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Free AICPA CPA-Auditing Exam Questions (page: 5)

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Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an:

  1. Unqualified opinion.
  2. Opinion qualified because of a lack of consistency.
  3. Opinion qualified because of a departure from GAAP.
  4. Adverse opinion.

Answer(s): A

Explanation:

Choice "a" is correct. GAAP allows a company to use different methods for costing different inventories as long as the methods are disclosed. Thus, the audit report would be unqualified; there is no departure from GAAP.
Choice "b" is incorrect. The consistency standard refers to changes in application of accounting practices between periods, affecting the comparability of financial statements. There is no indication Digit made any change in methods.
Choice "c" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in a qualification of the auditor's report. Choice "d" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in an adverse report.



In which of the following circumstances would an auditor not express an unqualified opinion?

  1. There has been a material change between periods in accounting principles.
  2. Quarterly financial data required by the SEC has been omitted.
  3. The auditor wishes to emphasize an unusually important subsequent event.
  4. The auditor is unable to obtain audited financial statements of a consolidated investee.

Answer(s): D

Explanation:

Choice "d" is correct. The inability to obtain audited financial statements of a consolidated investee represents a scope limitation which may result in either a qualified opinion or a disclaimer of opinion.
Choice "a" is incorrect. A material change in accounting principles between periods is disclosed in an explanatory paragraph added to an otherwise unqualified opinion. Choice "b" is incorrect. Omission of selected quarterly data required by SEC regulations is disclosed in an explanatory paragraph added to an otherwise unqualified opinion. Choice "c" is incorrect. Emphasis of a matter is disclosed in an explanatory paragraph added to an otherwise unqualified opinion.



Management of Edgington Industries plans to disclose an uncertainty as follows:
The Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. The auditor is satisfied that sufficient audit evidence supports management's assertions about the nature and disclosure of the uncertainty.
What type of opinion should the auditor express under these circumstances?

  1. Unqualified without an explanatory paragraph.
  2. "Subject to" qualified.
  3. "Except for" qualified.
  4. Disclaimer of opinion.

Answer(s): A

Explanation:

Choice "a" is correct. The note presented describes an uncertainty that is properly discloseD. An explanatory paragraph is not required in the unqualified opinion. Choice "b" is incorrect. A "subject to" qualified opinion should never be issued. Choice "c" is incorrect. Since the auditor is satisfied that the assertion and disclosure are supported by the existing evidence, a qualified opinion is not required. Choice "d" is incorrect. Since the auditor is satisfied that the assertion and disclosure are supported by the existing evidence, there is no need for the auditor to disclaim an opinion.



Kane, CPA, concludes that there is substantial doubt about Lima Co.'s ability to continue as a going concern for a reasonable period of time. If Lima's financial statements adequately disclose its financial difficulties, Kane's auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s):

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

Answer(s): D

Explanation:

Choice "d" 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 (following the opinion paragraph) to reflect that conclusion. This conclusion should be expressed through the use of the phrase "substantial doubt about its (the entity's) ability to continue as a going concern" [or similar wording that includes the terms "substantial doubt" and "going concern"]. The "reasonable period...not to exceed one year" is inherent in the definition of going concern and is not explicitly stated in the audit report. The phrase "possible discontinuation of operations" may be included in the going concern disclosure but is not specifically required. Choices "a", "b", and "c" are incorrect, as per the above Explanation.



Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when reporting on Tech's audited financial statements for the year ended June 30, 19X4. That doubt has been removed in 19X5.
What is Mead's reporting responsibility if Tech is presenting its financial statements for the year ended June 30, 19X5, on a comparative basis with those of 19X4?

  1. The explanatory paragraph included in the 19X4 auditor's report should not be repeated.
  2. The explanatory paragraph included in the 19X4 auditor's report should be repeated in its entirety.
  3. A different explanatory paragraph describing Mead's reasons for the removal of doubt should be included.
  4. A different explanatory paragraph describing Tech's plans for financial recovery should be included.

Answer(s): A

Explanation:

Choice "a" is correct. If substantial doubt about the entity's ability to continue as a going concern has been removed in the current period, the explanatory paragraph included in the prior period auditor's report should not be repeated, and no description of the reasons or plans for recovery need be included.
Choice "b" is incorrect. If doubt about the going concern assumption has been removed in the current period, it is not appropriate to include the explanatory paragraph from the prior year in the auditor's report for the current year.
Choice "c" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The auditor does not have to explain the reason for the change.
Choice "d" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The entity does not have to describe its plans for the future.



March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to:

  1. Monday Corp., the client that engaged March.
  2. Wall Corp., the entity audited by March.
  3. 1st Federal Bank.
  4. Both Monday Corp. and 1st Federal Bank.

Answer(s): A

Explanation:

Choice "a" is correct. The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday.
Choice "b" is incorrect. Wall Corp. did not engage the auditors and thus the report should not be addressed to them.
Choices "c" and "d" are incorrect. Even though the bank will be relying on the audited financial statements in determining whether to make the loan, the bank did not directly engage the auditing firm and accordingly, the report should not be addressed to them.



An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor's report but before issuance of the related financial statements. The auditor's responsibility for events occurring subsequent to the original report date was:

  1. Limited to include only events occurring up to the date of the last subsequent event referenced.
  2. Limited to the specific event referenced.
  3. Extended to subsequent events occurring through the later date.
  4. Extended to include all events occurring since the original report date.

Answer(s): B

Explanation:

Choice "b" is correct.
When an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditor's report, but before issuance of the related financial statements, the auditor's responsibility for events occurring subsequent to the original report date is limited to the specific event referenced.
Choices "a", "c", and "d" are incorrect. The auditor takes responsibility for only the specific event noted in the dual dating and no other event occurring subsequent to the original report date.



When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):

  1. Regulation S-X exemption.
  2. Report on pro forma financial statements.
  3. Unaudited association report.
  4. Disclaimer of opinion.

Answer(s): D

Explanation:

Choice "d" is correct.
When an accountant is associated with the financial statements of a public entity, but has not audited or reviewed such statements, the accountant must issue a report disclaiming any opinion on the statements.
Choices "a", "b", and "c" are incorrect since a disclaimer is required in this case.



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