cpa audit review ch13 to ch 17 review 4

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cpa audit review ch13 to ch 17 review 4
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cpa audit review ch13 to ch 17 review 4
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  1. Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

    A.Investigating changes in equity occurring after year end.

    B.Confirming bank accounts established after year end

    .C.Recomputing a sample of large-dollar transactions occurring after year end for arithmetic accuracy.

    D.Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising after year end.
    D.Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising after year end.

    Subsequent events procedures include (1) reading the latest subsequent interim statements, if any; (2) inquiring of management and those charged with governance about the occurrence of subsequent events and various financial and accounting matters; (3) reading the minutes of meetings of owners, management, and those charged with governance; (4) obtaining a letter of representations from management; (5) inquiring of client’s legal counsel; and (6) obtaining an understanding of management’s procedures for identifying subsequent events.
  2. A limitation on the scope of the audit sufficient to preclude an unmodified opinion is most likely to result when management

    A.Asks the auditor to report on the balance sheet and not on the other basic financial statements.

    B.Discloses material related party transactions in the notes to the financial statements.

    C.Refuses to permit its lawyer to respond to the letter of audit inquiry.

    D.Knows that confirmation of accounts receivable is not feasible.
    C.Refuses to permit its lawyer to respond to the letter of audit inquiry.

    Direct communication with the entity’s external legal counsel should be made if actual or potential litigation, claims, or assessments may result in a risk of material misstatement. If management refuses to permit this communication, the auditor should modify the opinion.
  3. An auditor’s inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should

    A.Confirm the marketability of the derivatives with a commodity specialist.

    B.Evaluate management’s conclusion about the recognition of an impairment loss.

    C. Perform analytical procedures to determine if the derivatives are properly valued.

    D.Document the derivatives in the auditor’s communication with the audit committee.
    B.Evaluate management’s conclusion about the recognition of an impairment loss.

    The auditor (1) evaluates management’s conclusion about recognition of an impairment loss for a decline in fair value below cost or carrying amount and (2) obtains support for the amount of the recorded adjustment, including compliance with the reporting framework.
  4. Wilson, CPA, obtained sufficient appropriate audit evidence on which to base the opinion on Abco’s December 31, Year 1, financial statements on March 6, Year 2, the date of the auditor’s report. A subsequently discovered fact requiring revision of the Year 1 financial statements occurred on April 10, Year 2, and came to Wilson’s attention on April 24, Year 2. If the fact became known prior to the report release date, and the revision is made, Wilson’s report ordinarily should be dated

    A.April 24, Year 2.

    B.Using dual-dating.

    C.March 6, Year 2.

    D.April 10, Year 2.
    B.Using dual-dating.

    A subsequently discovered fact (1) becomes known to the auditor after the report date and (2) may cause the auditor to revise the report. The report date is no earlier than the date when sufficient appropriate evidence is obtained. If such a fact becomes known to the auditor before the report release date, the auditor should (1) discuss the matter with management and (2) determine whether the statements need revision (adjustment or disclosure). If management revises the statements, the auditor should perform the necessary procedures on the revision. The auditor also (1) dates the report as of a later date or (2) dual-dates the report. Dual-dating indicates that the procedures performed subsequent to the original date are limited to the revision. Unless the auditor extends subsequent events procedures to a new date (one presumably later than April 24, Year 2, the date when the subsequently discovered fact became known), the auditor should dual-date the report.
  5. When an auditor expresses an adverse opinion, the opinion paragraph should include

    A.The effects of the material misstatement.

    B.The financial effects of the misstatement.

    C.A direct reference to a separate paragraph disclosing the basis for the opinion.

    D.A description of the uncertainty or scope limitation that prevents an unmodified opinion.
    C.A direct reference to a separate paragraph disclosing the basis for the opinion.

    An adverse opinion states that the financial statements are not fairly presented in accordance with the applicable financial reporting framework. When an adverse opinion is expressed, the opinion paragraph should directly refer to a basis for adverse opinion paragraph that discloses the basis for the adverse opinion. This paragraph should precede the opinion paragraph (AU-C 705).
  6. After year end but before completion of the audit, a major investment adviser issued a pessimistic report on Investee Co.’s long-term prospects. The market price for its common stock subsequently declined significantly. What is the effect of this event on the year-end statements?

    A.No financial statement disclosure necessary.

    B.Adjustment of the financial statements.

    C.Disclosure in a note to the financial statements.

    D.Disclosure by means of supplemental, pro forma financial data.
    No financial statement disclosure necessary.

    The market price of common stock is not a financial event that affects the fairness or interpretation of the financial statements. Accordingly, no revision of the statements is necessary for changes in the market price of the securities.
  7. Subsequent events that provide evidence of conditions that arose subsequent to the date of the financial statements

    A.Require adjustment of the financial statements.

    B.Should ordinarily be disclosed in the auditor’s report.

    C.May require disclosure in notes to the financial statements.

    D.Should not be considered for any purposes.
    C.May require disclosure in notes to the financial statements.

    . According to U.S. GAAP, subsequent events that provide evidence of conditions arising after the balance sheet date but before the statements are issued or available to be issued are not recognized. However, a nonrecognized subsequent event may be of such a nature that it must be disclosed to keep the statements from being misleading.
  8. The possibility of the auditor’s failure to recognize a misstatement in an amount or a deviation from a prescribed control arises from

    A.Nonsampling risk.

    B.Statistical risk.

    C.The standard error of the mean.

    D.Sampling risk.
    A.Nonsampling risk.

    Nonsampling risk is the risk that the auditor may draw an erroneous conclusion for any reason not related to sampling risk. Examples include the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation. Nonsampling risk may be reduced to an acceptable level through such factors as adequate planning and proper conduct of a firm’s audit practice in accordance with the quality control standards (AU-C 530). Sampling risk results from the use of statistical sampling.
  9. Which of the following factors does an auditor usually need to consider in planning a particular audit sample for a test of controls?

    A.Total dollar amount of the items to be sampled.

    B.Acceptable risk of overreliance.

    C.Number of items in the population.

    D.Tolerable misstatement.
    B.Acceptable risk of overreliance.

    A test of controls is an application of attribute sampling. The initial size for an attribute sample from a large population is based on the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate, the tolerable population deviation rate, and the expected population deviation rate.
  10. If an issuer releases 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(n)

    A.Disclaimer of opinion.

    B.Qualified opinion.

    C.Review report.

    D.Unmodified opinion with a separate emphasis-of-matter paragraph.
    B.Qualified opinion.

    . 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 and explain the reason in a basis for qualified opinion paragraph.
  11. Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to accumulated depreciation accounts in the current year?

    A.Current year’s depreciation expense was erroneously understated.

    B.The estimated remaining useful lives of plant assets were revised upward.

    C.Plant assets were retired during the current year.

    D.Prior years’ depreciation expenses were erroneously understated.
    C.Plant assets were retired during the current year.

    If plant assets were retired during the current year, their carrying amount is removed from the accounts. Accordingly, the asset (plant assets) is credited, accumulated depreciation is debited, and any consideration received and gain or loss are recognized.
  12. For which of the following events would an auditor issue a report that omits any reference to a change in accounting principle or correction of a material misstatement?

    A.Management’s lack of reasonable justification for a material change in accounting principle

    .B.A change in the method of accounting for inventories.

    C.A change from an accounting principle that is not in accordance with the applicable reporting framework to one that is.

    D.A change in the useful life used to calculate the provision for depreciation expense.
    D.A change in the useful life used to calculate the provision for depreciation expense.

    A change in estimate is neither a change in accounting principle nor the correction of a material misstatement in previously issued financial statements. Thus, it requires no modification of the opinion or other recognition in the report. However, an exception is a change in estimate that is inseparable from a change in principle. The auditor evaluates and reports on this change as a change in principle.
  13. An auditor’s opinion reads as follows: “In our opinion, except for the above-mentioned limitation on the scope of our audit...” This is an example of an

    A.Acceptable review opinion.

    B.Acceptable emphasis of a matter.

    C.Unacceptable reporting practice.

    D.Acceptable qualified opinion.
    C.Unacceptable reporting practice.

    When an opinion is qualified because of a scope limitation, the opinion paragraph should indicate that the qualification pertains to the possible effects on the statements of undetected misstatements (AU-C 705). The language given in the question bases the qualification on the restriction itself and is unacceptable.
  14. Which of the following statements is true concerning the auditor’s use of statistical sampling?

    A.The selection of zero balances usually does not require special sample design considerations when using monetary-unit sampling.

    B.A classical variables sample needs to be designed with special considerations to include negative balances in the sample.

    C.An assumption of monetary-unit sampling is that the underlying accounting population is normally distributed.

    D.An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling.
    D.An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling.

    Variables sampling is used to estimate the amount of misstatement in, or the value of, a population. In auditing, this process entails estimating the monetary value of an account balance or other accounting total. The estimated population standard deviation is used in the sample size formula for variables estimation. Hence, it should be stated in dollar terms.
  15. The financial statements include a separate statement of changes in equity. This statement should

    A.Be excluded from both the introductory and opinion paragraphs.


    B.Be identified in the introductory paragraph of the report and must be reported on separately in the opinion paragraph.

    C.Be identified in the introductory paragraph of the report but need not be reported on separately in the opinion paragraph.

    D.Not be identified in the introductory paragraph but should be reported on separately in the opinion paragraph.
    C.Be identified in the introductory paragraph of the report but need not be reported on separately in the opinion paragraph.

    The balance sheet, statement of income, statement of changes in equity, and statement of cash flows are the financial statements upon which the auditor customarily reports. The introductory paragraph identifies the titles of the entity’s financial statements. However, the statement of changes in equity and a separate statement of comprehensive income are not separately reported on the opinion paragraph. The reason is that changes in equity and comprehensive income are included in financial position, results of operations, and cash flows.
  16. Legal counsel’s response to an auditor’s request for information regarding litigation, claims, and assessments will ordinarily contain which of the following?

    A.A statement of concurrence with management’s determination of which unasserted possible claims warrant specification.

    B.An explanation regarding limitations on the scope of the response.

    C.An assertion that the unasserted possible claims identified by the client represent all such claims of the entity.

    D.Confidential information that would be prejudicial to the entity’s defense if publicized.
    B.An explanation regarding limitations on the scope of the response.

    AU-C 501 indicates that a statement regarding the nature and reasons for any limitation on legal counsel’s response should be requested in the letter of inquiry. The letter is sent to legal counsel requesting confirmation of the information presented.
  17. 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 emphasis-of-matter paragraph added to the auditor’s report. This paragraph should describe the change and

    A.State the auditor’s explicit concurrence with or opposition to the change.

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

    C.Describe the cumulative effect of the change on all periods prior to those presented.

    D.Explain why the change is justified under the applicable reporting framework.
    B.Refer to the financial statement note that discusses the change in detail.

    When a change in accounting principle has a material effect on comparability, the auditor should add an emphasis-of-matter paragraph after the opinion paragraph that (1) uses the heading “Emphasis of Matter,” (2) describes the change in principle, (3) refers to the entity’s disclosure, and (4) indicates that the opinion is not modified with regard to the matter emphasized.

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