AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1191:

  Which of the following is not true regarding an engagement to provide a written report on the application of accounting principles?

  A. An accountant is prohibited from providing a report on the application of accounting principles to a transaction not involving the facts and circumstances of a specific entity.

  B. The accountant's written report on the application of accounting principles should include an identification of the specific entity involved.

  C. An accountant is prohibited from providing a report on the application of accounting principles to a proposed future transaction involving the facts and circumstances of a specific entity.

  D. The accountant's written report on the application of accounting principles should include a paragraph restricting the use of the report.

  Correct Answer: C

  Explanation: Choice "c" is correct. An accountant may report on the application of accounting principles to a proposed future transaction as long as the transaction involves the facts and circumstances of a specific entity. Choice "a" is incorrect. An accountant is prohibited from providing a report on the application of accounting principles to "hypothetical transactions," which are defined as those not involving the facts and circumstances of a specific entity. Choices "b" and "d" are incorrect. The accountant's written report on the application of accounting principles should include an identification of the specific entity involved, a description of the transaction(s), a statement of the relevant facts, circumstances, and assumptions (and a statement that any changes therein may change the report), a statement about the source of the information, a statement describing the appropriate accounting principles or type of opinion that may be rendered, the reasons for the accountant's conclusions, a statement regarding management's responsibility, and a restrictive use paragraph.

• Question 1192:

  Green, CPA, was engaged to audit the financial statements of ABC Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of fieldwork made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditor's report most likely contained a(an):

  A. Unqualified opinion.

  B. Unqualified opinion with an explanatory paragraph.

  C. Qualified opinion due to a scope limitation.

  D. Qualified opinion due to a departure from generally accepted auditing standards.

  Correct Answer: A

  Explanation: Choice "a" is correct. There is a presumption that the auditor will request the confirmation of accounts receivable during an audit unless accounts receivable are immaterial, the use of confirmations would be ineffective, or the assessed inherent risk is so low that the evidence expected to be provided by analytical procedures or other substantive tests of details would be sufficient. In this example, the confirmation of accounts receivable by direct communication with the debtors would be ineffective. If Green was able to apply alternative audit procedures and was satisfied as to the reasonableness of the account balances, then an unqualified opinion could be issued. Choice "b" is incorrect. Since Green was satisfied as far as the accounts receivable balances, there is no need to add an explanatory paragraph. Choice "c" is incorrect. Since Green was able to perform alternative procedures and was satisfied as far as the reasonableness of the account balances, there is no scope limitation. Choice "d" is incorrect. Since Green was able to perform alternative procedures and was satisfied as far as the reasonableness of the account balances, there is no departure from generally accepted auditing standards.

• Question 1193:

  When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the auditor's report. This paragraph should identify the nature of the change and:

  A. Explain why the change is justified under generally accepted accounting principles.

  B. Describe the cumulative effect of the change on the audited financial statements.

  C. State the auditor's explicit concurrence with or opposition to the change.

  D. Refer to the financial statement note that discusses the change in detail.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The paragraph should refer to the note in the financial statements that discusses the

  change in detail. Following is an example of an appropriate explanatory paragraph: "As discussed in Note

  X to the financial statements, the company changed its method of accounting for income taxes in X2."

  Choice "a" is incorrect. The auditor need not explain why a change from one generally accepted

  accounting principle to another is justified.

  Choice "b" is incorrect. The paragraph should not identify the cumulative effect of the change on the

  audited financial statements.

  Choice "c" is incorrect. The auditor should never explicitly state concurrence with a change. If the auditor

  opposes the change, a qualified or adverse opinion should be issued.

• Question 1194:

  In which of the following circumstances would an auditor most likely add an explanatory paragraph to the standard report while not affecting the auditor's unqualified opinion?

  A. The auditor is asked to report on the balance sheet, but not on the other basic financial statements.

  B. There is substantial doubt about the entity's ability to continue as a going concern.

  C. Management's estimates of the effects of future events are unreasonable.

  D. Certain transactions cannot be tested because of management's records retention policy.

  Correct Answer: B

  Explanation: Choice "b" 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 to reflect that conclusion. Choice "a" is incorrect. Reporting on just the balance sheet is acceptable provided access to financial information is not limited. Such reporting does not require an explanatory paragraph. Choice "c" is incorrect. If the auditor concludes that management's estimate is unreasonable and that its effect is to cause the financial statements to be materially misstated, the auditor should express a qualified or an adverse opinion. Choice "d" is incorrect. Restrictions on the scope of the audit, whether imposed by the client or by circumstances, may require the auditor to qualify or to disclaim an opinion.

• Question 1195:

  If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an):

  A. Disclaimer of opinion.

  B. Qualified opinion.

  C. Review report.

  D. Unqualified opinion with a separate explanatory paragraph.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. If a company issues financial statements that purport to present financial position and

  results of operations but omits the related statement of cash flows, the auditor will normally conclude that

  the omission requires qualification of the opinion.

  Choice "a" is incorrect. If the company fails to present its statement of cash flows, this is considered

  inadequate disclosure. The auditor would not issue a disclaimer of opinion for inadequate disclosure.

  Choice "c" is incorrect. The auditor would not issue a review report when performing an audit.

  Choice "d" is incorrect. The auditor cannot issue an unqualified report if the client omits a statement of

  cash flows from the financial statements.

• Question 1196:

  An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(an):

  A. "Except for" qualified opinion.

  B. Explanatory paragraph.

  C. Unqualified opinion.

  D. Consistency modification.

  Correct Answer: C

  Explanation: Choice "c" is correct. If an accounting change has no material effect on the financial statements in the current year, but a material future effect, the auditor must ensure that the change is disclosed in the footnotes whenever the financial statements of the change period are presented, but does not have to recognize the change in the current year's audit report. Choice "a" is incorrect. Accounting changes that are accounted for properly do not result in qualified opinions. Choices "b" and "d" are incorrect. A consistency modification (explanatory paragraph) is not necessary when the effect of a change is immaterial.

• Question 1197:

  When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the

  nature of the omission in a separate explanatory paragraph and modify the:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: D

  Explanation:

  Choice "d" is correct. In a report qualified for inadequate disclosure, the auditor would add an explanatory

  paragraph and modify the opinion paragraph, but the introductory and scope paragraphs would not be

  modified.

  Choices "a", "b", and "c" are incorrect, as per the above explanation.

• Question 1198:

  An auditor decides to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to:

  A. A client-imposed scope limitation.

  B. A departure from generally accepted auditing standards.

  C. The possible effects on the financial statements.

  D. Inadequate disclosure of necessary information.

  Correct Answer: C

  Explanation: Choice "c" is correct. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself. Choice "a" is incorrect. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself. Choice "b" is incorrect. A scope limitation is a departure from generally accepted auditing standards. However, when an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself. Choice "d" is incorrect. Inadequate disclosure of necessary information is a departure from GAAP, rather than a scope limitation.

• Question 1199:

  When disclaiming an opinion due to a client-imposed scope limitation, an auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards. The auditor should also omit the:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: D

  Explanation:

  Choice "d" is correct. When disclaiming an opinion because of scope limitations, the auditor should

  indicate in a separate paragraph(s) the reasons that the audit did not comply with GAAS. The auditor

  should also omit the scope paragraph. The opinion paragraph is not omitted; however, it indicates that no

  opinion is expressed.

  Choices "a", "b", and "c" are incorrect, as per the above explanation.

• Question 1200:

  In which of the following circumstances would an auditor be most likely to express an adverse opinion?

  A. The chief executive officer refuses the auditor access to minutes of board of directors' meetings.

  B. Tests of controls show that the entity's internal control is so poor that it cannot be relied upon.

  C. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.

  D. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. An adverse opinion is issued when the financial statements are not presented in

  accordance with GAAP.

  Choice "a" is incorrect. The client's refusal to provide access to the minutes of the Board of Directors'

  meetings would result in a disclaimer of opinion.

  Choice "b" is incorrect. If internal control is so poor that it cannot be relied upon, the auditor must consider

  the effect on the audit procedures and subsequent report, but would not issue an adverse opinion.

  Choice "d" is incorrect. Substantial doubt with regard to the entity's ability to continue as a going concern

  should be disclosed in an additional explanatory paragraph appended to an otherwise unqualified opinion.