MULTIPLE CHOICE:

1. An auditor would issue an adverse opinion if

a. The audit was begun by other independent auditors who
withdrew from the engagement. b. A qualified
opinion cannot be given because the auditor lacks independence.
c. The restriction on the scope of the audit was
significant. d. The
statements taken as a whole do not fairly present the financial condition
and results of operations of the company.

ANSWER: D

2. An audit report contains the following paragraph: "Because of the

inadequacies in the company's accounting records during the year ended June 30,
2003, it was not practicable to extend our auditing procedures to the extent
necessary to enable us to obtain certain evidential matter as it relates to
classification of certain items in the consolidated statements of operations."
This paragraph most likely describes
a. A material departure from GAAP requiring a qualified audit opinion.
b. An uncertainty that should not lead to a qualified opinion.
c. A matter that the auditor wishes to emphasize and that does not lead to
a qualified audit opinion.
d. A material scope restriction requiring a qualification of the audit
opinion.

ANSWER: D

3. A limitation on the scope of the auditor's examination sufficient

to preclude an unqualified opinion will always result when management

a. Asks the auditor to report on the balance sheet and not on

the other basic financial statements. b. Refuses to permit its
lawyer to respond to the letter of audit inquiry.
c. Discloses material related party transactions in the
footnotes to the financial statements. d. Knows that
confirmation of accounts receivable is not feasible.

ANSWER: B

4. The auditor issued a qualified opinion covering the financial statements of

Client A for the year ended December 31, 2002. The reason for the qualification
was a departure from GAAP. In presenting comparative statements for the years
ended December 31, 2002 nd 2003, the client revised the 2002 financial statements
to correct the previous departure from GAAP. The auditor's 2003 report on the
12/31/02 and 12/31/03 comparative financial statements will
a. Express a qualified opinion on the 2002 financial statements and an
unqualified opinion on the 2003 statements.
b. Express unqualified opinions on both the 2002 and 2003 financial
statements.
c. Retain the qualified opinion covering the 2002 statements, but add an
explanatory paragraph describing the correction of the prior departure from GAAP.
d. Render qualified audit opinions for both 2002 and 2003 financial
statements given the 2003 carryover effect of the 2002 error.

ANSWER: B
5. When financial statements are presented that are not in conformity
with generally accepted accounting principles, an auditor may issue a(an)

"Except for" Disclaimer

opinion of an opinion
a. Yes No
b. Yes Yes
c. No Yes
d. No No

ANSWER: A

6. Under which of the following circumstances would a disclaimer of opinion not

be appropriate?
a. The auditor is engaged after fiscal year-end and is unable
to observe physical inventories or apply alternative procedures
to verify their balances. b. The auditor is unable to determine the
amounts associated with illegal acts committed by the client's
management. c. The
financial statements fail to contain adequate disclosure concerning
related party transactions. d. The client refuses to permit its attorney
to furnish information requested in a letter of audit inquiry.

ANSWER: C

7. An auditor may reasonably issue an "except for" qualified opinion for

Inadequate Scope disclosure

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

ANSWER: A

8. An auditor's report would be designated as a special report when it is

issued in connection with financial statements that are

a. For an interim period and are subjected to a limited

review. b. Unaudited
and are prepared from a client's accounting records.
c. Prepared in accordance with a comprehensive basis of
accounting other than generally accepted accounting
principles.
d. Purported to be in accordance with generally accepted accounting principles
but do not include a presentation
of the Statement of Cash Flows.

ANSWER: C

9. A limitation on the scope of an auditor's examination sufficient to

preclude an unqualified opinion will usually result when management

a. Presents financial statements that are prepared in

accordance with the cash receipts and disbursements basis of
accounting. b. States that the financial
statements are not intended to be presented in conformity with generally
accepted accounting principles. c.
Does not make the minutes of the Board of Directors' meetings
available to the auditor. d. Asks the auditor to report on
the balance sheet and not on the other basic financial statements.

ANSWER: C

10. When there is a significant change in accounting principle, an auditor's

report should refer to the lack of consistency in

a. The scope paragraph. b. An

explanatory paragraph between the second paragraph and the opinion
paragraph. c. The opinion paragraph.
d. An explanatory paragraph following the opinion
paragraph.

ANSWER: D

11. Which of the following subsequent events will be least likely to result in an
adjustment to the financial statements?
a. Culmination of events affecting the realization value of
accounts receivable owned as of the balance sheet date.
b. Culmination of events affecting the realization of
inventories owned as of the balance sheet date. c. Material
changes in the settlement of liabilities which
were estimated as of the balance sheet date.
d. Material changes in the quoted market prices of listed
investment securities since the balance sheet date.

ANSWER: D

12. Soon after Boyd's audit report was issued, Boyd learned of certain related
party transactions that occurred during the year under audit. These
transactions were not disclosed in the notes to the financial statements. Boyd
should
a. Plan to audit the transactions during the next
engagement. b. Recall all
copies of the audited financial statements. c. Determine whether the lack of
disclosure would affect the auditor's report.
d. Ask the client to disclose the transactions in
subsequent interim statements.

ANSWER: C

13. 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.

ANSWER: A

14. 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 disclosures concerning this matter
are adequate, the audit report may include a(an)
Disclaimer "Except for" of opinion
qualified opinion
a. Yes Yes
b. No No
c. No Yes
d. Yes No

ANSWER: D

15. Management of Blue Company has decided not to account for a material
transaction in accordance with the provisions of an FASB Standard. In setting
forth its reasons in a note to the financial statements, management has clearly
demonstrated that due to unusual circumstances the financial statements
presented in accordance with the FASB Standard would be misleading. The auditor's
report should include an explanatory separate paragraph and contain a(an)

a. Adverse opinion. b.
Unqualified opinion. c. "Except for"
qualified opinion. d. "Subject to" qualified
opinion.

ANSWER: B

16. In the "management discussion and analysis" contained in the 2002 annual
report of Dermicile Corporation, management stated that total sales were $4.95
billion and net profit was $500 million. The audited sales and net profit,
however, were $3.8 billion and $450 million respectively. The financial
statements, contained in the annual report, reflected the audited figures and the
CPA planned to issue an unqualified opinion. Upon noting the inconsistencies
between the MD&A and the audited financial statements, however, the CPA should
a. Refer to the inconsistency in the audit report and issue a qualified
audit opinion.
b. Issue an unqualified opinion without an explanatory paragraph, because
the MD&A is not covered in the audit report.
c. Issue an unqualified audit opinion with an explanatory paragraph
describing the inconsistency.
d. Render an adverse opinion on the basis that management had
intentionally misrepresented reported sales and net profit.

ANSWER: C

17. When the audited financial statements of the prior year are presented
together with those of the current year, the continuing auditor's report
should cover
a. Both years. b. Only
the current year. c. Only the current year,
but the prior year's report should be presented.
d. Only the current year, but the prior year's report should
be referred to.

ANSWER: A

18. If the auditor believes that financial statements which are prepared on a
comprehensive basis of accounting other than generally accepted accounting
principles are not suitably titled, the auditor should

a. Modify the auditor's report to disclose any

 reservations. b. Consider the
effects of the titles on the financial statements taken as a whole.
c. Issue a disclaimer of opinion. d. Add a
footnote to the financial statements which explains alternative
terminology.

ANSWER: A

19. Morgan, CPA, is the principal auditor for a multi-national corporation.

Another CPA has examined and reported on the financial statements of a
significant subsidiary of the corporation. Morgan is satisfied with the
independence and professional reputation of the other auditor, as well as the
quality of the other auditor's examination. With respect to Morgan's report on
the consolidated financial statements, taken as a whole, Morgan

a. Must not refer to the examination of the other auditor. b.

Must refer to the examination of the other auditor. c. May refer to
the examination of the other auditor. d. May refer to the examination
of the other auditor, in which case Morgan must include in the auditor's
report on the consolidated financial statements a qualified
opinion with respect to the examination of the other
auditor.

ANSWER: C

20. A post-audit review, conducted by another audit partner, discovered that the
audit team had failed to examine or confirm securities held in safekeeping. The
amounts involved were material in relation to reported net assets. The unqualified
audit report, along with the audited financial statements, had been released two
months earlier. Based on this information, the audit team should
a. Request the client for permission to examine or confirm the securities.
b. Notify persons known to be relying on the audit report that the report
can no longer be relied upon.
c. Draft a revised audit report containing an opinion qualified for a
scope restriction.
d. Ignore the finding inasmuch as the financial statements and audit
report have already been released.

ANSWER: A

21. The auditor's report should be dated as of the date on which the

a. Report is delivered to the client. b. Field

work is completed. c. Fiscal period under
audit ends. d. Review of the working papers is complete.

ANSWER: B

22. After issuing the audit report, the auditor may become aware of information
that would have affected the audit report had it been known at the time. Given
discovery of such information, the auditor must take appropriate action. Which of
the following actions would be considered inappropriate under these circumstances?
a. Determine whether the information is reliable and whether the facts
existed at the date of the audit report.
b. Request the client to disclose, to financial statement users, the newly
discovered facts and their impact on the financial statements.
c. If the client refuses to inform third parties, the auditor should
notify the board of directors and regulatory agencies having jurisdiction over the
client that the auditors' report can no longer be relied upon.
d. Draft a revised audit report expressing a qualified or adverse opinion,
depending on the materiality of the effect, and transmit the report to the
stockholders.

ANSWER: D

23. Which of the following best describes the auditor's responsibility

for "other information" included in the annual report to stockholders which
contains financial statements and the auditor's report?

a. The auditor has no obligation to read the "other

information." b. The auditor
has no obligation to corroborate the "other information," but
should read the "other information" to determine whether it is
materially inconsistent with the financial statements.
c. The auditor should extend the examination to the extent
necessary to verify the "other information." d. The auditor must modify
the auditor's report to state that the "other information is unaudited"
or "not covered by the auditor's report."

ANSWER: B

24. When an auditor conducts an examination in accordance with generally

accepted auditing standards and concludes that the financial statements are
fairly presented in accordance with a comprehensive basis of accounting other
than generally accepted accounting principles such as the cash basis of
accounting, the auditor should issue a
a. Disclaimer of opinion. b. Review
report. c. Qualified opinion.
d. Special report.

ANSWER: D

25. In which of the following circumstances would an auditor be most likely

to express an adverse opinion?
a. The statements are not in conformity with the FASB
Statements regarding the capitalization of leases. b. Information
comes to the auditor's attention that raises substantial doubt
about the entity's ability to continue in existence.
c. The chief executive officer refuses the auditor access to
minutes of board of directors' meetings. d. Control tests show that
the entity's internal control is so poor that the financial records
cannot be relied upon.

ANSWER: A

26. Under which of the following circumstances would an unqualified audit

opinion, followed by an explanatory paragraph, not be appropriate?
a. The auditor wishes to emphasize that the client has
entered into material transactions with related
parties. The substance of the related party transactions
is properly disclosed in the audited
financial statements.
b. The client has completed material transactions with
related parties and the auditor is unable to persuade
management to properly reflect the economic substance of the
transactions in the financial statements.
c. The client has used a method of revenue recognition that
is at variance with promulgated accounting standards. The
auditor, however, agrees with the departure on the basis that use of
the promulgated standard would make the financial statements
materially misleading.
d. The auditor believes that substantial doubt exists
concerning the ability of the client to continue as a going
concern.

ANSWER: B

27. 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 middle paragraph.
c. Either a qualified opinion or a disclaimer of opinion. d. An
"except for" qualification.

ANSWER: A

28. The adverse effects of events causing an auditor to believe there is

substantial doubt about an entity's ability to continue as a going concern would
most likely be mitigated by evidence relating to the

a. Ability to expand operations into new product lines in the

future. b. Feasibility of plans to
purchase leased equipment at less than market value.
c. Marketability of assets that management plans to sell. d.
Committed arrangements to convert preferred stock to long-term
debt.

ANSWER: C

29. Comparative financial statements include the financial

statements of a prior period which were examined by a predecessor auditor whose
report is not presented. If the predecessor auditor's report was qualified, the
successor auditor must
a. Obtain written approval from the predecessor auditor to
include the prior year's financial statements. b. Issue a standard
comparative audit report indicating the division of responsibility.
c. Express an opinion on the current year statements alone
and make no reference to the prior year statements. d. Disclose the
reasons for any qualification in the predecessor auditor's
opinion.

ANSWER: D

30. When reporting on financial statements prepared on a

comprehensive basis of accounting other than generally accepted accounting
principles, the independent auditor
should include in the report a paragraph that
a. States that the financial statements are not intended to be
in conformity with generally accepted accounting principles.
b. States that the financial statements are not intended to
have been examined in accordance with generally accepted auditing
standards. c. Refers to the authoritative
pronouncements that explain
the comprehensive basis of accounting being used. d.
Justifies the comprehensive basis of accounting being used.

ANSWER: A

31. After an audit report containing an unqualified opinion on a non-public

client's financial statements was issued, the client decided to sell the shares of
a subsidiary that accounts for 30% of its revenue and 25% of its net income. The
auditor should
a. Determine whether the information is reliable and, if
determined to be reliable, request that revised financial
statements be issued. b. Notify the entity that the
auditor's report may no longer be associated with the financial
statements. c. Describe the effects of this subsequently discovered
information in a communication with persons known to be
relying on the financial statements. d. Take
no action because the auditor has no obligation to make any further
inquiries.
ANSWER: D

32. An audit report contained the following wording: "In our opinion, except for
the omission of the segment information referred to in the preceding paragraph..."
This excerpt was taken from a(n)
a. Unqualified audit opinion with an explanatory paragraph added to
emphasize a matter.
b. Unqualified audit opinion with an explanatory paragraph added to
describe a material uncertainty.
c. Audit opinion qualified due to a departure from GAAP.
d. Adverse audit opinion.

ANSWER: C

33. An auditor includes a separate paragraph in an otherwise unqualified

report to emphasize that the entity being reported upon had significant
transactions with related parties. The inclusion of this separate paragraph

a. Violates generally accepted auditing standards if this

information is already disclosed in footnotes to the financial
statements. b. Necessitates a revision of
the opinion paragraph to include the phrase "with the foregoing
explanation." c. Is appropriate and would not negate the unqualified
opinion. d. Is
considered an "except for" qualification of the report.

ANSWER: C

34. An audit report contains the following paragraph: "Since the company did not
take physical inventories and we were not able to apply auditing procedures to
satisfy ourselves as to inventory quantities and the cost of property and
equipment, the scope of our work was not sufficient to enable us to express, and we
do not express, an opinion on these financial statements." This paragraph
illustrates a(n)
a. Disclaimer of opinion due to uncertainty.
b. Disclaimer of opinion due to scope restrictions.
c. Adverse audit opinion.
d. Audit opinion qualified for material scope restrictions.
 ANSWER: B

35. An auditor's examination reveals a misstatement in segment information

that is material in relation to the financial statements taken as a whole.
If the client refuses to make modifications to the presentation of segment
information, the auditor should issue a(n)

a. "Except for" opinion. b.

Adverse opinion. c. Unqualified
opinion. d. Disclaimer of opinion.

ANSWER: A

36. An auditor's report on financial statements that are prepared in accordance

with a comprehensive basis of accounting other than generally accepted accounting
principles should preferably include all of the following, except

a. Disclosure of the fact that the financial statements are

not intended to be presented in conformity with generally accepted
accounting principles. b. An opinion as to whether the use of
the disclosed method is appropriate.
c. An opinion as to whether the financial statements are
presented fairly in conformity with the basis of accounting
described. d. A description of a change in
accounting principles.

ANSWER: B

37. When the financial statements are prepared on the going concern basis but
the auditor concludes there is substantial doubt whether the client can
continue in existence and also believes there are uncertainties about the
recoverability of recorded asset amounts on the financial statements, the
auditor may issue a(an)
a. Adverse opinion. b.
"Except for" qualified opinion for scope limitation. c. "Except for"
qualified opinion for departure from GAAP. d. Unqualified opinion with an
explanatory separate paragraph.

ANSWER: D

38. Client A reports property, plant, and equipment at appraisal values and
records depreciation based on the appraised amounts. Also, the company does not
defer income taxes for temporary differences arising from using the installment
method of recognizing gross profit for tax purposes. The company uses the accrual
method for financial reporting purposes. Under these circumstances, the auditor
will probably issue a(n)
a. Audit opinion qualified for a departure from GAAP.
b. Adverse audit opinion.
c. Disclaimer of opinion.
d. Unqualified audit opinion with an explanatory paragraph describing the
client's unique accounting practices.

ANSWER: B

39. A CPA engaged to examine financial statements observes that

the accounting for a certain material item is not in
conformity with generally accepted accounting principles,
and that this fact is prominently disclosed in a footnote to
the financial statements. The CPA should
a. Express an unqualified opinion and insert a middle paragraph
emphasizing the matter by reference to the footnote.
b. Disclaim an opinion. c. Not
allow the accounting treatment for this item to affect the type of
opinion because the deviation from generally accepted accounting
principles was disclosed.
d. Qualify the opinion because of the deviation from generally
accepted accounting principles.

ANSWER: D

40. When a principal auditor decides to make reference to another auditor's

examination, the principal auditor's report should always indicate clearly, in the
introductory, scope, and opinion paragraphs, the

a. Magnitude of the portion of the financial statements

examined by the other auditor. b. Disclaimer
of responsibility concerning the portion of the financial statements
examined by the other auditor. c. Name of the other auditor.
d. Division of responsibility.

ANSWER: D

41. An auditor may issue a qualified opinion under which of the following
circumstances?

Lack of sufficient Restrictions on the

competent scope of the evidential
matter audit
a. Yes Yes
b. Yes No
c. No Yes
d. No No

ANSWER: A

42. In which of the following circumstances may the auditor issue the standard
audit report?
a. The principal auditor assumes responsibility for the work
of another auditor. b. The financial statements
are affected by a departure from a generally accepted accounting
principle. c. Substantial doubt exists concerning the ability of
the entity to continue as a going concern.
d. The auditor wishes to emphasize a matter regarding the
financial statements.

ANSWER: A

43. Does the auditor make the following representations explicitly or implicitly
when issuing the standard auditor's report on comparative financial statements?

Consistent Examination of application of

evidence on a
accounting principles test basis
a. Explicitly Explicitly b.
Implicitly Implicitly
 c. Implicitly Explicitly
d. Explicitly Implicitly

ANSWER: C

44. When there is a significant change in accounting principle, an auditor's

report should refer to the lack of consistency in
a. The scope paragraph. b. An
explanatory paragraph between the second paragraph and the opinion
paragraph. c. The opinion paragraph.
d. An explanatory paragraph following the opinion
paragraph.

ANSWER: D

45. In which of the following situations would an auditor ordinarily

issue an unqualified audit opinion without an explanatory paragraph?

a. The auditor wishes to emphasize that the entity had significant

related party transactions. b. The auditor decides to make
reference to the report of another auditor as a basis, in part, for the
auditor's opinion. c.
The entity issues financial statements that present financial
position and results of operations, but omits
the statement of cash flows. d. The auditor
has substantial doubt about the entity's ability to continue as a
going concern, but the circumstances are fully disclosed in the
financial statements.

ANSWER: B

46. How are management's responsibility and the auditor's

responsibility represented in the standard auditor's report?
Management's Auditor's responsibility
responsibility

a. Explicitly Explicitly
b. Implicitly Implicitly
c. Implicitly Explicitly
d. Explicitly Implicitly

ANSWER: A

47. An auditor should disclose the substantive reasons for expressing

an adverse opinion in an explanatory paragraph
a. Preceding the scope paragraph. b.
Preceding the opinion paragraph. c. Following
the opinion paragraph. d. Within the notes to the
financial statements.

ANSWER: B

48. When the financial statements contain a departure from generally

accepted accounting principles, the effect of
which is material, the auditor should
a. Qualify the opinion and explain the effect of the departure from
generally accepted accounting principles
in a separate paragraph. b.
Qualify the opinion and describe the departure from generally
accepted accounting principles within the opinion paragraph.
c. Disclaim an opinion and explain the effect of the
departure from generally accepted accounting principles
in a separate paragraph. d.
Disclaim an opinion and describe the departure from generally
accepted accounting principles within the opinion paragraph.

ANSWER: A

49. Tread Corp. accounts for the effect of a material accounting change
prospectively when the inclusion of the cumulative effect of the change is required
in the current year. The auditor would choose between expressing a(an)

a. Qualified opinion or a disclaimer of opinion. b.

Disclaimer of opinion or an unqualified opinion with an
explanatory paragraph. c. Unqualified
opinion with an explanatory paragraph and an adverse opinion.
d. Adverse opinion and a qualified opinion.

ANSWER: D

50. The Securities and Exchange Commission has authority to

a. Prescribe specific auditing procedures to detect fraud
concerning inventories and accounts receivable of companies
engaged in interstate commerce. b. Deny lack of privity as a
defense in third-party actions for gross negligence against the
auditors of
public companies. c.
Determine accounting principles for the purpose of financial
reporting by companies offering securities to
the public. d.
Require a change of auditors of governmental entities after a
given period of years as a means of ensuring auditor independence.

ANSWER: C

51. An auditor has previously expressed a qualified opinion on the financial

statements of a prior period because of a departure from generally accepted
accounting principles. The prior-period financial statements are restated in the
current period to conform with generally accepted accounting principles. The
auditor's updated report on the prior-period financial statements should

a. Express an unqualified opinion concerning the restated

financial statements. b. Be
accompanied by the original auditor's report on the prior period.

c. Bear the same date as the original auditor's report on the

prior period. d. Qualify the opinion
concerning the restated financial statements because of a change in
accounting principle.

ANSWER: A

52. 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.
Prepared in accordance with another comprehensive basis of
accounting.
c. Misleading d.
Affected by a material uncertainty.

ANSWER: C

53. An auditor who qualifies an opinion because of an insufficiency of

evidential matter should describe the limitation in an explanatory paragraph.
The auditor should also refer to the limitation in the

Scope Opinion Notes to the

paragraph paragraph financial
statements
a. Yes No Yes
b. No Yes No
c. Yes Yes No
d. Yes Yes Yes

ANSWER: C

54. Restrictions imposed by a client prohibit the observation of physical

inventories, which account for 35% of all assets. Alternative audit procedures
cannot be applied, although the auditor was able to examine satisfactory evidence
for all other items in the financial statements. The auditor should issue
a(an)
a. "Except for" qualified opinion. b.
Disclaimer of opinion. c. Unqualified
opinion with a separate explanatory paragraph.

d. Unqualified opinion with an explanation in the scope

paragraph.

ANSWER: B

55. An auditor may not issue a qualified opinion when

a. A scope limitation prevents the auditor from completing an
important audit procedure.
b. The auditor's report refers to the work of a specialist.

c. An accounting principle at variance with generally accepted accounting

principles is used.
d. The auditor lacks independence with respect to the audited entity.

ANSWER: D

COMPLETION:

56. The nature of the examination is described in the ____________ paragraph of

the audit report.

ANSWER: SCOPE

57. Generally accepted auditing standards are addressed in the


paragraph of the audit report, whereas generally
accepted accounting principles are the evaluation standard used in the
paragraph.

ANSWER: SCOPE, OPINION

58. The two relevant dates in a dual-dated audit report are the date of
completion of audit field work and the date of the
.

ANSWER: SUBSEQUENT EVENT

59. An unqualified audit opinion may be rendered only when the financial
statements contain no material departures from GAAP, and when no material
have prevented the auditor from collecting sufficient, competent evidence.

ANSWER: SCOPE LIMITATIONS (RESTRICTIONS)

60. The statement "in our opinion the financial statements do not present fairly"
is included in a(n) ____________ opinion.

ANSWER: ADVERSE

61. The responsibilities of management and the auditors with respect to the
financial statements are described in the
paragraph of the audit report.

ANSWER: INTRODUCTORY

62. An audit report, in a separate paragraph following the opinion paragraph,

describes the impact of related party transactions that have been properly
reflected and disclosed in the financial statements. This form of report
illustrates __ .

ANSWER: EMPHASIS OF A MATTER

63. A CPA who audited the financial statements for the preceding year, and will
also be auditing the current year, is said to be a auditor.

ANSWER: CONTINUING

64. If a scope restriction is material and client-imposed, the auditor should

render a(an) (qualified, adverse, disclaimer of) opinion.

ANSWER: DISCLAIMER OF

65. A fourth paragraph making reference to omission of supplemental data required

by FASB is categorized as
.

ANSWER: EMPHASIS OF A MATTER

66. If financial statements have been prepared utilizing a

comprehensive basis of accounting other than GAAP, the
auditor will evaluate fairness within the framework of
____ __________ ________.

ANSWER: THE OTHER BASIS

MATCHING:

67. From the following types of audit reports, select the one that best fits each
of the listed situations. A given selection may be used once, more than once, or
not at all.

A. Standard audit report

B. Report qualified because of scope restriction
C. Report qualified because of departure from GAAP
D. Adverse opinion
E. Disclaimer of opinion
F. Unqualified opinion with explanatory paragraph following
opinion paragraph

_____1. Management refuses to permit the audit team to confirm

accounts receivable which comprise 30% of current
assets. The auditors are unable to satisfy themselves
by other means.

_____2. Although significant related party transactions have

occurred, they are fully explained in the notes to the
financial statements; and related party receivables and
payables are separately reflected on the balance sheet.

_____3. A major legal action, fully described in Note 3 to the

financial statements, was been brought against the client during the
year being audited. Although the
outcome is unknown, a significant loss could result.

_____4. A patent infringement lawsuit, that could produce a

significant damage award, was filed against the client
during the year being audited. To maintain
confidentiality, the company elected not to disclose the lawsuit in the
notes to the financial statements.

_____5. Although the financial statements appear to be fairly

presented in all other respects, the auditors have been
unable to satisfy themselves regarding the future
economic benefit of certain intangible assets. The
aggregate balance in these accounts is considered to be
material.

_____6. The auditors did not review the quarterly financial data
of Client A, a publicly held company. The data is
included in the annual report to stockholders as
part of the supplemental financial data.

_____7. Given significant appreciation of its plant assets,

Client B elects to report them at current replacement
cost. The dollar amount of these assets accounts for
60% of total assets. The offsetting credit resulting
from the write-up was to an account entitled
appreciation surplus and is reflected as part of
stockholders equity.

_____8. Although the client has applied an accounting principle

not in accordance with GAAP, the audit team is satisfied
 that conforming to GAAP would make the financial
statements materially misleading.

_____9. Client F has suffered recurring losses over the past few
years, along with negative cash flows. In the auditors opinion,
management has not demonstrated a viable plan
for getting the company back on track. The financial
statements adequately disclose the companys financial
position, results of operations, and cash flows.

_____10. The auditors were appointed by Client G after year-end,

and therefore were unable to observe the taking of the
companys physical inventory. Given adequate perpetual
inventory records and documentation of transactions, the
audit team was able to satisfy themselves as to the
reasonableness of the ending inventory.

SOLUTION:

1. E
2. A
3. A
4. C
5. B
6. F
7. D
8. F
9. F
10. A

PROBLEM/ESSAY

68. Jonathon Hershey, CPA, is the senior auditor for Web Stores, Inc., a company
that markets products on the Internet. The current year-end is January 31, 2003.
Last year's audit report contained an explanatory paragraph because of doubt
regarding the ability of Web Stores to continue as a going concern. The company
had defaulted on two major loan agreements, and appeared to be losing the race to
develop a solid commercial presence on the Internet. Since the date of last year's
audit report, however, company management has changed. A new advertising campaign
and innovative marketing techniques, have proven successful. Creditors have agreed
to major debt restructuring agreements, and the client appears to be "out of the
woods."

Required:
Assuming the company presents comparative financial statements for 2003 and
2002, explain how the current audit report, as it relates to 2002, will differ from
the original report on the 2002 statements. Do not draft an audit report.

SOLUTION:

Last years audit report covering the year ended January 31, 2002, included a
fourth paragraph following the opinion paragraph. Explanatory in nature, this
paragraph expressed the auditors doubt as to the ability of Web Stores, Inc. to
continue as a going concern. Given the favorable developments during the past
year, the current report should omit the fourth paragraph.

69. General Joes Wholesale Produce changed its method for depreciating plant
assets from historical cost straight-line to replacement cost straight-line at the
beginning of its fiscal year ended March 31, 2003. Plant assets were also written
up to reflect replacement cost.

Required:

a. What type of accounting change is presented in this case?

b. Discuss the possible audit report modifications resulting from this change.

SOLUTION:

a. This is an error since replacement cost accounting for plant assets is at

variance with GAAP.
b. Depending on the materiality of the amounts involved, the auditor should
either qualify the audit opinion or render an adverse opinion.

70. Audit reports frequently contain an explanatory paragraph

following the scope paragraph or the opinion paragraph.

Required:
a. Describe the conditions under which one might expect to find an
explanatory paragraph following the opinion paragraph of the audit report.
b. Describe the conditions under which an explanatory
paragraph is mandatory.
c. Draft an explanatory paragraph for the following
situation:

Doria Gray, the chief executive officer of Dorias Beauty Botiques,

Inc., also owns a large cosmetics supply
company, Grays Cosmetics, Ltd. Several material
transactions have been completed between Dorias Beauty Botiques and Grays
Cosmetics. A sizeable receivable from Grays Cosmetics appears on Dorias Beauty
Botiques balance sheet. As auditor for Dorias Beauty Botiques, you have
concluded that the transactions have been properly reflected in the financial
statements, and adequately described in Note 4 to the financial statements.

SOLUTION:

a. The auditor may elect to add an explanatory paragraph under any one or more of
the following conditions.:
1. Departure from a designated principle and the
auditor agrees with the departure;
2. Doubt as to going concern ability;
3. Change in accounting principle properly accounted for and disclosed;
4. Emphasis of a matter
In addition, omission of supplemental information required by FASB, discovered
errors or inconsistencies in the data, or failure of the auditor to apply limited
procedures to the data, may require an explanatory paragraph. The explanatory
paragraph does not in any way qualify the auditor's opinion.
b. In some cases the explanatory paragraph is optional; in other cases it is
required. In the above listing, only (4), emphasis of a matter permits auditor
discretion as to whether or not to add the paragraph. In all of the other
categories, including supplemental information required by FASB, the
paragraph is mandatory.
c. The Company is under common control with an affiliate and has had
significant transactions with this company (See Note 4).