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Wiley CPA Exam Review Problems And Solutions Vol 2 2011-2012 38th Edition O. Ray Whittington, Patrick R. Delaney - Solutions
When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate explanatory paragraph and modify the Introductory Scope Opinion paragraph paragraph paragrapha. Yes No Nob. Yes Yes Noc. No Yes Yesd. No No Yes
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 directors’ meetings.b. Tests of controls show that the entity’s internal control is so poor that it cannot be
Which of the following phrases would an auditor most likely include in the auditor’s report when expressing a qualified opinion because of inadequate disclosure?a. Subject to the departure from US generally accepted accounting principles, as described above.b. With the foregoing explanation of
An auditor concludes that a client’s illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the materiality of the effect on the financial statements, the auditor should express either a(n)a. Adverse opinion or a
An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties.The inclusion of this separate paragrapha. Is considered an “except for” qualification of the opinion.b. Violates generally
When audited financial statements are presented in a client’s document containing other information, the auditor shoulda. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.b. Add an explanatory paragraph to the auditor’s report without changing
An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the
If an auditor is asked to provide an opinion relating to information accompanying the financial statements in a document, the opinion will ordinarily be upon whether the information is fairly stated ina. Accordance with US generally accepted auditing standards.b. Conformity with US generally
If management declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(n)a. Adverse opinion.b. Qualified opinion with an explanatory paragraph.c. Unqualified opinion.d. Unqualified opinion with an additional explanatory
In an audit of a nonissuer company, which statement is correct concerning required supplementary information by a designated accounting standards setter?a. The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements.b. The
Unaudited financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and I. The report on the prior period should be reissued to accompany the current period report.II. The report on
The predecessor auditor, who is satisfied after properly communicating with the successor auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor’s report should makea. Reference to the report of the successor auditor only in the
A client is presenting comparative (two-year) financial statements. Which of the following is correct concerning reporting responsibilities of a continuing auditor?a. The auditor should issue one audit report that is on both presented years.b. The auditor should issue two audit reports, one on each
When single-year financial statements are presented, an auditor ordinarily would express an unqualified opinion in an unmodified report if thea. Auditor is unable to obtain audited financial statements supporting the entity’s investment in a foreign affiliate.b. Entity declines to present a
Before reissuing the prior year’s auditor’s report on the financial statements of a former client, the predecessor auditor should obtain a letter of representations from the Former client’s management Successor auditora. Yes Yesb. Yes Noc. No Yesd. No No
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,
When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year’s financial statements if thea. Prior year’s financial statements are restated to conform with generally accepted accounting principles.b. Auditor is a
An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements, but is reasonably certain to have a substantial effect in later years. If the change is
When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the auditor’s report. This paragraph should identify the nature of the change anda. Explain why the change is
When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative financial statements, the auditor should express a qualified opiniona. Only in the year of the accounting principle change.b. Each year that the financial
In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor shoulda. Not report on the client’s income statement.b. Not refer to consistency in the auditor’s report.c. State that
Digit Co. uses the FIFO method of costing for its international subsidiary’s inventory and LIFO for its domestic inventory. Under these circumstances, the auditor’s report on Digit’s financial statements should express ana. Unqualified opinion.b. Opinion qualified because of a lack of
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
An auditor would express an unqualified opinion with an explanatory paragraph added to the auditor’s report for An unjustified accounting change A material weakness in the internal controla. Yes Yesb. Yes Noc. No Yesd. No No
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
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 thea. Ability to expand operations into new product lines in the future.b. Feasibility of plans to
Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period of time. In evaluating Hill’s plans for dealing with the adverse effects of future conditions and events, Davis most likely would consider, as a mitigating factor,
Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern?a. Review compliance with the terms of debt agreements.b. Confirmation of
Which of the following auditing 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. Inspecting title documents to verify whether any assets are pledged as collateral.b.
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?a. Cash flows from operating activities are negative.b. Research and development projects are postponed.c. Significant related-party
Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero’s plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?a. Significant related-party transactions are pervasive.b. Usual trade credit from suppliers is denied.c. Arrearages in preferred stock
After considering an entity’s negative trends and financial difficulties, an auditor has substantial doubt about the entity’s ability to continue as a going concern. The auditor’s considerations relating to management’s plans for dealing with the adverse effects of these conditions most
In which of the following circumstances would an auditor most likely add an explanatory paragraph to the standard report while not affecting the auditor’s unqualified opinion?a. The auditor is asked to report on the balance sheet, but not on the other basic financial statements.b. There is
Green, CPA, concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern. If JKL’s financial statements adequately disclose its financial difficulties, Green’s auditor’s report should Include an explanatory Specifically paragraph Specifically use the
When an auditor concludes there is substantial doubt about a continuing audit client’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is toa. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on
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, 2009. That doubt has been removed in 2010. What is Mead’s reporting responsibility if Tech is presenting its financial
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
When financial statements of a company that follows GASB standards would be misleading due to unusual circumstances depart from those standards, the auditor should explain the unusual circumstances in a separate paragraph and express an opinion that isa. Unqualified.b. Qualified.c. Adverse.d.
In the auditor’s report, the principal auditor decides not to make reference to another CPA who audited a client’s subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditora. Issues an unqualified opinion on the consolidated financial
An auditor may issue the standard audit report when thea. Auditor refers to the findings of a specialist.b. Financial statements are derived and condensed from complete audited financial statements that are filed with a regulatory agency.c. Financial statements are prepared on the cash receipts and
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
The introductory paragraph of an auditor’s report contains the following sentences:We did not audit the financial statements of EZ Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27% and 29%, respectively, of the related consolidated totals. Those
A principal auditor decides not to refer to the audit of another CPA who audited a subsidiary of the principal auditor’s client. After making inquiries about the other CPA’s professional reputation and independence, the principal auditor most likely woulda. Add an explanatory paragraph to the
Which of the following is not correct concerning information included in an audit report of financial statements issued under the requirements of the Public Company Accounting Oversight Board?a. The report should include the title “Report of Independent Registered Public Accounting Firm.”b. The
A financial statement audit report issued for the audit of an issuer (public) company concludes that the financial statements followa. Generally accepted accounting principles.b. Public Company Accounting Oversight Board standards.c. Generally accepted auditing standards.d. International accounting
An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditor’s report. The auditor’s responsibility for events occurring subsequent to the completion of fieldwork wasa. Extended to subsequent events
Wilson, CPA, completed the fieldwork of the audit of Abco’s December 31, 2009 financial statements on March 6, 2010. A subsequent event requiring adjustment to the 2009 financial statements occurred on April 10, 2010, and came to Wilson’s attention on April 24, 2010. If the adjustment is made
Which of the following best describes the reference to the expression “taken as a whole” in the fourth generally accepted auditing standard of reporting?a. It applies equally to a complete set of financial statements and to each individual financial statement.b. It applies only to a complete
The fourth standard of reporting requires the auditor’s report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to preventa. An auditor from
How does an auditor make the following representations when issuing the standard auditor’s report on comparative financial statements?Examination of Consistent evidence on a test basis application of accounting principlesa. Explicitly Explicitlyb. Implicitly Implicitlyc. Implicitly Explicitlyd.
Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?When read in conjunction with Note X With the foregoing explanationa. Yes Nob. No Yesc. Yes Yesd. No No
An auditor’s responsibility to express an opinion on the financial statements isa. Implicitly represented in the auditor’s standard report.b. Explicitly represented in the opening paragraph of the auditor’s standard report.c. Explicitly represented in the scope paragraph of the auditor’s
An auditor expressed a qualified opinion on the prior year’s financial statements because of a lack of adequate disclosure. These financial statements are properly restated in the current year and presented in comparative form with the current year’s financial statements. The auditor’s
Which paragraphs of an auditor’s standard report on financial statements should refer to generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP)?GAAS GAAPa. Opening Scopeb. Scope Scopec. Scope Opiniond. Opening Opinion
In May 2009, an auditor reissues the auditor’s report on the 2007 financial statements at a continuing client’s request.The 2007 financial statements are not restated and the auditor does not revise the wording of the report. The auditor shoulda. Dual date the reissued report.b. Use the release
Which of the following statements is a basic element of the auditor’s standard report?a. The disclosures provide reasonable assurance that the financial statements are free of material misstatement.b. The auditor evaluated the overall internal control.c. An audit includes assessing significant
Which of the following statements is correct concerning an auditor’s responsibility for controlling the distribution by the client of a restricted-use report?a. An auditor must inform the client that a restricteduse report is not intended for distribution to nonspecified parties.b. When an
Which of the following is least likely to be a restricted use report?a. A report on internal control significant deficiencies noted in an audit.b. A required communication with the audit committee.c. A report on financial statements prepared following a comprehensive basis of accounting other than
When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonissuer (nonpublic) entity, the accountant generally should issue the report that is appropriate fora. The lowest level of
The existence of audit risk is recognized by the statement in the auditor’s standard report that the auditora. Obtains reasonable assurance about whether the financial statements are free of material misstatement.b. Assesses the accounting principles used and also evaluates the overall financial
The objective of an accountant’s compilation of the financial statements of a nonissuer (nonpublic company) is to provide what type of assurance?a. Absolute assurance.b. Limited assurance.c. No assurance.d. Reasonable assurance.
A typical objective of an operational audit is to determine whether an entity’sa. Internal control is adequately operating as designed.b. Operational information is in accordance with generally accepted governmental auditing standards.c. Financial statements present fairly the results of
Operational auditing is primarily oriented towarda. Future improvements to accomplish the goals of management.b. The accuracy of data reflected in management’s financial records.c. The verification that a company’s financial statements are fairly presented.d. Past protection provided by
Which of the following procedures would an auditor most likely perform during an audit engagement’s overall review stage in formulating an opinion on an entity’s financial statements?a. Obtain assurance from the entity’s attorney that all material litigation has been disclosed in the
Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion ofa. Presentation.b. Completeness.c. Rights.d. Existence.
Which of the following most likely would be detected by an auditor’s review of a client’s sales cutoff?a. Shipments lacking sales invoices and shipping documents.b. Excessive write-offs of accounts receivable.c. Unrecorded sales at year-end.d. Lapping of year-end accounts receivable.
Which of the following procedures is least likely to be performed before the balance sheet date?a. Testing of internal control over cash.b. Confirmation of receivables.c. Search for unrecorded liabilities.d. Observation of inventory.
Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client’s material accounts receivable balances. The auditor should firsta. Request the permission of the client to undertake the
On March 15, 2002, Kent, CPA, issued an unqualified opinion on a client’s audited financial statements for the year ended December 31, 2001. On May 4, 2002, Kent’s internal inspection program disclosed that engagement personnel failed to observe the client’s physical inventory.Omission of
An auditor is considering whether the omission of a substantive procedure considered necessary at the time of an audit may impair the auditor’s present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if thea. Financial statements and
On March 2, the CPA learned that on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating financial condition of the entity’s principal customer that led to the customer's bankruptcy. Management then refused to adjust the financial
On February 25, a CPA issued an auditor’s report expressing an unqualified opinion on financial statements for the year ended January
Which of the following procedures should an auditor generally perform regarding subsequent events?a. Compare the latest available interim financial statements with the financial statements being audited.b. Send second requests to the client’s customers who failed to respond to initial accounts
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?a. Confirming a sample of material accounts receivable established after year-end.b. Comparing the financial statements being reported on with those of the prior
A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor’s fieldwork.The auditor shoulda. Advise management to adjust the balance sheet to reflect the acquisition.b. Issue pro forma financial statements giving effect to the acquisition as if it
After an audit report containing an unqualified opinion on a nonissuer (nonpublic) 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 shoulda. Determine whether the information
Zero Corp. suffered a loss that would have a material effect on its financial statements on an uncollectible trade account receivable due to a customer’s bankruptcy. This occurred suddenly due to a natural disaster ten days after Zero’s balance sheet date, but one month before the issuance of
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. An uninsured natural disaster occurs that may affect the entity’s ability to continue as a going
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?a. Determine that changes in employee pay rates after year-end were properly authorized.b. Recompute depreciation charges for plant assets sold after year-end.c. Inquire about
An auditor most likely would modify an unqualified opinion if the entity’s financial statements include a footnote on related-party transactionsa. Disclosing loans to related parties at interest rates significantly below prevailing market rates.b. Describing an exchange of real estate for similar
Which of the following statements is correct concerning related-party transactions?a. In the absence of evidence to the contrary, related-party transactions should be assumed to be outside the ordinary course of business.b. An auditor should determine whether a particular transaction would have
When auditing related-party transactions, an auditor places primary emphasis ona. Ascertaining the rights and obligations of the related parties.b. Confirming the existence of the related parties.c. Verifying the valuation of the related-party transactions.d. Evaluating the disclosure of the
After determining that a related-party transaction has, in fact, occurred, an auditor shoulda. Add a separate paragraph to the auditor’s standard report to explain the transaction.b. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded.c. Obtain an
Which of the following auditing procedures most likely would assist an auditor in identifying related-party transactions?a. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.b. Vouching accounting records for recurring transactions recorded just after the
Which of the following is least likely to be an approach followed when auditing the fair values of assets and liabilities?a. Review and test management’s process of valuation.b. Confirm valuations with audit committee members.c. Independently develop an estimate of the value of the account.d.
When auditing the fair value of an asset or liability, valuation issues ordinarily arise at the point of Initial recording Subsequent to initial recordinga. Yes Yesb. Yes Noc. No Yesd. No No
Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?a. “I believe that the possible liability to the company is nominal in amount.”b. “I believe that the
A CPA has received an attorney’s letter in which no significant disagreements with the client’s assessments of contingent liabilities were noted. The resignation of the client’s lawyer shortly after receipt of the letter should alert the auditor thata. Undisclosed unasserted claims may have
The scope of an audit is not restricted when an attorney’s response to an auditor as a result of a client’s letter of audit inquiry limits the response toa. Matters to which the attorney has given substantive attention in the form of legal representation.b. An evaluation of the likelihood of an
Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?a. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed.b.
The primary reason an auditor requests letters of inquiry be sent to a client’s attorneys is to provide the auditor witha. The probable outcome of asserted claims and pending or threatened litigation.b. Corroboration of the information furnished by management about litigation, claims, and
Which of the following is an audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments?a. Request the client’s lawyer to evaluate whether the client’s pending litigation, claims, and assessments indicate a going concern problem.b. Examine the legal
The refusal of a client’s attorney to provide information requested in an inquiry letter generally is considereda. Grounds for an adverse opinion.b. A limitation on the scope of the audit.c. Reason to withdraw from the engagement.d. Equivalent to a significant deficiency.
A lawyer’s response to an auditor’s inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client’s financial statements. Which parties should reach an understanding on the limits of materiality for
Which of the following is not a specialist upon whose work an auditor may rely?a. Actuary.b. Appraiser.c. Internal auditor.d. Engineer.
In using the work of a specialist, an understanding should exist among the auditor, the client, and the specialist as to the nature of the specialist’s work. The documentation of this understanding should covera. A statement that the specialist assumes no responsibility to update the
In using the work of a specialist, an auditor referred to the specialist’s findings in the auditor’s report. This would be an appropriate reporting practice if thea. Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist.b.
Which of the following statements is correct about the auditor’s use of the work of a specialist?a. The specialist should not have an understanding of the auditor’s corroborative use of the specialist’s findings.b. The auditor is required to perform substantive procedures to verify the
In using the work of a specialist, an auditor may refer to the specialist in the auditor’s report if, as a result of the specialist’s findings, the auditora. Becomes aware of conditions causing substantial doubt about the entity’s ability to continue as a going concern.b. Desires to disclose
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