AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1201:

  Which paragraphs of an auditor's standard report on financial statements should refer to generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP)?

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Explanation:

  Choice "c" is correct. The auditor states that the audit was conducted in accordance with GAAS in the

  scope paragraph. The auditor expresses an opinion on the financial statements' conformity with GAAP in

  the opinion paragraph.

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

• Question 1202:

  Park, CPA, was engaged to audit the financial statements of ABC Co., a new client, for the year ended December 31, 20X3. Park obtained sufficient audit evidence for all of ABC's financial statement items except ABC's opening inventory. Due to inadequate financial records, Park could not verify ABC's January 1, 20X3, inventory balances. Park's opinion on ABC's 20X3 financial statements most likely will be:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: B

  Explanation:

  Choice "b" is correct. When the auditor is unable to satisfy himself or herself regarding the amount of

  beginning inventory, he or she must disclaim an opinion on the income statement because of the inability

  to verify the cost of goods sold during the year. The auditor may, however, still be able to issue an

  unqualified opinion on the balance sheet, since inventory can be verified as of the balance sheet date.

  Choices "a", "c", and "d" are incorrect, based on the explanation above.

• Question 1203:

  When single-year financial statements are presented, an auditor ordinarily would express an unqualified opinion in an unmodified report if the:

  A. Auditor is unable to obtain audited financial statements supporting the entity's investment in a foreign affiliate.

  B. Entity declines to present a statement of cash flows with its balance sheet and related statements of income and retained earnings.

  C. Auditor wishes to emphasize an accounting matter affecting the comparability of the financial statements with those of the prior year.

  D. Prior year's financial statements were audited by another CPA whose report, which expressed an unqualified opinion, is not presented.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Since only single-year financial statements are presented, the fact that another CPA

  audited the prior year's financial statements is not relevant. Therefore, the auditor would express an

  unqualified opinion in an unmodified report.

  Choice "a" is incorrect. The situation described would result in a qualified opinion or disclaimer of opinion

  due to a scope limitation.

  Choice "b" is incorrect. The situation described would result in a qualified opinion due to inadequate

  disclosure.

  Choice "c" is incorrect. The situation described would result in an otherwise unqualified opinion modified by

  adding an additional explanatory paragraph after the opinion paragraph.

• Question 1204:

  When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should:

  A. Refer to the change in an explanatory paragraph.

  B. Explicitly concur that the change is preferred.

  C. Not refer to consistency in the auditor's report.

  D. Refer to the change in the opinion paragraph.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. If an accounting change has no material effect on the comparability of the financial

  statements, the auditor does not need to recognize the change in the current year's audit report.

  Choice "a" is incorrect. The change would only be referred to in an explanatory paragraph if the effect were

  material.

  Choice "b" is incorrect. The auditor does not explicitly concur with the change in the report.

  Choice "d" is incorrect. Even if the change had a material effect, the opinion paragraph would not be

  affected. The explanatory paragraph would follow the opinion paragraph.

• Question 1205:

  An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph:

  A. Is considered an "except for" qualification of the opinion.

  B. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.

  C. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing Explanation: ."

  D. Is appropriate and would not negate the unqualified opinion.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Emphasis of a matter should be disclosed in an explanatory paragraph appended to

  an otherwise unqualified opinion.

  Choice "a" is incorrect. An "except for" qualification is used for a scope limitation or a departure from

  GAAP, but not for emphasis of a matter.

  Choice "b" is incorrect. The auditor may emphasize a matter even if it is included in the footnotes.

  Choice "c" is incorrect. A phrase such as "with the foregoing Explanation: " should not be used in an

  unqualified opinion.

• Question 1206:

  Reference in a principal auditor's report to the fact that part of the audit was performed by another auditor

  most likely would be an indication of the:

  A. Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.

  B. Lack of materiality of the portion of the financial statements audited by the other auditor.

  C. Principal auditor's recognition of the other auditor's competence, reputation, and professional certification.

  D. Different opinions the auditors are expressing on the components of the financial statements that each audited.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Reference to another auditor indicates division of responsibility for the audits of the

  components of the overall financial statements.

  Choice "b" is incorrect. Reference to another auditor would not generally be made if the other auditor's

  portion of the financial statements were immaterial.

  Choice "c" is incorrect. The reference in the report is not meant to recognize the qualifications of the other

  auditor, but simply to divide the responsibility between the two auditors.

  Choice "d" is incorrect. The reference to the other auditor would be made regardless of what type of

  opinion is expressed by each auditor.

• Question 1207:

  When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to:

  A. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.

  B. Consider the adequacy of disclosure about the client's possible inability to continue as a going concern.

  C. Report to the client's audit committee that management's accounting estimates may need to be adjusted.

  D. Reissue the prior year's auditor's report and add an explanatory paragraph that specifically refers to "substantial doubt" and "going concern."

  Correct Answer: B

  Explanation: Choice "b" is correct. When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to consider the adequacy of disclosure about the entity's possible inability to continue as a going concern and include an explanatory paragraph in the audit report. Choice "a" is incorrect. The auditor would include an explanatory paragraph following the unqualified opinion, or disclaim an opinion due to a material uncertainty. A qualified or adverse opinion is not appropriate for doubt about an entity's ability to continue as a going concern. Choice "c" is incorrect. Management's accounting estimates are unrelated to going concern issues. Choice "d" is incorrect. Going concern issues are considered prospectively. It is not appropriate to reissue a prior audit report if doubt arises about an entity's ability to continue in a future period.

• Question 1208:

  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. Documenting that internal control is not being relied on.

  B. Reading the financial statements for obvious material misstatements.

  C. Ascertaining whether the financial statements are in conformity with GAAP.

  D. Determining whether management has elected to omit substantially all required disclosures.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The accountant is only required to read the financial statements for obvious material

  misstatements.

  Choice "a" is incorrect. The accountant need not document that internal control is not being relied on.

  Choices "c" and "d" are incorrect. The accountant is not required to evaluate conformity with GAAP, but

  any known departures (including inadequate disclosure) should be described in the disclaimer.

• Question 1209:

  Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

  A. Inspecting title documents to verify whether any assets are pledged as collateral.

  B. Confirming with third parties the details of arrangements to maintain financial support.

  C. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.

  D. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

  Correct Answer: B

  Explanation: Choice "b" is correct. Confirming with third parties the details of arrangements to provide or "maintain (needed) financial support" is an audit procedure that may identify doubts about an entity's ability to

  continue as a going concern.

  Choice "a" is incorrect. Inspecting title documents provides evidence of ownership of assets but would not

  necessarily identify conditions affecting an entity's ability to continue as a going concern.

  Choice "c" is incorrect. Reconciling the cash balance per books with the cut-off bank statement and the

  bank confirmation provides evidence of completeness and valuation, but would not necessarily identify

  conditions affecting an entity's ability to continue as a going concern.

  Choice "d" is incorrect. Comparing an entity's policies to other entities in the industry would not necessarily

  identify conditions affecting an entity's ability to continue as a going concern.

• Question 1210:

  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):

  A. Regulation S-X exemption.

  B. Report on pro forma financial statements.

  C. Unaudited association report.

  D. Disclaimer of opinion.

  Correct Answer: 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.