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Free AICPA CPA-Auditing Exam Questions (page: 20)

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An annual shareholders' report includes audited financial statements and contains supplementary information required by GAAP. Is it permissible for the auditor to report on such information?

  1. No, because such reporting may lead to the belief that the auditor is responsible for the information.
  2. No, because the auditor has no responsibility to read the other information in a document containing audited financial statements.
  3. Yes, provided the report provides negative assurance only.
  4. Yes, provided the auditor performs sufficient audit procedures to determine whether the information is fairly stated, in all material respects, in relation to the financial statements.

Answer(s): D

Explanation:

Choice "d" is correct. If the auditor performs sufficient procedures, he or she may report on whether the information is fairly stated, in all material respects, in relation to the financial statements. Choices "a" and "b" are incorrect. The auditor may report on such information. Choice "c" is incorrect. The report provides positive assurance about whether the information is fairly stated, in all material respects, in relation to the financial statements.



Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion rather than an unqualified opinion most likely would be determined by the:

  1. Lack of sufficient evidence.
  2. Inability to estimate the amount of loss.
  3. Entity's lack of experience with such litigation.
  4. Lack of insurance coverage for possible losses from such litigation.

Answer(s): A

Explanation:

Choice "a" is correct. Lack of sufficient evidence to support management's assertions would most likely cause an auditor to issue a qualified or disclaimer of opinion. Choice "b" is incorrect. As long as it is fully disclosed, an inability to estimate the amount of loss from a future event (outcome of pending legislation) would most likely result in an unqualified opinion. Choices "c" and "d" are incorrect. Neither a lack of experience nor a lack of insurance coverage would impact the auditor's report.



It is not appropriate to refer a reader of an auditor's report to a financial statement footnote for details concerning:

  1. Subsequent events.
  2. The pro forma effects of a business combination.
  3. Sale of a discontinued operation.
  4. The results of confirmation of receivables.

Answer(s): D

Explanation:

Choice "d" is correct. Details concerning the results of audit procedures (such as the results of confirmation of receivables) generally do not appear in the footnotes. Choice "a" is incorrect. Subsequent events may be discussed in an explanatory paragraph of the auditor's report, which would also refer to the related footnote. Choice "b" is incorrect. The pro forma effects of a business combination may be included in an explanatory paragraph of the auditor's report, which would also refer to the related footnote. Choice "c" is incorrect. Sale of a discontinued operation may be discussed in an explanatory paragraph of the auditor's report, which would also refer to the related footnote.



Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide's legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme. Under these circumstances, Morris should:

  1. Express an unqualified opinion with a separate explanatory paragraph.
  2. Disclaim an opinion on the financial statements.
  3. Express an adverse opinion on the financial statements.
  4. Issue a special report regarding the illegal bribes.

Answer(s): B

Explanation:

Choice "b" is correct. Since the CPA could not determine whether the suspected illegal bribes were material to the financial statements, or whether senior management was involved in the scheme, Morris should disclaim an opinion on the financial statements. Choice "a" is incorrect. An unqualified opinion with a separate explanatory paragraph is not appropriate if suspected material illegal bribes cannot be disproven. Choice "c" is incorrect. An adverse opinion is inappropriate since the suspected material illegal bribes have not been proven, nor has any material effect on the financial statements been determined. Choice "d" is incorrect. Special reports are not issued regarding illegal bribes.



The first general standard requires that an audit of financial statements is to be performed by a person or persons having:

  1. Seasoned judgment in varying degrees of supervision and review.
  2. Adequate technical training and proficiency.
  3. Knowledge of the standards of fieldwork and reporting.
  4. Independence with respect to the financial statements and supplementary disclosures.

Answer(s): B

Explanation:

Choice "b" is correct. The "first" general standard states that the auditor must have adequate technical training and proficiency to perform the audit. Comment: It is important to memorize the 10 auditing standards. Choices "a", "c", and "d" are incorrect, as they do not represent a requirement of the first general standard of reporting.



An auditor's report that refers to the use of an accounting principle at variance with generally accepted accounting principles contains the words, "In our opinion, with the foregoing Explanation: , the financial statements referred to above present fairly...." This is considered an:

  1. Adverse opinion.
  2. "Except for" qualified opinion.
  3. Unqualified opinion with an explanatory paragraph.
  4. Example of inappropriate reporting.

Answer(s): D

Explanation:

Choice "d" is correct. "In our opinion, with the foregoing , the FS referred to above present fairly" is an example of inappropriate reporting.
When an auditor's report refers to the use of an accounting principle at variance with GAAP, the words, "in our opinion, except for the effects of the matters discussed in the preceding paragraph, the FS referred to above present fairly,..." should be used.
Choice "a" is incorrect. An adverse opinion would include the phrase, "...do not present fairly..." Choice "b" is incorrect. A qualified opinion would include the phrase, "In our opinion, except for the [problem] discussed in the preceding paragraph,..."
Choice "c" is incorrect. An unqualified opinion would not include the phrase "with the foregoing " in an explanatory paragraph.



Management of Hill Company has decided not to account for a material transaction in accordance with the provisions of an FASB Standard. In setting forth its reasons in a note to the financial statements, management has clearly demonstrated that due to unusual circumstances the financial statements presented in accordance with the FASB Standard would be misleading. The auditor's report should include a separate explanatory paragraph and contain a(an):

  1. "Except for" qualified opinion.
  2. "Subject to" qualified opinion.
  3. Adverse opinion.
  4. Unqualified opinion.

Answer(s): D

Explanation:

Choice "d" is correct. In unusual circumstances, where the literal application of accounting standards would make the FS misleading (e.g., new legislation or new business practices), the proper accounting treatment is that which will more fairly present the FS. In such a case, the auditor should express an unqualified opinion on the financial statements and include a separate explanatory paragraph.
Choice "a" is incorrect. Under the circumstances, the method of accounting selected by the client is justified. There is no need for an "except for" qualification. Choice "b" is incorrect. "Subject to" opinions are not acceptable under any circumstances. Choice "c" is incorrect. An adverse opinion is not appropriate since the financial statements as prepared by the client are fairly presented.



A former client requests a predecessor auditor to reissue an audit report on a prior period's financial statements. The financial statements are not restated and the report is not reviseD. What date(s) should the predecessor auditor use in the reissued report?

  1. The date of the prior-period report.
  2. The date of the client's request.
  3. The date of reissue.
  4. The dual-dates.

Answer(s): A

Explanation:

Choice "a" is correct. The date of the prior-period report should be used as long as the FS are not restated, the report is not revised, and no significant changes have occurred that would affect the prior FS.
Choices "b" and "c" are incorrect. Using the date of the client's request or the date of reissue would extend the auditor's responsibility to that date.
Choice "d" is incorrect. The auditor may dual date the report if a material subsequent event has occurred, but dual dating is not used for reissuing a report.



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