory paragraph.
  3. Unqualified opinion.
  4. Consistency modification.

Answer(s): C

Explanation:

Choice "c" is correct. If an accounting change has no material effect on the financial statements in the current year, but a material future effect, the auditor must ensure that the change is disclosed in the footnotes whenever the financial statements of the change period are presented, but does not have to recognize the change in the current year's audit report. Choice "a" is incorrect. Accounting changes that are accounted for properly do not result in qualified opinions.
Choices "b" and "d" are incorrect. A consistency modification (explanatory paragraph) is not necessary when the effect of a change is immaterial.



If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an):

  1. Disclaimer of opinion.
  2. Qualified opinion.
  3. Review report.
  4. Unqualified opinion with a separate explanatory paragraph.

Answer(s): B

Explanation:

Choice "b" is correct. If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires qualification of the opinion. Choice "a" is incorrect. If the company fails to present its statement of cash flows, this is considered inadequate disclosure. The auditor would not issue a disclaimer of opinion for inadequate disclosure. Choice "c" is incorrect. The auditor would not issue a review report when performing an audit. Choice "d" is incorrect. The auditor cannot issue an unqualified report if the client omits a statement of cash flows from the financial statements.



In which of the following circumstances would an auditor most likely add an explanatory paragraph to the standard report while not affecting the auditor's unqualified opinion?

  1. The auditor is asked to report on the balance sheet, but not on the other basic financial statements.
  2. There is substantial doubt about the entity's ability to continue as a going concern.
  3. Management's estimates of the effects of future events are unreasonable.
  4. Certain transactions cannot be tested because of management's records retention policy.

Answer(s): B

Explanation:

Choice "b" is correct. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph to reflect that conclusion.
Choice "a" is incorrect. Reporting on just the balance sheet is acceptable provided access to financial information is not limited. Such reporting does not require an explanatory paragraph. Choice "c" is incorrect. If the auditor concludes that management's estimate is unreasonable and that its effect is to cause the financial statements to be materially misstated, the auditor should express a qualified or an adverse opinion.
Choice "d" is incorrect. Restrictions on the scope of the audit, whether imposed by the client or by circumstances, may require the auditor to qualify or to disclaim an opinion.



When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the auditor's report. This paragraph should identify the nature of the change and:

  1. Explain why the change is justified under generally accepted accounting principles.
  2. Describe the cumulative effect of the change on the audited financial statements.
  3. State the auditor's explicit concurrence with or opposition to the change.
  4. Refer to the financial statement note that discusses the change in detail.

Answer(s): D

Explanation:

Choice "d" is correct. The paragraph should refer to the note in the financial statements that discusses the change in detail. Following is an example of an appropriate explanatory paragraph: "As discussed in Note X to the financial statements, the company changed its method of accounting for income taxes in X2."
Choice "a" is incorrect. The auditor need not explain why a change from one generally accepted accounting principle to another is justified.
Choice "b" is incorrect. The paragraph should not identify the cumulative effect of the change on the audited financial statements.
Choice "c" is incorrect. The auditor should never explicitly state concurrence with a change. If the auditor opposes the change, a qualified or adverse opinion should be issued.



Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of fieldwork made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances.
Green's auditor's report most likely contained a(an):

  1. Unqualified opinion.
  2. Unqualified opinion with an explanatory paragraph.
  3. Qualified opinion due to a scope limitation.
  4. Qualified opinion due to a departure from generally accepted auditing standards.

Answer(s): A

Explanation:

Choice "a" is correct. There is a presumption that the auditor will request the confirmation of accounts receivable during an audit unless accounts receivable are immaterial, the use of confirmations would be ineffective, or the assessed inherent risk is so low that the evidence expected to be provided by analytical procedures or other substantive tests of details would be sufficient. In this example, the confirmation of accounts receivable by direct communication with the debtors would be ineffective. If Green was able to apply alternative audit procedures and was satisfied as to the reasonableness of the account balances, then an unqualified opinion could be issued.
Choice "b" is incorrect. Since Green was satisfied as far as the accounts receivable balances, there is no need to add an explanatory paragraph.
Choice "c" is incorrect. Since Green was able to perform alternative procedures and was satisfied as far as the reasonableness of the account balances, there is no scope limitation. Choice "d" is incorrect. Since Green was able to perform alternative procedures and was satisfied as far as the reasonableness of the account balances, there is no departure from generally accepted auditing standards.






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