AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1141:

  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:

  A. Adverse opinion.

  B. "Except for" qualified opinion.

  C. Unqualified opinion with an explanatory paragraph.

  D. Example of inappropriate reporting.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. "In our opinion, with the foregoing Explanation, 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,…andquot; 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

  Explanation: " in an explanatory paragraph.

• Question 1142:

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

  A. Seasoned judgment in varying degrees of supervision and review.

  B. Adequate technical training and proficiency.

  C. Knowledge of the standards of fieldwork and reporting.

  D. Independence with respect to the financial statements and supplementary disclosures.

  Correct Answer: 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.

• Question 1143:

  Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of ABC, Inc., a new audit client. Morris notified the audit committee and ABC'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:

  A. Express an unqualified opinion with a separate explanatory paragraph.

  B. Disclaim an opinion on the financial statements.

  C. Express an adverse opinion on the financial statements.

  D. Issue a special report regarding the illegal bribes.

  Correct Answer: 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.

• Question 1144:

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

  A. Subsequent events.

  B. The pro forma effects of a business combination.

  C. Sale of a discontinued operation.

  D. The results of confirmation of receivables.

  Correct Answer: 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.

• Question 1145:

  ABC 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:

  A. Lack of sufficient evidence.

  B. Inability to estimate the amount of loss.

  C. Entity's lack of experience with such litigation.

  D. Lack of insurance coverage for possible losses from such litigation.

  Correct Answer: 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.

• Question 1146:

  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?

  A. No, because such reporting may lead to the belief that the auditor is responsible for the information.

  B. No, because the auditor has no responsibility to read the other information in a document containing audited financial statements.

  C. Yes, provided the report provides negative assurance only.

  D. 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.

  Correct Answer: 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.

• Question 1147:

  Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?

  A. Review the cut-off bank statements for the period after the year-end.

  B. Inquire of the client's legal counsel concerning litigation.

  C. Investigate significant deficiencies in internal control previously communicated to the client.

  D. Analyze related party transactions to discover possible irregularities.

  Correct Answer: B

  Explanation: Choice "b" is correct. An auditor would most likely obtain a letter from the entity's legal counsel describing any pending litigation, unasserted claims, or loss contingencies, to obtain evidence that might impact the year-end financial statements. Choice "a" is incorrect. Reviewing cut-off bank statements for the period after year-end generally is performed to evaluate the year-end cash balance, not to identify subsequent events. Choice "c" is incorrect. Investigating significant deficiencies in internal control previously communicated to the client would be a procedure performed as part of the planning process and would provide the auditor with information regarding the internal control structure, not subsequent events. Choice "d" is incorrect. Analyzing related party transactions to discover possible irregularities generally is performed to evaluate financial statement disclosure, not to identify subsequent events.

• Question 1148:

  Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances.

  The auditor should first:

  A. Request the permission of the client to undertake the confirmation of accounts receivable.

  B. Perform alternative procedures to provide a satisfactory basis for the unqualified opinion.

  C. Assess the importance of the omitted procedures to the auditor's ability to support the previously expressed opinion.

  D. Inquire whether there are persons currently relying, or likely to rely, on the unqualified opinion.

  Correct Answer: C

  Explanation: Choice "c" is correct. When an auditor discovers the omission of an audit procedure related to a previously issued report, the auditor should first assess the importance of the omitted procedure to the auditor's ability to support the previously expressed opinion. Choice "a" is incorrect. The auditor would request the permission of the client to undertake the confirmation of accounts receivable only after determining that the procedure was necessary to support the previously expressed opinion and no other alternative procedure had been performed. Choice "b" is incorrect. Alternative procedures would be performed only after the auditor determined that the procedure was necessary to support the previously expressed opinion. Choice "d" is incorrect. The auditor needs to be able to support (or revise) the previously issued opinion regardless of whether or not there are persons currently relying on it.

• Question 1149:

  Which of the following standards requires a critical review of the work done and the judgment exercised by those assisting in an audit at every level of supervision?

  A. Proficiency.

  B. Audit risk.

  C. Inspection.

  D. Due care.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The third general standard is: "The auditor must exercise due professional care in the

  planning and performance of the audit and the preparation of the report." This standard is interpreted to

  require a critical review of the work performed and the judgment exercised at every level of supervision.

  Choice "a" is incorrect. Proficiency relates to the first general standard (technical training and proficiency of

  an auditor).

  Choice "b" is incorrect. Audit risk and materiality underlie the application of all the standards of fieldwork

  and reporting, but are not standards themselves.

  Choice "c" is incorrect. Inspection pertains to the audit evidence standard, which is the third standard of

  fieldwork.

• Question 1150:

  An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary. Between which of the following opinions should the entity's auditor choose?

  A. Adverse and unqualified with an explanatory paragraph added.

  B. Disclaimer and unqualified with an explanatory paragraph added.

  C. Qualified and adverse.

  D. Qualified and disclaimer.

  Correct Answer: D

  Explanation: Choice "d" is correct. When an auditor is unable to obtain audited financial statements or other evidence supporting an entity's investment in a subsidiary (foreign or domestic), the auditor should issue a qualified or disclaimer of opinion depending on the materiality of the investment in the subsidiary. Choices "a", "b", and "c" are incorrect. An adverse opinion is only issued when the FS are not presented fairly in conformity with GAAP, and an unqualified opinion with an explanatory paragraph is not appropriate for a scope limitation.