The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the:
A. Ability to expand operations into new product lines in the future.
B. Feasibility of plans to purchase leased equipment at less than market value.
C. Marketability of assets that management plans to sell.
D. Committed arrangements to convert preferred stock to long-term debt.
Correct Answer: C
Explanation: Choice "c" is correct. The adverse effects of events causing an auditor to believe there is a substantial doubt about an entity's ability to continue, as a going concern would most likely be mitigated by evidence relating to the marketability of assets that management plans to sell. By providing evidence that there is a ready market for assets that could be converted to cash, management has demonstrated that the company could remain in operation for a longer period of time, thereby mitigating the need for an explanatory paragraph describing the matter. Choices "a", "b", and "d" are incorrect. Evidence regarding the ability to expand operations into new product lines in the future, the feasibility of plans to purchase leased equipment at less than market value, or committed arrangements to convert preferred stock to long-term debt would not be sufficient to mitigate doubts about an entity's ability to continue as a going concern, unless it could also be demonstrated that the events would provide adequate cash flow to fund operations for at least the next year.
Question 1152:
When an auditor qualifies an opinion because of the inability to confirm accounts receivable by direct communication with debtors, the wording of the opinion paragraph of the auditor's report should indicate that the qualification pertains to the:
A. Limitation on the auditor's scope.
B. Possible effects on the financial statements.
C. Lack of sufficient appropriate audit evidence.
D. Departure from generally accepted auditing standards.
Correct Answer: B
Explanation:
Choice "b" is correct. When an auditor qualifies his or her opinion because of a scope limitation, such as
the inability to confirm A/R, the wording in the opinion paragraph should indicate that the qualification
pertains to the possible effects on the FS and not to the scope limitation itself.
The opinion paragraph should not refer to the scope limitation itself, the lack of evidence, or the departure
from GAAS.
Choices "a", "c", and "d" are incorrect, based on the above explanation.
Question 1153:
An auditor most likely would issue a disclaimer of opinion because of:
A. Inadequate disclosure of material information.
B. The omission of the statement of cash flows.
C. A material departure from generally accepted accounting principles.
D. Management's refusal to furnish written representations.
Correct Answer: D
Explanation:
Choice "d" is correct. Management's refusal to furnish written representations is a significant client
imposed restriction on the scope of an audit, ordinarily warranting a disclaimer of opinion.
Choice "a" is incorrect. Inadequate disclosure would result in a qualified or adverse opinion.
Choice "b" is incorrect. A qualified report would be appropriate when a "statement of cash flows" is omitted
and the scope of the audit is not restricted.
Choice "c" is incorrect. A departure from GAAP would result in either a qualified or adverse opinion,
depending on materiality.
Question 1154:
An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor's report. The auditor's responsibility for events occurring subsequent to the original date was:
A. Extended to subsequent events occurring through the date of reissuance of the report.
B. Extended to include all events occurring since the original date of the auditor's report.
C. Limited to the specific event referenced.
D. Limited to include only events occurring up to the date of the last subsequent event referenced.
Correct Answer: C
Explanation:
Choice "c" 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, the auditor's responsibility for events occurring subsequent to
the original date of the auditor's report is limited to the specific event referenced.
Choices "a", "b", and "d" are incorrect. The auditor takes responsibility for only the specific event noted in
the dual dating and for no other event occurring subsequent to the original date of the auditor's report.
Question 1155:
When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond:
A. Ascertaining whether the financial statements are in conformity with generally accepted accounting principles.
B. Determining whether management has elected to omit substantially all required disclosures.
C. Documenting that the internal control structure is not being relied on.
D. Reading the financial statements for obvious material misstatements.
Correct Answer: D
Explanation:
Choice "d" is correct. When an independent CPA assists in preparing the FS of a publicly held entity, but
has not "audited" or "reviewed" them, the CPA should issue a disclaimer of opinion and has only the
responsibility to read the FS for obvious material misstatements.
Choice "a" is incorrect. A disclaimer does not require ascertaining whether the FS are in conformity with
GAAP.
Choice "b" is incorrect. A disclaimer does not require ascertaining whether management has elected to
omit substantially all required disclosures.
Choice "c" is incorrect. A disclaimer of opinion does not require ascertaining whether or not the internal
control structure is being relied upon.
Question 1156:
An auditor's responsibility to express an opinion on the financial statements is:
A. Implicitly represented in the auditor's standard report.
B. Explicitly represented in the opening paragraph of the auditor's standard report.
C. Explicitly represented in the scope paragraph of the auditor's standard report.
D. Explicitly represented in the opinion paragraph of the auditor's standard report.
Correct Answer: B
Explanation:
Choice "b" is correct. The auditor's responsibility to express an opinion on the FS is explicitly represented
in the last sentence of the opening paragraph: "Our responsibility is to express an opinion on these
financial statements based on our audit."
Choice "a" is incorrect. The responsibility to express an opinion is explicitly represented (i.e., clearly
stated), not implicitly represented (i.e., assumed).
Choice "c" is incorrect. There are no words in the scope paragraph that represent an auditor's
responsibility to express an opinion.
Choice "d" is incorrect. The opinion paragraph includes the auditor's opinion, but does not specifically
mention the auditor's responsibility to express an opinion.
Question 1157:
What is an auditor's responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?
A. Label the information as unaudited and expand the auditor's report to include a disclaimer on the information.
B. Add an explanatory paragraph to the auditor's report and refer to the information as "required supplementary information."
C. Apply limited procedures to the information and report deficiencies in, or the omission of, the information.
D. Audit the required supplementary information in accordance with generally accepted governmental auditing standards.
Correct Answer: C
Explanation: Choice "c" is correct. With respect to supplementary information required by the GASB that is placed outside the basic financial statements, the auditor should apply limited procedures to the information (to determine that it is consistent with the basic audited financial statements) and report deficiencies in or the omission of the information (via an explanatory paragraph). Choice "a" is incorrect. If the information is labeled "unaudited," a disclaimer generally would not be necessary. Choice "b" is incorrect. The explanatory paragraph is only added if the supplemental information required by the GASB is deficient, omitted entirely, if the auditor cannot complete procedures, or if there is doubt about conformity with guidelines. Choice "d" is incorrect. The supplementary information required by the GASB is not required to be audited since it is placed outside of the basic financial statements; however, an opinion is permitted.
Question 1158:
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A. Recomputing a sample of large-dollar transactions occurring after year-end for arithmetic accuracy.
B. Investigating changes in stockholders' equity occurring after year-end.
C. Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after yearend.
D. Confirming bank accounts established after year-end.
Correct Answer: C
Explanation: Choice "c" is correct. The auditor would most likely inquire of the entity's legal counsel concerning litigation, claims and assessments arising after year-end in order to obtain evidence about the occurrence of subsequent events. Claims arising after year-end might well impact the year-end financial statements. Choice "a" is incorrect. Recomputing a sample of large-dollar transactions occurring after year-end for arithmetic accuracy would not provide evidence about year-end amounts. Choice "b" is incorrect. The auditor would inquire about changes in stockholders' equity occurring after year-end, but would not generally perform an investigation of such items. Choice "d" is incorrect. Confirming bank accounts established after year-end is generally not done (only those in existence at year-end are confirmed). Accounts established after year-end generally would not be relevant to year-end amounts.
Question 1159:
Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?
A. Option A
B. Option B
C. Option C
D. Option D
Correct Answer: D
Explanation:
Choice "d" is correct. No − No.
A qualified opinion phrase is, "in our opinion, except for [Explanation: of problem] as discussed in the
preceding paragraph . . ."
Choice "a" is incorrect, as "when read in conjunction with Note X" is not a phrase included in the opinion
paragraph of a qualified opinion.
Choice "b" is incorrect, as "with the foregoing Explanation: " is not a phrase included in the opinion
paragraph of a qualified opinion.
Choice "c" is incorrect. Neither phrase is included in the opinion paragraph of a qualified opinion.
(This is why it's important to memorize the qualifying phrases as well as the standard independent auditor's
report.)
Question 1160:
An auditor's report contains the following sentences: We did not audit the financial statements of ABC Co., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 17 percent and 19 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for ABC Co., is based solely on the report of the other auditors. These sentences:
A. Are an improper form of reporting.
B. Divide responsibility.
C. Disclaim an opinion.
D. Qualify the opinion.
Correct Answer: B
Explanation:
Choice "b" is correct. The report indicates a division of responsibility.
Choice "a" is incorrect. Words describing the percentages of revenues and assets audited by other
auditors are proper in dividing responsibility.
Choice "c" is incorrect. Dividing responsibility does not affect the unqualified opinion, nor does it require a
disclaimer of opinion.
Choice "d" is incorrect. Dividing responsibility does not affect the unqualified opinion, nor does it require a
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