cpa audit review ch16 review 7

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cpa audit review ch16 review 7
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2014-10-19 23:07:13
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cpa audit review ch16 review 7
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  1. Which of the following circumstances would not be considered a departure from the auditor’s unmodified report?

    A.The auditor wishes to emphasize a particular matter regarding the financial statements.

    B.The auditor’s opinion is based in part on the report of another auditor.

    C.The financial statements are affected by a departure from a generally accepted accounting principle.

    D.The auditor is asked to report only on the balance sheet, and the auditor can comply with relevant standards.
    D.The auditor is asked to report only on the balance sheet, and the auditor can comply with relevant standards.

    The auditor may report on one basic financial statement and not on the others if (1) the auditor complies with all AU-C sections relevant to the audit, (2) the audit is feasible, and (3) the auditor can perform procedures on interrelated items. For example, (1) sales and receivables, (2) inventory and payables, and (3) equipment and depreciation are interrelated.
  2. The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of

    A.Generally accepted accounting principles.

    B.Quality control.

    C.The auditor’s assessment of the risk of material misstatement.

    D.Generally accepted auditing standards, which include the concept of materiality.
    A.Generally accepted accounting principles.

    Reporting standards require the auditor to state whether the audited entity’s financial statements are presented in conformity with GAAP. Without an applicable reporting framework, the auditor would have no uniform standard for judging fairness of presentation.
  3. The opinion paragraph of the auditor’s report --------------- states whether the financial statements are in accordance with the applicable financial reporting framework, e.g., U.S. GAAP or IFRS. The adequacy of disclosure is -------------- in the auditor’s report.
    explicitly

    implicit
  4. Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?

    A.The auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme.

    B.Management refuses to produce documentation verifying the ownership of its equipment and production facilities.

    C.The chief financial officer and the chief executive officer are unwilling to sign the management representation letter.

    D.The company issues financial statements that purport to present financial position and results of operations but refuses to include the related statement of cash flows.
    D.The company issues financial statements that purport to present financial position and results of operations but refuses to include the related statement of cash flows.

    An entity that reports financial position and results of operations should provide a statement of cash flows. Thus, the omission of the cash flow statement is normally a basis for modifying the opinion. If the statements fail to disclose required information, the auditor should provide the information in the report, if practicable. However, the auditor is not required to prepare a basic financial statement. Accordingly, (s)he should qualify the opinion because of a material misstatement and explain the reason in a basis for qualified opinion paragraph.
  5. Under which of the following circumstances would a disclaimer of opinion not be appropriate?

    A.The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.

    B.Management does not provide reasonable justification for a change in accounting principles.

    C.The chief executive officer is unwilling to sign the management representation letter.

    D.The auditor is unable to determine the amounts associated with an employee fraud scheme.
    B.Management does not provide reasonable justification for a change in accounting principles.

    If (1) the new principle and the method of accounting for the effect of the change are in accordance with the applicable reporting framework, (2) disclosures are adequate, and (3) the entity has justified that the principle is preferable, the auditor expresses an unmodified opinion. Otherwise, if the change is material, the misstatement results in expression of a qualified or an adverse opinion in the report for the year of change. A basis for modified opinion paragraph is added preceding the opinion paragraph.
  6. A limitation on the scope of an audit sufficient to preclude an unmodified opinion is most likely to result when management

    A.Prevents the auditor from reviewing the audit documentation of the predecessor auditor.

    B.Refuses to furnish a management representation letter to the auditor.

    C.Fails to correct a material internal control weakness that had been identified during the prior year’s audit.

    D.Engages the auditor after the year-end physical inventory count is completed.
    B.Refuses to furnish a management representation letter to the auditor.

    According to AU-C 580, Written Representations, management’s refusal to furnish written representations constitutes a limitation on the scope of the audit. The refusal is often sufficient to preclude an unmodified opinion. Moreover, it may cause an auditor to disclaim an opinion or withdraw from the engagement, especially with regard to representations about (1) fraud, (2) noncompliance, (3) uncorrected misstatements, (4) litigation and claims, (5) estimates, (6) related party transactions, and (7) subsequent events. However, the circumstances may permit a qualified opinion. Furthermore, the auditor should consider the effects of management’s refusal on his/her ability to rely on other management representations.
  7. An auditor decides to express 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.Inadequate disclosure of necessary information.

    B.The possible effects on the financial statements.

    C.A departure from generally accepted auditing standards.

    D.A client-imposed scope limitation.
    B.The possible effects on the financial statements.

    AU-C 705 states that, when an auditor qualifies his/her 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.
  8. When a certified public accountant who is not independent is associated with financial statements, (s)he is precluded from expressing an opinion because

    A.(S)he will be in the position of auditing his/her own work.

    B.(S)he will be placed in the position of suffering an adverse decision in a possible liability suit.

    C.The public will be aware of his/her lack of independence and would place little or no faith in the opinion.

    D.Any auditing procedures (s)he might perform will not be in accordance with generally accepted auditing standards.
    D.Any auditing procedures (s)he might perform will not be in accordance with generally accepted auditing standards.

    An auditor is associated with financial information when (s)he applies procedures that suffice to report in accordance with GAAS. The auditor must be independent of the entity when performing an engagement in accordance with GAAS unless (1) GAAS provide otherwise or (2) the auditor is required by law to accept and report on the engagement. Barring one of the exceptions, an auditor who is not independent must not report under GAAS. Independence means independence in fact and appearance (AU-C 200). This crucially important quality gives credibility to the auditor’s opinion. If an auditor does not maintain the appearance of independence, however unbiased (s)he may be in fact, the public will be reluctant to believe that (s)he is unbiased.
  9. When an auditor expresses an adverse opinion, the matter resulting in the modification should be described in a paragraph

    A.Following the opinion paragraph.

    B.Within the notes to the financial statements.

    C.Preceding the auditor’s responsibility section.

    D.Preceding the opinion paragraph.
    D.Preceding the opinion paragraph.

    When an adverse opinion is expressed, the opinion paragraph should refer to a basis for adverse opinion paragraph that precedes the opinion paragraph. This paragraph describes the matter resulting in the modification (AU-C 705).

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