AUDITING REVIEW

Spring, 2012

Exam – Reporting

Note: Remember to record your answers on this exam

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Answer the following questions on the enclosed answer sheet. 1. Negative assurance may be expressed when an accountant is requested to report on the

a. Compilation of prospective financial statements. b. Compliance with the provisions of the Foreign Corrupt Practices Act. c. Results of an engagement in which the auditors test compliance with a bank agreement and

the auditor has also performed an audit on the financial statements. d. Audit of historical financial statements.

2. A CPA is required to comply with the provisions of Statements on Standards for Attestation

Engagements (SSAE) when engaged to a. Report on financial statements that the CPA generated through the use of computer software. b. Review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC. c. Provide the client with a financial statement format that does not include dollar amounts. d. Audit financial statements that the client prepared for use in another country.

3. For a particular entity's financial statements to be presented fairly in conformity with generally

accepted accounting principles, it is not required that the principles selected a. Be appropriate in the circumstances for the particular entity. b. Reflect transactions in a manner that presents the financial statements within a range of

acceptable limits. c. Present information in the financial statements that is classified and summarized in a

reasonable manner. d. Be applied on a basis consistent with those followed in the prior year.

4. Doe, an independent auditor, was engaged to perform an examination of the financial statements

of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to gain satisfaction by applying alternative auditing procedures. Doe's auditor's report will probably contain a. A standard unqualified opinion. b. An unqualified opinion and an explanatory paragraph. c. Either a qualified opinion or a disclaimer of opinion. d. An "except for" qualification.

5. An accountant is required to comply with the provisions of Statements on Standards for

Accounting and Review Services when I. Reproducing client-prepared financial statements, without modification, as an

accommodation to a client. II. Preparing standard monthly journal entries for depreciation and expiration of prepaid

expenses. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

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6. A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when

Testifying as an expert Compiling a client's Witness in accounting financial projection that And auditing matters presents a hypothetical Given stipulated facts course of action _ a. Yes Yes b. Yes No c. No Yes d. No No 7. Which of the following circumstances requires modification of the accountant's report on a review

of interim financial information of a publicly held entity?

An Inadequate uncertainty disclosure

a. Yes Yes b. No No c. Yes No d. No Yes

8. When an auditor qualifies an opinion because of a scope limitation, which paragraph(s) of the

auditor's report should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself? a. The scope paragraph and the separate explanatory paragraph. b. The separate explanatory paragraph and the opinion paragraph. c. The scope paragraph only. d. The opinion paragraph only.

9. An accountant has compiled the financial statements of a nonpublic entity in accordance with

Statements on Standards for Accounting and Review Services (SSARS). Does SSARS require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant?

Printed on the Manually Signed Accountant's Letterhead by the Accountant a. Yes Yes b. Yes No c. No Yes d. No No 10. An auditor's report includes the following statement: "The financial statements do not present

fairly the financial position, results of operations, or cash flows in conformity with generally accepted accounting principles." This auditor's report was most likely issued in connection with financial statements that are a. Inconsistent. b. Based on prospective financial information. c. Misleading. d. Affected by a material uncertainty.

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11. Under which of the following circumstances would a disclaimer of opinion not be appropriate? a. The financial statements fail to contain adequate disclosure concerning related party

transactions. b. The client refuses to permit its attorney to furnish information requested in a letter of audit

inquiry. c. The auditor is engaged after fiscal year end and is unable to observe physical inventories or

apply alternative procedures to verify their balances. d. The auditor is unable to determine the amounts associated with illegal acts committed by the

client's management. 12. An auditor would express an unqualified opinion with an explanatory paragraph added to the

auditor's report for A material weakness An unjustified in the internal Accounting change control structure a. Yes Yes b. Yes No c. No Yes d. No No 13. Under which of the following circumstances would a disclaimer of opinion not be appropriate? a. 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. c. The client refuses to permit the auditor to confirm certain accounts receivable or apply

alternative procedures to verify their balances. d. The chief executive officer is unwilling to sign the management representation letter. 14. Reports are considered special reports when issued in connection with

a. Compliance with aspects of regulatory requirements related to audited financial statements. b. Pro forma financial presentations designed to demonstrate the effect of hypothetical transac-

tions. c. Feasibility studies presented to illustrate an entity's results of operations. d. Interim financial information reviewed to determine whether material modifications should

be made to conform with generally accepted accounting principles. 15. A CPA is associated with client-prepared financial statements, but is not independent. With

respect to the CPA's lack of independence, which of the following actions by the CPA might confuse a reader of such financial statements? a. Stamping the word "unaudited" on each page of the financial statements. b. Disclaiming an opinion and stating that independence is lacking. c. Issuing a qualified auditor's report explaining the reason for the auditor's lack of indepen-

dence. d. Preparing an auditor's report that included essential data that was not disclosed in the finan-

cial statements.

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16. Kane, CPA, concludes that there is substantial doubt about Lima Co.'s ability to continue as a going concern for a reasonable period of time. If Lima's financial statements adequately disclose its financial difficulties, Kane's auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s)

"Possible "Reasonable period discontinuance of time, not to of operations" exceed one year" a. Yes Yes b. Yes No c. No Yes d. No No

17. Which of the following best describes the auditor's reporting responsibility concerning

information accompanying the basic financial statements in an auditor-submitted document? a. The auditor has no reporting responsibility concerning information accompanying the basic

financial statements. b. The auditor should report on the information accompanying the basic financial statements

only if the auditor participated in its preparation. c. The auditor should report on the information accompanying the basic financial statements

only if the auditor did not participate in its preparation. d. The auditor should report on all the information included in the document.

18. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually

result when management a. is unable to obtain audited financial statements supporting the entity's investment in a foreign

subsidiary. b. refuses to disclose in the notes to the financial statements related party transactions

authorized by the Board of Directors. c. does not sign an engagement letter specifying the responsibilities of both the entity and the

auditor. d. fails to correct a reportable condition communicated to the audit committee after the prior

year's audit. 19. Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when

reporting on Tech's audited financial statements for the year ended June 30, 1994. That doubt has been removed in 1995. What is Mead's reporting responsibility if Tech is presenting its financial statements for the year ended June 30, 1995, on a comparative basis with those of 1994? a. The explanatory paragraph included in the 1994 auditor's report should not be repeated. b. The explanatory paragraph included in the 1994 auditor's report should be repeated in its

entirety. c. A different explanatory paragraph describing Mead's reasons for the removal of doubt should

be included. d. A different explanatory paragraph describing Tech's plans for financial recovery should be

included.

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20. During an engagement to review the financial statements of a nonpublic entity, an accountant becomes aware that several leases that should be capitalized are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should a. Issue an adverse opinion because of the departure from GAAP. b. Express no assurance of any kind on the entity's financial statements. c. Emphasize that the financial statements are for limited use only. d. Disclose the departure from GAAP in a separate paragraph of the accountant's report.

21. Jewel, CPA, audited Infinite Co.'s prior-year financial statements. These statements are presented

with those of the current year for comparative purposes without Jewel's auditor's report, which expressed a qualified opinion. In drafting the current year's auditor's report, Crain, CPA, the successor auditor, should

I. Not name Jewel as the predecessor auditor. II. Indicate the type of report issued by Jewel. III. Indicate the substantive reasons for Jewel's qualification. a. I only. b. I and II only. c. II and III only d. I, II, and III.

22. "There have been no communications from regulatory agencies concerning noncompliance with,

or deficiencies in, financial reporting practices that could have a material effect on the financial statement." The foregoing passage is most likely from a

a. Report on internal control. b. Special report. c. Management representation letter. d. Letter for underwriters. 23. Which of the following statements is correct about an auditor's required communication with an

entity's audit committee? a. Any matters communicated to the entity's audit committee also are required to be

communicated to the entity's management. b. The auditor is required to inform the entity's audit committee about significant errors

discovered by the auditor and subsequently corrected by management. c. Disagreements with management about the application of accounting principles are required

to be communicated in writing to the entity's audit committee. d. Weaknesses in the internal control structure previously reported to the entity's audit

committee are required to be communicated to the audit committee after each subsequent audit until the weaknesses are corrected.

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24. Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell refer to Smith's audit?

I. Pell reviews Smith's working papers and assumes responsibility for Smith's work but

expresses a qualified opinion on Tech's financial statements. II. Pell is unable to review Smith's working papers; however, Pell's inquiries indicate that Smith

has an excellent reputation for professional competence and integrity. a. I only. b. II only. c. Both I and II. d. Neither I nor II. 25. For which of the following events would an auditor issue a report that omits any reference to consistency? a. A change in the method of accounting for inventories. b. A change from an accounting principle that is not generally accepted to one that is generally

accepted. c. A change in the useful life used to calculate the provision for depreciation expense. d. Management's lack of reasonable justification for a change in accounting principle. 26. If information accompanying the basic financial statements in an auditor-submitted document has

been subjected to auditing procedures, the auditor may include in the auditor's report in the financial statements an opinion that the accompanying information is fairly stated in

a. Accordance with generally accepted auditing standards. b. Conformity with generally accepted accounting principles. c. All material respects in relation to the basic financial statements taken as a whole. d. Accordance with attestation standards expressing a conclusion about management's

assertions. 27. Financial information is presented in a printed form that prescribes the wording of the

independent auditor's report. The form is not acceptable to the auditor because the form calls for statements that are inconsistent with the auditor's responsibility. Under these circumstances, the auditor most likely would

a. Withdraw from the engagement. b. Reword the form or attach a separate report. c. Express a qualified opinion with an explanation. d. Limit distribution of the report to the party who designed the form. 28. In reporting on compliance with laws and regulations during a financial statement audit in

accordance with Government Auditing Standards, an auditor should include in the auditor's report a. A statement of assurance that all controls over fraud and illegal acts were tested. b. Material instances of fraud and illegal acts that were discovered. c. The materiality criteria used by the auditor in considering whether instances of

noncompliance were significant. d. An opinion on whether compliance with laws and regulations affected the entity's goals and

objectives.

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29. Although the scope of audits of recipients of federal financial assistance in accordance with

federal audit regulations varies, these audits generally have which of the following elements in common?

a. The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

b. The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient.

c. The auditor should obtain written management representations that the recipient's internal auditors will report their findings objectively without fear of political repercussion.

d. The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipient's financial statements are disclosed to the inspector general.

30. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going

concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s)

"Reasonable period of time, not to exceed one year" "Going concern" a. Yes Yes b. Yes No c. No Yes d. No No END OF TESTLET I – TEST CONTINUES ON THE NEXT PAGE.

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31. In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If the amounts in question could materially affect current operating results, the auditor would

a. Be unable to express an opinion on the current year's results of operations and cash flows. b. Express a qualified opinion on the financial statements because of a client-imposed scope

limitation. c. Withdraw from the engagement and refuse to be associated with the financial statements. d. Specifically state that the financial statements are not comparable to the prior year due to an

uncertainty. 32. An auditor was engaged to conduct a performance audit of a governmental entity in accordance

with Government Auditing Standards. These standards do not require, as part of this auditor's report a. A statement of the audit objectives and a description of the audit scope. b. Indications or instances of illegal acts that could result in criminal prosecution discovered

during the audit. c. The pertinent views of the entity's responsible officials concerning the auditor's findings. d. A concurrent opinion on the financial statements taken as a whole.

33. An auditor may report on condensed financial statements that are derived from complete financial

statements if the a. Condensed financial statements are distributed to shareholders along with the complete

financial statements. b. Auditor describes the additional procedures performed on the condensed financial statements. c. Auditor indicates whether the information in the condensed financial statements is fairly

stated in all material respects in relation to the complete financial statements from which it has been derived.

d. Condensed financial statements are presented in comparative form with the prior year's condensed financial statements.

34. In reporting under Government Auditing Standards, an auditor most likely would be required to communicate management's misappropriation of assets directly to a federal inspector general when the fraudulent activities are

a. Concealed by management by circumventing specific internal controls designed to safeguard those assets.

b. Reported to the entity's governing body and the governing body fails to make a required report to the federal inspector general.

c. Accompanied by fraudulent financial reporting that results in material misstatements of asset balances.

d. Perpetrated by several levels of management in a scheme that is likely to continue in future years.

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35. Key Co. plans to present comparative financial statements for the years ended December 31, 1998, and 1999, respectively. Smith, CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, 2000. Key's current management team was not present until January 1, 1999. What period of time should be covered by Key's management representation letter?

a. January 1, 1998 through December 31, 1999. b. January 1, 1998 through May 1, 2000. c. January 1, 1999 through December 31, 1999. d. January 1, 1999 through May 1, 2000. 36. On March 15, 1994, Kent, CPA, issued an unqualified opinion on a client's audited financial

statements for the year ended December 31, 1993. On May 4, 1994, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first

a. Advise management to disclose to the stockholders that Kent's unqualified opinion should not be relied on.

b. Undertake to apply alternative procedures that would provide a satisfactory basis for the unqualified opinion.

c. Reissue the auditor's report and add an explanatory paragraph describing the departure from generally accepted auditing standards.

d. Compensate for the omitted procedures by performing tests of controls to reduce audit risk to a sufficiently low level.

37. Which of the following statements is a standard applicable to financial statement audits in

accordance with Government Auditing Standards (the Yellow Book)? a. An auditor should report on the scope of the auditor's testing of internal controls. b. All instances of abuse, waste, and mismanagement should be reported to the audit committee. c. An auditor should report the views of responsible officials concerning the auditor's findings. d. Internal control activities designed to detect or prevent fraud should be reported to the

inspector general. 38. In connection with a proposal to obtain a new client, an accountant in public practice is asked to

prepare a written report on the application of accounting principles to a specific transaction. The accountant's report should include a statement that

a. Any difference in the facts, circumstances, or assumptions presented may change the report. b. The engagement was performed in accordance with Statements on Standards for Consulting

Services. c. The guidance provided is for management use only and may not be communicated to the

prior or continuing auditors. d. Nothing came to the accountant's attention that caused the accountant to believe that the

accounting principles violated GAAP. 39. 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.

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40. 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 director's meetings.

b. Tests of controls show that the entity's internal control structure 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.

41. Which of the following is a term for an attest engagement in which a CPA assesses a client's

commercial Internet site for predefined criteria that are designed to measure transaction integrity, information protection, and disclosure of business practices?

a. ElectroNet. b. EDIFACT. c. TechSafe. d. WebTrust. 42. When unaudited financial statements of a nonpublic entity are presented in comparative form with

audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and

I. The report on the unaudited financial statements should be reissued. II. The report on the audited financial statements should include a separate paragraph describing

the responsibility assumed for the unaudited financial statements. a. I only. b. II only c. Both I and II. d. Either I or II.

43. A CPA is required to comply with the provisions of Statements on Standards for Accounting and

Review Services when Processing financial Consulting on Data for clients of accounting Other CPA firms matters. a. Yes Yes b. Yes No c. No Yes d. No No 44. An entity engaged a CPA to determine whether the client's web sites meet defined criteria for

standard business practices and controls over transaction integrity and information protection. In performing this engagement, the CPA should comply with the provisions of

a. Statements on Assurance Standards. b. Statements on Standards for Attestation Engagements. c. Statements on Standards for Management Consulting Services. d. Statements on Auditing Standards.

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45. A scope limitation sufficient to preclude an unqualified opinion always will result when management

a. Prevents the auditor from reviewing the working papers of the predecessor auditor. b. Engages the auditor after the year-end physical inventory is completed. c. Requests that certain material accounts receivable not be confirmed. d. Refuses to acknowledge its responsibility for the fair presentation of the financial statements

in conformity with GAAP. 46. Which of the following is a documentation requirement that an auditor should follow when

auditing in accordance with Government Auditing Standards? a. The auditor should obtain written representations from management acknowledging

responsibility for correcting instances of fraud, abuse, and waste. b. The auditor's working papers should contain sufficient information so that supplementary

oral explanations are not required. c. The auditor should document the procedures that assure discovery of all illegal acts and

contingent liabilities resulting from noncompliance. d. The auditor's working papers should contain a caveat that all instances of material errors and

irregularities may not be identified. 47. In which of the following situations would an auditor ordinarily choose between expressing a

qualified opinion or an adverse opinion? a. The auditor did not observe the entity's physical inventory and is unable to become satisfied

about its balance by other auditing procedures. b. Conditions that cause the auditor to have substantial doubt about the entity's ability to

continue as a going concern are inadequately disclosed. c. There has been a change in accounting principles that has a material effect on the

comparability of the entity's financial statements. d. The auditor is unable to apply necessary procedures concerning an investor's share of an

investee's earnings recognized on the equity method. 48. When auditing an entity's financial statements in accordance with Government Auditing

Standards (the Yellow Book), an auditor is required to report on I. Noteworthy accomplishments of the program. II. The scope of the auditor's testing of internal controls. a. I only. b. II only. c. Both I and II. d. Neither I nor II. 49. When auditing an entity's financial statements in accordance with Government Auditing

Standards, an auditor should prepare a written report on the auditor's a. Identification of the causes of performance problems and recommendations for actions to

improve operations. b. Understanding of the internal control structure and assessment of control risk. c. Field work and procedures that substantiated the auditor's specific findings and conclusions. d. Opinion on the entity's attainment of the goals and objectives specified by applicable laws

and regulations.

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50. When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on

I. Recommendations for actions to improve operations. II. The scope of the auditor's tests of compliance with laws and regulations. a. I only. b. II only. c. Both I and II. d. Neither I nor II 51. 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

Scope Opinion paragraph paragraph a. No Yes b. Yes Yes c. No No d. Yes No

52. In reviewing the financial statements of a nonpublic entity, an accountant is required to modify

the standard report for which of the following matters? Inability to assess Discovery of signifi- The risk of material cant deficiencies in the Misstatement due to design of the entity's fraud internal control a. Yes Yes b. Yes No c. No Yes d. No No 53. Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to

financial data supplied by Modern Co. regarding Modern's written assertion about its compliance with contractual requirements to pay royalties. Mill's report on these agreed-upon procedures should contain a(n)

a. Disclaimer of opinion about the fair presentation of Modern's financial statements. b. List of the procedures performed (or reference thereto) and Mill's findings. c. Opinion about the effectiveness of Modern's internal control activities concerning royalty

payments. d. Acknowledgment that the sufficiency of the procedures is solely Mill's responsibility.

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54. Comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should a. Indicate the substantive reasons for the qualification in the predecessor auditor's opinion. b. Request the client to reissue the predecessor's report on the prior year's statements. c. Issue an updated comparative audit report indicating the division of responsibility. d. Express an opinion only on the current year's statements and make no reference to the prior

year's statements. 55. Dunn, CPA, is auditing the financial statements of Taft Co. Taft uses Quick Service Center

(QSC) to process its payroll. Price, CPA, is expressing an opinion on a description of the controls placed in operation at QSC regarding the processing of its customers' payroll transactions. Dunn expects to consider the effects of Price's report on the Taft engagement. Price's report should contain a(n)

a. Description of the scope and nature of Price's procedures. b. Statement that Dunn may assess control risk based on Price's report. c. Assertion that Price assumes no responsibility to determine whether QSC's controls are

suitably designed. d. Opinion on the operating effectiveness of QSC's internal controls. 56. 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. 57. When a CPA examines a client's projected financial statements, the CPA's report should a. Explain the principal differences between historical and projected financial statements. b. State that the CPA performed procedures to evaluate management's assumptions. c. Refer to the CPA's auditor's report on the historical financial statements. d. Include the CPA's opinion on the client's ability to continue as a going concern. 58. When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer

to the situation in the

Scope Notes to the Paragraph Financial Statements

a. Yes Yes b. Yes No c. No Yes d. No No

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59. The auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (GAGAS or the Yellow Book), is required to include I. The scope of the auditor's testing of internal controls. II. Uncorrected misstatements that were determined by management to be immaterial.

a. I only. b. II only. c. Both I and II. d. Neither I nor II.

60. The GAO standards of reporting for governmental financial audits incorporate the AlCPA

standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for governmental financial audits?

a. Auditors should report the scope of their testing of compliance with laws and regulations and of internal controls.

b. Material indications of illegal acts should be reported in a document distributed only to the entity's senior officials.

c. All changes in the audit program from the prior year should be reported to the entity's audit committee.

d. Any privileged or confidential information discovered should be reported to the organization that arranged for the audit.

END OF TESTLET 2 – TEST CONTINUES ON THE NEXT PAGE.

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61. Which of the following representations does an accountant make implicitly when issuing the standard report for the compilation of a nonpublic entity's financial statements'? a. The accountant is independent with respect to the entity. b. The financial statements have not been audited. c. A compilation consists principally of inquiries and analytical procedures. d. The accountant does not express any assurance on the financial statements.

62. An auditor most likely would modify an unqualified opinion if the entity's financial statements

include a footnote on related party transactions a. disclosing loans to related parties at interest rates significantly below prevailing market rates. b. describing an exchange of real estate for similar property in a nonmonetary related party

transaction. c. stating that a particular related party transaction occurred on terms equivalent to those that

would have prevailed in an arm's-length transaction. d. presenting the dollar volume of related party transactions and the effects of any change in the

method of establishing terms from prior periods. 63. If a client will not permit inquiry of outside legal counsel, the auditor's report ordinarily will

contain a(n) a. Adverse opinion. . b. Disclaimer of opinion. c. Unqualified opinion with a separate explanatory paragraph. d. Qualified opinion. 64. Which of the following expressions most likely would be included in a management

representation letter? a. No events have occurred subsequent to the balance sheet date that require adjustment to, or

disclosure in, the financial statements. b. There are no reportable conditions identified during the prior year's audit of which the audit

committee of the board of directors is unaware. c. We do not intend to provide any information that may be construed to constitute a waiver of

the attorney-client privilege. d. Certain computer files and other required evidential matter may exist only for a short period

of time and only in computer-readable form. 65. Which of the following procedures should an auditor perform concerning litigation, claims, and

assessments? a. Inspect legal documents in the possession of the client's lawyer that are relevant to pending

litigation and unasserted claims and assessments. b. Discuss with the client's lawyer its philosophy of defending litigation, claims, and

assessments that have a high probability of being resolved unfavorably. c. Confirm directly with the client's lawyer that all litigation, claims, and assessments have been

properly recorded in the financial statements. d. Obtain assurance from management that it has disclosed all unasserted claims that its lawyer

has advised are probable of assertion.

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66. Which of the following audit 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. Reading the minutes of meetings of the stockholders and the board of directors. b. Comparing the market value of property to amounts owed on the property. c. Reviewing lease agreements to determine whether leased assets should be capitalized. d. Inspecting the documents to verity whether any assets are pledged as collateral. 67. Which of the following statements is correct concerning an auditor's responsibility to report

fraud? a. The auditor is required to communicate to the client's audit committee all minor fraudulent

acts perpetrated by low-level employees, even if the amounts involved are inconsequential. b. The disclosure of material management fraud to principal stockholders is required when both

senior management and the board of directors fail to acknowledge the fraudulent activities. c. Fraudulent activities involving senior management of which the auditor becomes aware

should be reported directly to the SEC. d. The disclosure of fraudulent activities to parties other than the client's senior management

and its audit committee is not ordinarily part of the auditor's responsibility. 68. An accountant's standard report on a compilation of a projection should not include a statement

that a. There will usually be differences between the forecasted and actual results. b. The hypothetical assumptions used in the projection are reasonable in the circumstances. c. The accountant has no responsibility to update the report for future events and circumstances. d. The compilation of a projection is limited in scope. 69. "In connection with an audit of our financial statements, management has prepared, and furnished

to our auditors a description and evaluation of certain contingencies." The forgoing passage most likely is from a(n)

a. Audit inquiry letter to legal counsel. b. Management representation letter. c. Audit committee's communication to the auditor. d. Financial statement footnote disclosure. 70. Which of the following events occurring after the issuance of an auditor's report most likely

would cause the auditor to make further inquiries about the previously issued financial statements?

a. A lawsuit is resolved that is explained in a separate paragraph of the prior year's auditor's report.

b. New information discovered concerning undisclosed related-party transactions of the prior year.

c. A technological development occurs that affects the entity's ability to continue as a going concern.

d. The entity sells a subsidiary that accounts for 35% of the entity's consolidated sales.

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71. On February 9, Brown, CPA, expressed an unqualified opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement.

Brown should first a. Request Web's permission to perform substantive procedures that would provide a

satisfactory basis for the opinion. b. Inquire of Web whether there are persons currently relying, or likely to rely, on the financial

statements. c. Take no additional action because subsequent events have no effect on the financial

statements that were reported on. d. Assess the importance of the omitted procedures to Brown's present ability to support the

opinion. 72. An accountant has been asked to issue a review report on the balance sheet of a nonpublic entity

without reporting on the related statements of income, retained earnings, and cash flows. The accountant may issue the requested review report only if

a. The balance sheet is not to be used to obtain credit or distributed to the entity's creditors. b. The balance sheet is part of a comprehensive personal financial plan developed to assist the

entity. c. There have been no material changes during the year in the entity's accounting principles. d. The scope of the accountant's inquiry and analytical procedures has not been restricted. 73. When a CPA reports on audited financial statements prepared on the cash receipts and

disbursements basis of accounting, the report should a. Explain why this basis of accounting is more useful for the readers of this entity's financial

statements than GAAP. b. Refer to the note in the financial statements that describes management's responsibility for

the financial statements. c. State that the basis of presentation is a comprehensive basis of accounting other than GAAP. d. Include a separate explanatory paragraph that discusses the justification for, and the CPA's

concurrence with, the departure from GAAP. 74. An accountant is asked to issue a review report on the balance sheet, but not on other related

statements. The scope of the inquiry and analytical procedures has not been restricted, but the client failed to provide a representation letter. Which of the following should the accountant issue under these circumstances?

a. Review report with a qualification. b. Issue no report. c. Review report and footnote exceptions. d. Compilation report with the client's consent. 75. When an auditor has substantial doubt about an entity's ability to continue as a going concern

because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if

a. The effects of the adverse financial conditions likely will cause a bankruptcy filing. b. Information about the entity's ability to continue as a going concern is not disclosed. c. Management has no plans to reduce or delay future expenditures. d. Negative trends and recurring operating losses appear to be irreversible.

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76. Which of the following is a professional engagement that a CPA may perform to provide assurance on a system's reliability?

a. MAS AssurAbility. b. CPA WebMaster. c. MAS AttestSure. d. CPA SysTrust. 77. A practitioner's report on agreed-upon procedures that is in the form of procedures and findings

should contain a. Negative assurance that the procedures did not necessarily disclose all reportable conditions. b. An acknowledgment of the practitioner's responsibility for the sufficiency of the procedures. c. A statement of restrictions on the use of the report. d. A disclaimer of opinion on the entity's financial statements. 78. An auditor concludes that there is a material inconsistency in the other information in an annual

report to shareholders containing audited financial statements. The auditor believes that the financial statements do not require revision, but the client is unwilling to revise or eliminate the material inconsistency in the other information. Under these circumstances, what action would the auditor most likely take?

a. Consider the situation closed because the other information is not in the audited financial statements.

b. Issue an "except for" qualified opinion after discussing the matter with the client's audit committee.

c. Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory paragraph.

d. Revise the auditor's report to include a separate explanatory paragraph describing the material inconsistency.

79. The scope of audits of recipients of federal financial assistance in accordance with federal audit

regulations varies. Which of the following elements do these audits have in common? a. The auditor is required to disclose all situations and transactions that could be indicative of

fraud, abuse, and illegal acts to the federal inspector general. b. The materiality levels are higher and are determined by the government entities that provide

the federal financial assistance to the recipients. c. The auditor is required to document an understanding of internal control established to ensure

compliance with the applicable laws and regulations. d. The accounts should be 100% verified by substantive tests because certain statistical

sampling applications are not permitted. 80. When an accountant compiles a financial forecast, the accountant's report should include a(n) a. Explanation of the differences between a financial forecast and a financial projection. b. Caveat that the prospective results of the financial forecast may not be achieved. c. Statement that the accountant's responsibility to update the report is limited to one year. d. Disclaimer of opinion on the reliability of the entity's internal controls.

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81. An accountant's standard report issued after compiling the financial statements of a nonpublic entity should state that

a. I am not aware of any material modifications that should be made to the accompanying financial statements.

b. A compilation consists principally of inquiries of company personnel and analytical procedures.

c. A compilation is limited to presenting in the form of financial statements information that is the representation of management.

d. A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.

82. A CPA's standard report on audited financial statements would be inappropriate if it referred to a. Management's responsibility for the financial statements. b. An assessment of the entity's accounting principles. c. Significant estimates made by management. d. The CPA's assessment of sampling risk factors. 83. An enterprise engaged a CPA to audit its financial statements in accordance with Government

Auditing Standards (the Yellow Book) because of the provisions of government grant funding agreements. Under these circumstances, the CPA is required to report on the enterprise's internal controls either in the report on the financial statements or in

a. The report on the performance audit. b. The notes to the financial statements. c. A letter to the government funding agency. d. A separate report. 84. An auditor determines that the entity is presenting certain supplementary financial disclosures of

pension information that are required by the GASB. Under these circumstances, the auditor should

a. Add an explanatory paragraph to the auditor's report that refers to the required supplementary information.

b. State that this audit is not being performed in accordance with generally accepted auditing standards.

c. Document in the working papers that the required supplementary information is presented, but should not apply any procedures to the information. .

d. Compare the required supplementary information for consistency with the audited financial statements.

85. Comfort letters ordinarily are Addressed to the client's Signed by the client's a. Audit committee Independent auditor b. Underwriter of securities Senior management c. Audit committee Senior management d. Underwriter of securities Independent auditor

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86. Under which of the following circumstances would an auditor's expression of an unqualified opinion be inappropriate?

a. The auditor is unable to obtain the audited financial statements of a significant subsidiary. b. The financial statements are prepared on the entity's income tax basis. c. There are significant deficiencies in the design and operation of the entity's internal control. d. Analytical procedures indicate that many year-end account balances are not comparable with

the prior year's balances. 87. At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the

financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?

a. Consult with the audit committee and issue a disclaimer of opinion. b. Consult with the audit committee and issue a qualified opinion. c. Obtain additional evidence regarding the valuation of inventory. d. Obtain a statement from management supporting their inventory valuation. 88. An auditor reads the letter of transmittal accompanying a county's comprehensive annual financial

report and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take?

a. Request that the client revise the letter of transmittal. b. Include an explanatory paragraph in the auditor's report. c. Consider withdrawing from the engagement. d. Request a client representation letter acknowledging the inconsistency. 89. The standard report issued by an accountant after reviewing the financial statements of a

nonpublic entity should state that a. A review is limited to presenting in the form of financial statements information that is the

representation of management. b. A review consists of inquiries of company personnel and analytical procedures applied to

financial data. c. The accountant does not express an opinion or any other form of assurance on the financial

statements. d. The accountant did not obtain an understanding of the entity's internal control or assess

control risk. 90. When an accountant compiles projected financial statements, the accountant's report should

include a separate paragraph that a. Explains the difference between a compilation and a review. b. Documents the assessment of the risk of material misstatement due to fraud. c. Expresses limited assurance that the actual results may be within the projected range. d. Describes the limitations on the projection's usefulness. END OF TESTLET 3 – TEST CONTINUES ON THE NEXT PAGE.

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91. While auditing the financial statements of a nonpublic entity, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client's request is reasonable, the CPA's review report should

I. Refer to the scope limitation that caused the change II. Describe the auditing procedures that have already been applied. a. I only. b. II only. c. Both I and II. d. Neither I nor II. 92. Reporting standards for financial audits under Government Auditing Standards (the Yellow Book)

differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to

a. Provide positive assurance that control activities regarding segregation of duties are consistent with the entity's control objectives.

b. Present the results of the auditor's tests of controls. c. Provide negative assurance that the auditor discovered no evidence of intentional override of

internal controls. d. Describe the scope of the auditor's principal substantive tests. 93. An accountant may accept an engagement to apply agreed-upon procedures to prospective

financial statements provided the a. Provisions of Statements on Standards for Accounting and Review Services (SSARS) are

followed. b. Accountant also examines the prospective financial statements. c. Distribution of the report is restricted to the specified users. d. The accountant takes responsibility for the adequacy of the procedures performed. 94. On March 1, Green, CPA, expressed an unqualified opinion on the financial statements of Ajax

Co. On July 1, Green's internal inspection program discovered that engagement personnel failed to observe Ajax's physical inventory. Green believes that this omission impairs Green's ability to support the unqualified opinion. If Ajax's creditors are currently relying on Green's opinion, Green should first

a. Request Ajax's management to communicate to its creditors that Green's opinion should not be relied on.

b. Reissue Green's auditor's report with an explanatory paragraph describing the departure from GAAS.

c. Undertake to apply the alternative procedures that would provide a satisfactory basis for Green's opinion.

d. Advise Ajax's board of directors to disclose this development in its next interim report.

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95. Which of the following statements is correct regarding a compilation report on financial statements issued in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

a. The report should not be issued if the accountant is not independent from the entity. b. The report should include a statement indicating that the information is the representation of

the accountant. c. The report should include a description of other procedures performed during the

compilation. d. The date on the report should be the date of completion of the compilation. 96. Which of the following circumstances would permit an independent auditor to accept an

engagement after the close of the fiscal year? a. Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by

generally accepted auditing standards due to the timing of acceptance of the engagement. b. Assessment of control risk below the maximum level.

c. Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern.

d. Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

97. When issuing letters for underwriters, commonly referred to as comfort letters, an accountant may

provide negative assurance concerning a. The absence of any significant deficiencies in internal control. b. The conformity of the entity's unaudited condensed interim financial information with

generally accepted accounting principles (GAAP). c. The results of procedures performed in compiling the entity's financial forecast. d. The compliance of the entity's registration statement with the requirements of the Securities

Act of 1933. 98. An accountant is required to comply with the provisions of the Statements on Standards for

Accounting and Review Services when performing which of the following tasks? a. Preparing monthly journal entries. b. Providing the client with software to generate financial statements. c. Generating financial statements of a nonissuer. d. Providing a blank financial statement format or template. 99. Which of the following statements would be appropriate in an accountant's report on compiled

financial statements of a nonissuer prepared in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

a. We are not aware of any material modifications that should be made to the accompanying financial statements.

b. A compilation is substantially less in scope than an audit in accordance with generally accepted auditing standards (GAAS).

c. A compilation is limited to presenting in the form of financial statements information that is a representation of management.

d. A compilation is performed to obtain reasonable assurance about whether the financial statements are free from material misstatement.

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100. A CPA concludes that the unaudited financial statements on which the CPA is disclaiming an opinion are not in conformity with generally accepted accounting principles (GAAP) because management has failed to capitalize leases. The CPA suggests appropriate revisions to the financial statements, but management refuses to accept the CPA's suggestions. Under these circumstances, the CPA ordinarily would

a. Express limited assurance that no other material modifications should be made to the financial statements.

b. Restrict the distribution of the CPA's report to management and the entity's board of directors.

c. Issue a qualified opinion or adverse opinion depending on the materiality of the departure from GAAP.

d. Describe the nature of the departure from GAAP in the CPA's report and state the effects on the financial statements, if practicable.

101. An accountant is required to comply with the provisions of Statements on Standards for

Accounting and Review Services when I. Reproducing client-prepared financial statements, without modification, as an

accommodation to a client. II. Preparing standard monthly journal entries for depreciation and expiration of prepaid

expenses. a. I only. b. II only. c. Both I and II. d. Neither I nor II. 102. Before reissuing a compilation report on the financial statements of a nonissuer for the prior year,

the predecessor accountant is required to a. Obtain an updated management representation letter from the entity's management. b. Compare the prior year's financial statements with those of the current year. c. Review the successor accountant's working papers for matters affecting the prior year. d. Make inquiries of the entity's lawyers concerning continuing litigation. 103. A client decides not to make an auditor's proposed adjustments that collectively are not material

and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?

a. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.

b. The financial statements do not conform with generally accepted accounting principles (GAAP).

c. The financial statements contain unadjusted misstatements that should result in a qualified opinion.

d. The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.

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104. When an accountant is not independent with respect to an entity, which of the following types of compilation reports may be issued?

a. The standard compilation report may be issued, regardless of independence. b. A compilation report with negative assurance may be issued. c. A compilation report with special wording that notes the accountant's lack of independence

may be issued. d. A compilation report may be issued if the engagement is upgraded to a review. 105. Accepting an engagement to compile an entity's financial projection most likely would be

inappropriate if the projection is to be included in a(n) a. Mortgage application for the purpose of expanding the entity's facilities. b. Offering statement of the entity's initial public offering of common stock. c. Comprehensive document to be used in negotiating a new labor contract. d. Report to the audit committee that is not sent to the stockholders. 106. An accountant agrees to the client's request to change an engagement from a review to a

compilation of financial statements. The compilation report should include a. No reference to the original engagement. b. Reference to a departure from GAAS. c. Scope limitations that may have resulted in the change of engagement. d. Information about review procedures already performed. 107. A practitioner has been engaged to apply agreed-upon procedures in accordance with Statements

on Standards for Attestation Engagements (SSAE) to prospective financial statements. Which of the following conditions must be met for the practitioner to perform the engagement?

a. The prospective financial statement includes a summary of significant accounting policies. b. The practitioner takes responsibility for the sufficiency of the agreed-upon procedures. c. The practitioner and specified parties agree upon the procedures to be performed by the

practitioner. d. The practitioner reports on the criteria to be used in the determination of findings. 108. Which of the following titles would be considered suitable for financial statements that are

prepared on a cash basis? a. Income statement. b. Statement of operations. c. Statement of revenues collected and expenses paid. d. Statement of cash flows. 109. An accountant's compilation report on a financial forecast should include a statement that a. The hypothetical assumptions used in the forecast are reasonable in the circumstances. b. The forecast should be read only in conjunction with the audited historical financial

statements. c. The accountant expresses only limited assurance on the forecasted statements and their

assumptions. d. There will usually be differences between the forecasted and actual results.

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110. After issuing an auditor's report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless

a. Information about a material transaction that occurred just after the auditor's report was issued is deemed to be reliable.

b. A final resolution is made of a contingent liability that had been disclosed in the financial statements.

c. Information that existed at the report date and may affect the report comes to the auditor's attention.

d. An event occurs just after the auditor's report was issued that affects the entity's ability to continue as a going concern.

111. An accountant has been engaged to compile the financial statements of a nonpublic entity. The

financial statements contain many departures from GAAP because of inadequacies in the accounting records. The accountant believes that modification of the compilation report is not adequate to indicate the deficiencies. Under these circumstances the accountant should

a. Inform management that the engagement can proceed only if distribution of the accountant's report is restricted to internal use.

b. Withdraw from the engagement and provide no further service concerning these financial statements.

c. Quantify the effects of the departures from GAAP and describe the departures from GAAP in a special report.

d. Obtain written representations from management that the financial statements will not be used to obtain credit from financial institutions.

112. Under which of the following circumstances would the expression of a disclaimer of opinion be

inappropriate? a. The auditor is unable to obtain the audited financial statements of a consolidated investee. b. Management does not provide reasonable justification for a change in accounting principles. c. The company failed to make a count of its physical inventory during the year and the auditor

was unable to apply alternative procedures to verify inventory quantities. d. Management refuses to allow the auditor to have access to the company's canceled checks

and bank statements. 113. A CPA is engaged to examine an entity's financial forecast. The CPA believes that several

significant assumptions do not provide a reasonable basis for the forecast. Under these circumstances, the CPA should issue a(n)

a. Adverse opinion. b. Pro forma opinion. c. Qualified opinion. d. Unqualified opinion with an explanatory paragraph. 114. Which of the following prospective financial statements is(are) appropriate for general use? Financial forecast Financial projection a. Yes Yes b. Yes No c. No Yes d. No No

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115. An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the

a. Auditor believes that the specialist's findings are reasonable in the circumstances. b. Specialist's findings support the related assertions in the financial statements. c. Auditor modifies the report because of the difference between the client's and the specialist's

valuations of an asset. d. Specialist's findings provide the auditor with greater assurance of reliability about

management's representations.

116. What is an auditor's responsibility for supplementary information, such as disclosure of pension

information, which is outside the basic financial statements but required by the GASB? a. The auditor should engage a specialist, such as an actuary, to verify that management's

assertions are reasonable. b. The auditor's only responsibility for supplementary information is to determine that such

information has not been omitted. c. The auditor should perform tests of transactions to the supplementary information to verify

that it is reasonably comparable to the prior year's information. d. The auditor should apply certain limited procedures to the supplementary information and

report deficiencies in, or omissions of, such information. 117. Which of the following would be an appropriate title for a statement of revenue and expenses

prepared using an other comprehensive basis of accounting (OCBOA)? a. Statement of operations. b. Statement of income-regulatory basis c. Income statement. d. Statement of activities. 118. An accountant has been engaged to review a nonissuer's financial statements that contain several

departures from GAAP. Management is unwilling to revise the financial statements, and the accountant believes that modification of the standard review report is inadequate to communicate the deficiencies. Under these circumstances, the accountant should

a. Determine the effects of the departures from GAAP and issue a special report on the financial statements.

b. Express a disclaimer of opinion on the financial statements and advise the board of directors that the financial statements should not be relied on.

c. Inform management that a review of the financial statements cannot be completed and request a change from a review to a compilation engagement.

d. Withdraw from the engagement and provide no further services concerning these financial statements.

119. Green, CPA, is auditing the financial statements of Ajax Co. Ajax uses the DP Service Center to

process its payroll. DP's financial statements are audited by Blue, CPA, who recently issued a report on DP's policies and procedures regarding the processing of other entities' transactions. In considering whether Blue's report is satisfactory for Green's purposes, Green should

a. Make inquiries concerning Blue's professional reputation. b. Assess control risk at the maximum level. c. Review the audit programs followed by Blue. d. Perform tests of controls at the DP Service Center.

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120. When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the

Notes to the Scope paragraph financial statements a. Yes Yes b. Yes No c. No Yes d. No No END OF TESTLET 4 – TEST CONTINUES ON THE NEXT PAGE.

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121. Which of the following is correct about reporting on compliance with laws and regulations in a financial audit under Government Auditing Standards (the Yellow Book)?

a. Auditors are not required to report fraud, illegal acts, and other material noncompliance in the audit report.

b. In some circumstances, auditors are required to report fraud and illegal acts directly to parties external to the audited entity.

c. The auditor's key findings of the audit of the financial statements should be communicated in a separate report.

d. The reporting standards in a governmental audit modify the auditor's responsibilities under generally accepted auditing standards.

122. Reports are considered special reports when issued in conjunction with a. Interim financial information reviewed to determine whether material modifications should

be made to conform with GAAP. b. Feasibility studies presented to illustrate an entity's results of operations. c. Compliance with aspects of regulatory requirements related to audited financial statements. d. Pro forma financial presentations designed to demonstrate the effects of hypothetical

transactions. 123. How does Office of Management and Budget CircularA-133, Audits of States, Local

Governments, and Non-Profit Organizations, define a subrecipient? a. As a nonfederal entity that provides a federal award to another entity to carry out a federal

program. b. As an individual who receives and expends federal awards received from a pass-through

entity. c. As a dealer, distributor, merchant, or other seller providing goods or services that are required

for the conduct of a federal program. d. As a nonfederal entity that expends federal awards received from another entity to carry out a

federal program. 124. During the audit of a new client, the auditor determined that management had given illegal bribes

to municipal officials during the year under audit and for several prior years. The auditor notified the client's board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should

a. Add an explanatory paragraph emphasizing that certain matters, while not affecting the unqualified opinion, require disclosure.

b. Report the illegal bribes to the municipal official at least one level above those persons who received the bribes.

c. Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

d. Issue an "except for" qualified opinion or an adverse opinion with a separate paragraph that explains the circumstances.

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125. Which of the following procedures should an accountant perform during an engagement to compile prospective financial statements?

a. Test the entity's internal controls to determine if adequate controls exist so that financial projections can be reasonably achieved.

b. Make inquiries prior to the date of the report about possible future transactions that may impact the forecast once the report is issued.

c. Make inquiries about the accounting principles used in the preparation of the prospective financial statements.

d. Compare the prospective financial statements with the entity's historical results for the prior year.

126. Which of the following components is appropriate in a practitioner's report on the results of

applying agreed-upon procedures? a. A list of procedures performed, as agreed to by the specified parties identified in the report. b. A statement that management is responsible for expressing an opinion. c. A title that includes the phrase "independent audit." d. A statement that the report is unrestricted in its use. 127. An auditor may report on condensed financial statements that are derived from a complete set of

audited financial statements only if the auditor a. Expresses an unqualified opinion on the audited financial statements from which the

condensed financial statements are derived. b. Indicates whether the information is fairly stated in all material respects in relation to the

complete financial statements. c. Determines that the condensed financial statements include all the disclosures necessary for

the complete set of financial statements. d. Presents the condensed financial statements in comparative form with the prior year's

condensed financial statements. 128. After considering management's plans, an auditor concludes that there is substantial doubt about a

client's ability to continue as a going concern for a reasonable period of time. The auditor's responsibility includes

a. Disclaiming an opinion on the financial statements due to the indications of possible financial difficulties.

b. Indicating to the client's audit committee whether management's plans for dealing with the adverse effects of the financial difficulties can be effectively implemented.

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

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

129. A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the

prior year's financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year's audited financial statements. This separate paragraph should indicate

a. The type of opinion expressed previously. b. That the CPA did not update the assessment of control risk. c. The reasons for the change from an audit to a review. d. That the audit report should no longer be relied on.

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130. A CPA started to audit the financial statements of a nonissuer. After completing certain audit procedures, the client requested the CPA to change the engagement to a review because of a scope limitation. The CPA concludes that there is reasonable justification for the change. Under these circumstances, the CPA's review report should include a

a. Statement that a review is substantially less in scope than an audit. b. Reference to the scope limitation that caused the changed engagement. c. Description of the auditing procedures that were completed before the engagement was

changed. d. Reference to the CPA's justification for agreeing to change the engagement. 131. Which of the following statements would not normally be included in a representation letter for a

review of interim financial information? a. To the best of our knowledge and belief, no events have occurred subsequent to the balance

sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information.

b. We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.

c. We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.

d. We have made available to you all financial records and data. 132. An entity's comparative financial statements include the financial statements of the prior year that

were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should

a. Issue an updated comparative audit report indicating the division of responsibility. b. Explain to the client that comparative financial statements may not be presented under these

circumstances. c. Express an opinion only on the current year's financial statements and make no reference to

the prior year's statements. d. Indicate the substantive reasons for the qualification in the predecessor auditor's opinion. 133. How does an auditor make the following representations when issuing the standard auditor's

report on comparative financial statements? Consistent application Examination of of accounting principles evidence on a test basis a. Implicitly Explicitly b. Explicitly Implicitly c. Implicitly Implicitly d. Explicitly Explicitly

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134. As a condition of obtaining a loan from First National Bank, Maxim Co. is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows. Maxim would like to engage a CPA to audit only its balance sheet. Under these circumstances, the CPA

a. May not audit only Maxim's balance sheet if the amount of the loan is material to the financial statements taken as a whole.

b. May not audit only Maxim's balance sheet if Maxim is a nonissuer. c. May audit only Maxim's balance sheet if the CPA disclaims an opinion on· the other financial

statements. d. May audit only Maxim's balance sheet if access to the information underlying the basic

financial statements is not limited. 135. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going

concern for a reasonable period of time. The entity's financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s)

"Except for the effects "Possible discontinuance of such adjustments" of the entity’s operations" a. Yes Yes b. Yes No c. No Yes d. No No 136. A company hires one of its board members, a CPA, to issue accounting reports for the company.

Assuming any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?

a. Compilations. b. Reviews. c. Audits. d. Agreed-upon procedures. 137. When planning a review of an audit client's interim financial statements, which of the following

procedures should the accountant perform to update the accountant's knowledge about the entity's business and its internal control?

a. Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year-end.

b. Inquire of the entity's outside legal counsel about the status of an previous pending litigation and any new litigation involving the entity.

c. Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation.

d. Consider the results of audit procedures performed with respect to the current year's financial statements.

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138. An accountant has been engaged to compile pro forma financial statements. During the accountant's acceptance procedures, it is discovered that the accountant is not independent with respect to the company. What action should the accountant take with regard to compilation?

a. The accountant should discuss the lack of independence with legal counsel to determine whether it is appropriate to accept the engagement.

b. The accountant should disclose the lack of independence in the accountant's compilation report.

c. The accountant should withdraw from the engagement. d. The accountant should compile the pro forma statements but should not provide a

compilation report.

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OTHER OBJECTIVE QUESTION NUMBER 1 – This consists of 19 items. Select the best answer for each item.

Required: Items 101 through 119 represent a series of unrelated statements, questions, excerpts, and comments taken from various parts of an auditor's working paper file. On the enclosed page there is a list of the likely sources of the statements, questions, excerpts, and comments. Select, as the best answer for each item, the most likely source. Select only one source for each item. A source may be selected once, more than once, or not at all. 101. During our audit we discovered evidence of the company's failure to safeguard inventory from

loss, damage, and misappropriation. 102. The company considers the decline in value of equity securities classified as available-for-sale

to be temporary. 103. Was the difference of opinion on the accrued pension liabilities that existed between the

engagement personnel and the actuarial specialist resolved in accordance with firm policy and appropriately documented?

104. Our audit is designed to provide reasonable assurance of detecting misstatements that, in our

judgment, could have a material effect on the financial statements taken as a whole. Consequently, our audit will not necessarily detect all misstatements that exist due to error, fraudulent financial reporting, or misappropriation of assets.

105. There have been no communications from regulatory agencies concerning noncompliance with

or deficiencies in financial reporting practices. 106. Nothing came to our attention that caused us to believe that at October 31, 2000, there was any

change in the capital stock, increase in long-term debt, or decrease in consolidated net current assets or stockholders' equity as compared with the amounts shown in the September 30, 2000 unaudited condensed consolidated balance sheet.

107. It is our opinion that the possible liability to the company in this proceeding is nominal in

amount. 108. As discussed in Note 4 to the financial statements, the company experienced a net loss for the

year ended July 31, 2000, and is currently in default under substantially of its debt agreements. In addition, on September 25, 2000, the company filed a prenegotiated voluntary petition for relief under Chapter 11 of the US Bankruptcy Code. These matters raise substantial doubt about the company's ability to continue as a going concern.

109. During the year under audit, we were advised that management consulted with Better & Best,

CPAs. The purpose of this consultation was to obtain another CPA firm's opinion concerning the company's recognition of certain revenue that we believe should be deferred to future periods. Better & Best's opinion was consistent with our opinion, so management did not recognize the revenue in the current year.

110. The company believes that all material expenditures that have been deferred to future periods

will be recoverable.

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111. Our use of professional judgment and the assessment of audit risk and materiality for the purpose of our audit mean that matters may have existed that would have been assessed differently by you. We make no representation as to the sufficiency or appropriateness of the information in our working papers for your purposes.

112. Indicate in the space provided below whether this information agrees with your records. If

there are exceptions, please provide any information that will assist the auditor in reconciling the difference.

113. Blank checks are maintained in an unlocked cabinet along with the check-signing machine.

Blank checks and the check-signing machine should be locked in separate locations to prevent the embezzlement of funds.

114. Our audit cannot be relied upon to disclose significant deficiencies in the design or operation of

internal control. Nevertheless, we will communicate to you all reportable conditions and potential areas for improvement that we become aware of during the course of our audit.

115. The timetable set by management to complete our audit was unreasonable considering the

failure of the company's personnel to complete schedules on a timely basis and delays in providing necessary information.

116. Several employees have disabled the antivirus detection software on their PCs because the

software slows the processing of data and occasionally rings false alarms. The company should obtain antivirus software that runs continuously at all system entry points and that cannot be disabled by unauthorized personnel.

117. In connection with an audit of our financial statements, management has prepared, and

furnished to our auditor, a description and evaluation of certain contingencies. 118. The company has no plans or intentions that may materially affect the carrying value or

classification of assets and liabilities. 119. In planning the sampling application, was appropriate consideration given to the relationship of

the sample to the audit objective and to preliminary judgments about materiality levels?

OTHER OBJECTIVE QUESTION NUMBER 1

List of Sources

A. Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B. Auditor's communications on reportable conditions. C. Audit inquiry letter to legal counsel. D. Lawyer's response to audit inquiry letter. E. Audit committee's communication to the auditor. F. Auditor's communication to the audit committee (other than with respect to reportable

conditions). G. Report on the application of accounting principles. H. Auditor's engagement letter. I. Letter for underwriters. J. Accounts receivable confirmation request. K. Request for bank cutoff statement. L. Explanatory paragraph of an auditor's report on financial statements. M. Partner's engagement review notes. N. Management representation letter. O. Successor auditor's communication with predecessor auditor. P. Predecessor auditor's communication with successor auditor.

AUDITING REVIEW QUIZ Reporting Exam Name _______________________________ OOF #1 – Answer A through P 101. _____________ 102. _____________ 103. _____________ 104. _____________ 105. _____________ 106. _____________ 107. _____________ 108. _____________ 109. _____________ 110. _____________ 111. _____________ 112. _____________ 113. _____________ 114. _____________ 115. _____________ 116. _____________ 117. _____________ 118. _____________ 119. _____________