AICPA – Auditing and Attestation (AUD) Exam 1

Explanation:
Choice "B" is correct. A "disclaimer of opinion" must be issued when a CPA is "associated" with FS of a publicly held entity, but has not audited or (interim) reviewed such FS.
Choice "A" is incorrect. A "compilation report" refers to a report related to a non-public entity.
Choice "C" is incorrect. There is no such thing as an "unaudited association report."
Choice "D" is incorrect. The auditor did not audit the FS, so he/she cannot issue an opinion on them.

Explanation:
Choice "D" is correct. An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.
Choice "A" is incorrect. Emphasis of a matter, such as the existence of significant transactions with related parties, may result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
Choice "B" is incorrect. A change in accounting principle does result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
Choice "C" is incorrect. Omission of supplemental information required by GAAP does result in an additional explanatory paragraph appended to an otherwise unqualified opinion.

Explanation: Reviewing cash disbursements made after the balance sheet date can help identify liabilities that should have been recorded at year-end, thus searching for unrecorded liabilities.

Explanation:
Choice "A" is correct. Since the auditor is unable to observe inventory or apply alternative audit procedures, a scope limitation exists. Due to the significance of the inventory balance (40% of total assets is quite material), a disclaimer of opinion (rather than simply a qualification) is appropriate.
Choice "B" is incorrect. Since the inventory balance is so material, a qualified opinion is not sufficient in this case.
Choice "C" is incorrect. An adverse opinion is not an appropriate response to a scope limitation.
Choice "D" is incorrect. Since the scope limitation relates to a material balance, an unqualified opinion is not appropriate.

Explanation:
Choice "D" is correct. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph (following the opinion paragraph) to reflect that conclusion. This conclusion should be expressed through the use of the phrase "substantial doubt about it"™s (the entity's) ability to continue as a going concern" [or similar wording that includes the terms "substantial doubt" and "going concern"]. The "reasonable period...not to exceed one year" is inherent in the definition of going concern and is not explicitly stated in the audit report. The phrase "possible discontinuation of operations" may be included in the going concern disclosure but is not specifically required.
Choices "A", "B", and "C" are incorrect, as per the above Explanation.

Explanation: Understanding the internal control structure is crucial for assessing the risk of material misstatement in the financial statements, which in turn affects the nature, timing, and extent of substantive procedures.

Explanation:
Choice "A" is correct. If substantial doubt about the entity's ability to continue as a going concern has been removed in the current period, the explanatory paragraph included in the prior period auditor's report should not be repeated, and no description of the reasons or plans for recovery need be included.
Choice "B" is incorrect. If doubt about the going concern assumption has been removed in the current period, it is not appropriate to include the explanatory paragraph from the prior year in the auditor's report for the current year.
Choice "C" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The auditor does not have to explain the reason for the change.
Choice "D" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The entity does not have to describe its plans for the future.

Explanation:
Choice "D" is correct. Yes - No. If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern and that the entity's disclosures are adequate, then the audit report may be either: -Unqualified with explanatory paragraph, or -Disclaimed. (Generally, an unqualified opinion is issued, but the auditor is not prohibited from choosing to issue a disclaimer.)
Choice "A" is incorrect. An "except for" qualified opinion would be appropriate if the entity's disclosures were inadequate.
Choice "B" is incorrect. While an unqualified opinion is generally issued, the auditor is not prohibited from choosing to issue a disclaimer; for example, in areas involving a high degree of uncertainty.
Choice "C" is incorrect, per Explanation: above.

Explanation: The primary consideration is that the internal control system provides reasonable assurance that the entity's objectives, including reliable financial reporting, compliance with laws and regulations, and effective and efficient operations, will be achieved.

Answer : A

Explanation:
Choice "A" is correct. No - No - Yes. When a change in accounting principle materially affects the comparability of the comparative FS, the auditor should refer to the change in an explanatory paragraph following the unqualified opinion paragraph.
Choices "B" and "C" are incorrect. The auditor's concurrence with a change in GAAP is implicit, not explicit.
Choice "D" is incorrect. An unqualified opinion should be issued, not an "except for" qualified opinion.

Explanation:
Choice "D" is correct. When a qualified opinion results from a limitation of scope, it should be described in an explanatory paragraph preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.
Choices "A", "B", and "C" are incorrect, as they do not comply with the rule above.

Explanation:
Choice "D" is correct. If a liability is significant enough, it may give rise to a situation in which there is substantial doubt about an entity's ability to continue as a going concern. Inquiring of an entity's legal counsel about litigation, claims, and assessments is one way to determine whether such a liability exists.
Choice "A" is incorrect. Cutoff tests are used to determine whether sales are recorded in the proper period. Applying such tests to customer accounts with long- standing receivable balances would not provide information about the entity's ability to continue a as a going concern.
Choice "B" is incorrect. Evaluating the entity's procedures for identifying and recording related party transactions is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues.
Choice "C" is incorrect. Identifying situations in which real property is pledged as collateral is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues.

Explanation:
Choice "D" is correct. An unjustified accounting change may cause the auditor to issue a qualified or adverse opinion. A material weakness must be reported to management and those charged with governance, but would not be disclosed in an explanatory paragraph appended to an otherwise unqualified opinion.
Choices "A", "B", and "C" are incorrect, as per the above Explanation.

Explanation:
Choice "B" is correct. In a situation where it is likely that an entity's operations will be discontinued, disclosure of information about the entity's ability to continue as a going concern is required by GAAP. Failure to make such disclosure would be a departure from GAAP, resulting in either a qualified or adverse opinion.
Choice "A" is incorrect. As long as the going concern situation is adequately disclosed, the fact that there will be a bankruptcy filing would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "C" is incorrect. As long as the going concern situation is adequately disclosed, the fact that management does not intend to reduce or delay future expenditures would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "D" is incorrect. As long as the going concern situation is adequately disclosed, the fact that negative trends and recurring operating loses appear to be irreversible would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.

Explanation:
Choice "C" is correct. Leasing rather than purchasing operating facilities results in reduced (or at least delayed) expenditures, which is a mitigating factor in a going concern situation.
Choice "A" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Repurchasing stock is an outflow of cash that would reduce ownership equity; as such, it is not a mitigating factor.
Choice "B" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Issuing stock options does not fall into any of these categories and would not be considered a mitigating factor.
Choice "D" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Accelerating the due date of an existing mortgage would increase expenditures, and therefore would not be a mitigating factor.

Explanation:
Choice "B" is correct. When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative
FS, the auditor should express a qualified opinion each year that the FS initially reflecting the change are presented.
Choices "A", "C", and "D" are incorrect, per the rule stated above.

Explanation:
Choice "B" is correct. Restrictions of scope imposed on the audit of such a large (35%) asset would require a disclaimer of opinion.
Choices "A" and "C" are incorrect. The asset not audited is too large for a qualified opinion and much too large for an unqualified opinion.
Choice "D" is incorrect. Explanatory language does not get inserted into the scope paragraph, nor is an unqualified opinion appropriate.

Explanation: Substantive tests of transactions are procedures designed to detect material misstatements at the assertion level. Confirming accounts receivable balances with customers directly tests the existence and accuracy of the reported balances.

Explanation: Management's philosophy and operating style significantly influence the control environment as they set the tone at the top and impact the overall control consciousness of the entity.

Explanation:
Choice "C" is correct. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards, and should refer to GAAP in the opinion paragraph.
Choice "A" is incorrect. An auditor reporting on the audit of financial statements of a nonissuer may (but is not required to) refer to both PCAOB standards and generally accepted auditing standards in the scope paragraph. Audit reports for audits of issuers refer only to PCAOB standards in the scope paragraph.
Choice "B" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed.
Choice "D" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. Referring to generally accepted auditing standards instead is not an option, as audits of issuers must follow
PCAOB standards.

Explanation: The person who signs checks should be involved in reviewing the bank reconciliation to ensure there are no discrepancies and to provide a check on the disbursement process.

Explanation:
Choice "A" is correct. GAAP allows a company to use different methods for costing different inventories as long as the methods are disclosed. Thus, the audit report would be unqualified; there is no departure from GAAP.
Choice "B" is incorrect. The consistency standard refers to changes in application of accounting practices between periods, affecting the comparability of financial statements. There is no indication Digit made any change in methods.
Choice "C" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in a qualification of the auditor's report.
Choice "D" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in an adverse report.

Explanation:
Choice "B" is correct. The auditor should disclose the substantive reasons for expressing an adverse opinion in a separate explanatory paragraph preceding the opinion paragraph.
Choice "A" is incorrect. There are no circumstances where an explanatory paragraph precedes the scope paragraph.
Choice "C" is incorrect. The explanatory paragraph follows the opinion paragraph when there is a change in accounting principle or when there is doubt as to going concern.
Choice "D" is incorrect. The auditor cannot include an explanatory paragraph in the financial statements, which are the responsibility of management.

Explanation:
Choice "A" is correct. The auditor should examine any evidence that appears contrary to the basic principle of going concern. Reviewing the minutes from stockholder and board of director meetings is one procedure that is used in this regard.
Choice "B" is incorrect. Comparison of the market value of property to amounts owed on the property determines its net value, but would not necessarily indicate a going concern issue.
Choice "C" is incorrect. Reviewing lease agreements to determine whether leased assets should be capitalized is important in evaluating the financial statements, but it would not provide evidence of going concern issues.
Choice "D" is incorrect. Inspecting title documents to verify whether any assets are pledged as collateral provides information regarding presentation and disclosure, but would not provide evidence of going concern issues.

Explanation:
Choice "B" is correct. Inadequate disclosure of the substantial doubt about an entity's ability to continue as a going concern is a departure from GAAP, resulting in either a qualified or adverse opinion.
Choices "A" and "D" are incorrect. Scope limitations result in either a qualified opinion or in a disclaimer of opinion, but not in an adverse opinion.
Choice "C" is incorrect. A change in accounting principle results in a modified unqualified report, as long as the change was accounted for properly.

Explanation:
Choice "B" is correct. An auditor would generally issue an unqualified audit opinion without an explanatory paragraph when the auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion. The auditor would modify his/her report (all three paragraphs), but would not add an explanatory paragraph.
Choices "A" and "D" are incorrect. An auditor ordinarily would issue an unqualified opinion with an explanatory paragraph if he or she wishes to emphasize that the entity had significant related party transactions, or if the auditor has substantial doubt about the entity's ability to continue as a going concern (even if the circumstances are fully disclosed in the financial statements).
Choice "C" is incorrect. If the entity issues financial statements that present financial position and results of operations but omit the statement of cash flows, the opinion will be qualified.

Explanation:

External confirmations are one of the more reliable sources of audit evidence because they are obtained directly from parties outside the entity and exist in documentary form, which is more reliable than oral evidence. A/R confirmations can provide audit evidence associated with the existence, rights and obligations, allocations and valuations, and completeness assertions.

Confirmations can be negative, positive, or blank. Blank confirmations are a type of positive confirmation where the customer is asked to record the amount they owe to the client (Choice A). Positive confirmation is more reliable than negative because the customer indicates either agreement or disagreement with the client’s recorded A/R balance (Choice C). Because blank confirmations show only customer names and addresses without the A/R balances, they are easier to prepare (Choice D).

Negative and positive confirmations ask the customer to confirm or indicate any differences in the A/R balance recorded by the client. Blank confirmations do not contain any indication from the client of the customer’s A/R balance, so they may be less efficient and more difficult for the auditor to reconcile customer responses with client information. For example, returned items in transit may be included in the customer’s version of their amount due but not yet received by the client and reflected in the A/R balance.

Things to remember:
Because blank confirmations do not contain any indication from the client of the customer’s A/R balance, they may be less efficient and more difficult for the auditor to reconcile customer responses with client information.

Explanation:
Choice "A" is correct. Since the auditor was unable to gather sufficient evidence on the beginning balances of the balance sheet accounts, the auditor would be unable to express an opinion on the current year's results of operations and cash flows. The auditor could express an opinion on the statement of financial position.
Choice "B" is incorrect. Since the scope limitation could have a pervasive effect on the financial statements (affecting all assets and liabilities), a disclaimer of opinion (and not merely a qualified opinion) is required on the income statement and statement of cash flows. An opinion may be expressed on the year-end statement of financial position.
Choice "C" is incorrect. The auditor does not need to withdraw from the engagement and refuse to be associated with the financial statements.
Choice "D" is incorrect. An uncertainty does not exist. The auditor can express an opinion on one of the financial statements.

Explanation:
Choice "D" is correct. When assessing management's plans for dealing with the adverse effects of future conditions and events, mitigating factors would include:
1. The postponement of expenditures (including R&D).
2. Plans to dispose of assets.
3. Plans to borrow money or restructure debt.
4. Plans to increase ownership equity (sell stock).
Choice "A" is incorrect. Discussions with lenders regarding terms would not be a mitigating factor. Actual agreements regarding restructuring of debt or amendments to covenants would be required.
Choice "B" is incorrect. Strengthening internal controls over cash would not qualify as a management tactic to address going concern issues.
Choice "C" is incorrect. Purchasing facilities which are currently being leased would only further decrease cash flow.

Explanation:
Choice "D" is correct. The inability to obtain audited financial statements of a consolidated investee represents a scope limitation which may result in either a qualified opinion or a disclaimer of opinion.
Choice "A" is incorrect. A material change in accounting principles between periods is disclosed in an explanatory paragraph added to an otherwise unqualified opinion.
Choice "B" is incorrect. Omission of selected quarterly data required by SEC regulations is disclosed in an explanatory paragraph added to an otherwise unqualified opinion.
Choice "C" is incorrect. Emphasis of a matter is disclosed in an explanatory paragraph added to an otherwise unqualified opinion.

Explanation:
Choice "B" is correct. Indications of possible financial difficulties, such as denial of usual trade credit from suppliers, may cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.
Choice "A" is incorrect. The existence of related parties and the occurrence of related party transactions do not indicate doubt about the entity's ability to continue as a going concern.
Choice "C" is incorrect. Payment of preferred stock dividends in arrears might very well indicate an improvement in the entity's financial situation. It is the lack of payment of preferred, cumulative dividends (a possible indication of financial difficulty) that might cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.
Choice "D" is incorrect. Restrictions on the disposal of assets might limit the options available to management as far as mitigating adverse conditions, but it would not in and of itself cause the auditor to have substantial doubt about an entity's ability to continue as a going concern.

Explanation:
Choice "B" is correct. If the auditor lacks independence with respect to an audit client, the auditor must disclaim an opinion on the financial statements. A qualified opinion is not an option.
Choice "A" is incorrect. A departure from GAAP (which is not sufficiently material to warrant an adverse opinion) may justify a qualification of the auditor's report.
Choice "C" is incorrect. A scope limitation may result in a qualified opinion or a disclaimer of opinion.
Choice "D" is incorrect. The auditor's report may make reference to the use of a specialist only if the specialist's findings result in a change to the auditor's report, such as a qualified opinion.

Explanation:
Choice "D" is correct. The CPA's standard report on audited financial statements does not include matters related to the auditor's assessment of specific risk factors.
Choice "A" is incorrect. The CPA's standard report on audited financial statements states that, "These financial statements are the responsibility of the Company's management."
Choices "B" and "C" are incorrect. The CPA's standard report on audited financial statements states that, "An audit also includes assessing the accounting principles used and significant estimates made by management."

Explanation: If the specialist's findings significantly affect the auditor's opinion and result in a modification, the auditor may refer to the specialist in the audit report to explain the basis of the modified opinion.

Explanation:
Choice "A" is correct. The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday.
Choice "B" is incorrect. Wall Corp. did not engage the auditors and thus the report should not be addressed to them.
Choices "C" and "D" are incorrect. Even though the bank will be relying on the audited financial statements in determining whether to make the loan, the bank did not directly engage the auditing firm and accordingly, the report should not be addressed to them.

Explanation:
Choice "A" is correct. The note presented describes an uncertainty that is properly disclosed. An explanatory paragraph is not required in the unqualified opinion.
Choice "B" is incorrect. A "subject to" qualified opinion should never be issued.
Choice "C" is incorrect. Since the auditor is satisfied that the assertion and disclosure are supported by the existing evidence, a qualified opinion is not required.
Choice "D" is incorrect. Since the auditor is satisfied that the assertion and disclosure are supported by the existing evidence, there is no need for the auditor to disclaim an opinion.

Explanation:
Choice "C" is correct. The auditor's standard audit report includes a statement that "An audit includes assessing...significant estimates made by management..."
Choice "A" is incorrect. The standard audit report does not state that disclosures provide reasonable assurance that the financial statements are free of material misstatement. The correct statement is: "...standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement."
Choice "B" is incorrect. The standard audit report does not state that the auditor evaluated the overall internal control. The correct statement is "An audit includes...evaluating the overall financial statement presentation." Internal control is not mentioned in the standard audit report.
Choice "D" is incorrect. The standard audit report does not state "The financial statements are consistent with those of the prior period." According to the second standard of reporting, consistency is implicitly reported. Only if there is an inconsistency is an explicit statement included.

Explanation:

During an audit, client management asserts that the financial statements are complete, clear, correct, and in compliance with GAAP or an acceptable financial reporting framework. The auditor then gathers evidence to either support or refute these assertions.

The auditor may compare financial (eg, equipment depreciation expense) and nonfinancial (eg, vendor information about equipment’s expected useful life) information. This comparison can provide evidence regarding the validity of the valuation assertion (eg, depreciation expense is based on reasonable estimates).

(Choices B and C) The audit firm must develop a system of quality control, and the auditors must create adequate, appropriate documentation to provide evidence that the audit complies with professional standards. These activities do not provide evidence that supports or refutes management assertions regarding the financial statements.

(Choice D) The desired or acceptable level of detection risk might decrease when there is greater risk of material misstatement. This action would occur after the auditor obtains evidence that refutes management’s assertions.

Things to remember:
A comparison of financial (eg, equipment depreciation expense) and nonfinancial (eg, vendor information about equipment useful lives) information can provide audit evidence that either supports or refutes management assertions regarding financial statements.

Explanation: The auditor's responsibility is to obtain reasonable assurance that the financial statements are not materially misstated due to noncompliance with laws and regulations. The auditor is not responsible for detecting all instances of noncompliance or providing legal advice.

Explanation:
Choice "B" is correct. The principal auditor makes reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it.
Choice "A" is incorrect. When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed.
Choice "C" is incorrect. When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed.
Choice "D" is incorrect. The principal auditor will make reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor.
Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it.