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Free AICPA CPA-Auditing Exam Questions (page: 4)

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PDF with 1026 Questions

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?

  1. Significant related party transactions are pervasive.
  2. Usual trade credit from suppliers is denied.
  3. Arrearages in preferred stock dividends are paid.
  4. Restrictions on the disposal of principal assets are present.

Answer(s): B

Explanation:

Choice "b" is correct. Indications of possible financial difficulties, such as denial of usual trade credit from suppliers, may cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.
Choice "a" is incorrect. The existence of related parties and the occurrence of related party transactions do not indicate doubt about the entity's ability to continue as a going concern. Choice "c" is incorrect. Payment of preferred stock dividends in arrears might very well indicate an improvement in the entity's financial situation. It is the lack of payment of preferred, cumulative dividends (a possible indication of financial difficulty) that might cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Choice "d" is incorrect. Restrictions on the disposal of assets might limit the options available to management as far as mitigating adverse conditions, but it would not in and of itself cause the auditor to have substantial doubt about an entity's ability to continue as a going concern.



In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If the amounts in question could materially affect current operating results, the auditor would:

  1. Be unable to express an opinion on the current year's results of operations and cash flows.
  2. Express a qualified opinion on the financial statements because of a client-imposed scope limitation.
  3. Withdraw from the engagement and refuse to be associated with the financial statements.
  4. Specifically state that the financial statements are not comparable to the prior year due to an uncertainty.

Answer(s): A

Explanation:

Choice "a" is correct. Since the auditor was unable to gather sufficient evidence on the beginning balances of the balance sheet accounts, the auditor would be unable to express an opinion on the current year's results of operations and cash flows. The auditor could express an opinion on the statement of financial position.
Choice "b" is incorrect. Since the scope limitation could have a pervasive effect on the financial statements (affecting all assets and liabilities), a disclaimer of opinion (and not merely a qualified opinion) is required on the income statement and statement of cash flows. An opinion may be expressed on the year-end statement of financial position.

Choice "c" is incorrect. The auditor does not need to withdraw from the engagement and refuse to be associated with the financial statements.
Choice "d" is incorrect. An uncertainty does not exist. The auditor can express an opinion on one of the financial statements.



Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to Smith's audit?

I). Pell reviews Smith's audit documentation and assumes responsibility for Smith's work, but expresses a qualified opinion on Tech's financial statements.
II). Pell is unable to review Smith's audit documentation; however, Pell's inquiries indicate that Smith has an excellent reputation for professional competence and integrity.

  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

Answer(s): B

Explanation:

Choice "b" is correct. The principal auditor makes reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it. Choice "a" is incorrect.
When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed.
Choice "c" is incorrect.
When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed.
Choice "d" is incorrect. The principal auditor will make reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it.



Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero's plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero's plans to:

  1. Discuss with lenders the terms of all debt and loan agreements.
  2. Strengthen internal controls over cash disbursements.
  3. Purchase production facilities currently being leased from a related party.
  4. Postpone expenditures for research and development projects.

Answer(s): B

Explanation:

Choice "d" is correct.
When assessing management's plans for dealing with the adverse effects of future conditions and events, mitigating factors would include:
1. The postponement of expenditures (including R&D),
2. Plans to dispose of assets,
3. Plans to borrow money or restructure debt,
4. Plans to increase ownership equity (sell stock).
Choice "a" is incorrect. Discussions with lenders regarding terms would not be a mitigating factor. Actual agreements regarding restructuring of debt or amendments to covenants would be required. Choice "b" is incorrect. Strengthening internal controls over cash would not qualify as a management tactic to address going concern issues.
Choice "c" is incorrect. Purchasing facilities which are currently being leased would only further decrease cash flow.



Which of the following statements is a basic element of the auditor's standard report?

  1. The disclosures provide reasonable assurance that the financial statements are free of material misstatement.
  2. The auditor evaluated the overall internal control.
  3. An audit includes assessing significant estimates made by management.
  4. The financial statements are consistent with those of the prior period.

Answer(s): C

Explanation:

Choice "c" is correct. The auditor's standard audit report includes a statement that "An audit includes assessing...significant estimates made by management..." Choice "a" is incorrect. The standard audit report does not state that disclosures provide reasonable assurance that the financial statements are free of material misstatement. The correct statement is:
"...standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement." Choice "b" is incorrect. The standard audit report does not state that the auditor evaluated the overall internal control. The correct statement is "An audit includes...evaluating the overall financial statement presentation." Internal control is not mentioned in the standard audit report. Choice "d" is incorrect. The standard audit report does not state "The financial statements are consistent with those of the prior period." According to the second standard of reporting, consistency is implicitly reported. Only if there is an inconsistency is an explicit statement included.



An auditor may not issue a qualified opinion when:

  1. An accounting principle at variance with GAAP is used.
  2. The auditor lacks independence with respect to the audited entity.
  3. A scope limitation prevents the auditor from completing an important audit procedure.
  4. The auditor's report refers to the work of a specialist.

Answer(s): B

Explanation:

Choice "b" is correct. If the auditor lacks independence with respect to an audit client, the auditor must disclaim an opinion on the financial statements. A qualified opinion is not an option. Choice "a" is incorrect. A departure from GAAP (which is not sufficiently material to warrant an adverse opinion) may justify a qualification of the auditor's report. Choice "c" is incorrect. A scope limitation may result in a qualified opinion or a disclaimer of opinion. Choice "d" is incorrect. The auditor's report may make reference to the use of a specialist only if the specialist's findings result in a change to the auditor's report, such as a qualified opinion.



An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor:

  1. Wishes to emphasize that the entity had significant transactions with related parties.
  2. Concurs with the entity's change in its method of computing depreciation.
  3. Discovers that supplementary information required by FASB has been omitted.
  4. Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.

Answer(s): D

Explanation:

Choice "d" is correct. An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed. Choice "a" is incorrect. Emphasis of a matter, such as the existence of significant transactions with related parties, may result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
Choice "b" is incorrect. A change in accounting principle does result in an additional explanatory paragraph appended to an otherwise unqualified opinion. Choice "c" is incorrect. Omission of supplemental information required by GAAP does result in an additional explanatory paragraph appended to an otherwise unqualified opinion.



An auditor would express an unqualified opinion with an explanatory paragraph added to the auditor's report for:

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): D

Explanation:

Choice "d" is correct. An unjustified accounting change may cause the auditor to issue a qualified or adverse opinion. A material weakness must be reported to management and those charged with governance, but would not be disclosed in an explanatory paragraph appended to an otherwise unqualified opinion.
Choices "a", "b", and "c" are incorrect, as per the above Explanation.



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