Question Details

BUSINESS 101
FINAL EXAM
The third general standard states that due care is to be exercised in the performance of an audit. This
standard is ordinarily interpreted to require:
a. Thorough review of the existing safeguards over access to assets and records.
b. Limited review of the indications of employee fraud and illegal acts.
c. Objective review of the adequacy of the technical training and proficiency of firm personnel.
d. Critical review of the judgment exercised at every level of supervision
Under U.S. auditing standards, when an auditor believes there is substantial doubt about the ability of an
entity to continue as a going concern, all of the following should be included in the audit documentation,
except:
a. The conditions that gave rise to the substantial doubt.
b. The auditor's conclusion about whether substantial doubt remains or is alleviated.
c. Management's conclusion regarding whether substantial doubt remains or is alleviated.
d. The effect of the auditor's conclusion on the auditor's report.
An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for
a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the
auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s):
"Reasonable period
of time, not to exceed
one year" "Going concern"
a. Yes Yes
b. Yes No
c. No Yes
d. No No
In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent
application of accounting principles between the current and prior year, as well as the amounts of assets or
liabilities at the beginning of the current year. This was due to the client's record retention policies. If the
amounts in question could materially affect current operating results, the auditor would:
a. Be unable to express an opinion on the current year's results of operations and cash flows.
b. Express a qualified opinion on the financial statements because of a client-imposed scope limitation.
c. Withdraw from the engagement and refuse to be associated with the financial statements.
d. Specifically state that the financial statements are not comparable to the prior year due to an uncertainty
Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to
Smith's audit?
I. Pell reviews Smith's audit documentation and assumes responsibility for Smith's work, but expresses a
qualified opinion on Tech's financial statements.
II. Pell is unable to review Smith's audit documentation; however, Pell's inquiries indicate that Smith has an
excellent reputation for professional competence and integrity.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
Explanation
For which of the following events would an auditor issue a report that omits any reference to consistency?
a. A change in the method of accounting for inventories.
b. A change from an accounting principle that is not generally accepted to one that is generally accepted.
c. A change in the useful life used to calculate the provision for depreciation expense.
d. Management's lack of reasonable justification for a change in accounting principle.
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 factor, Zero's plans to:
a. Discuss with lenders the terms of all debt and loan agreements.
b. Strengthen internal controls over cash disbursements.
c. Purchase production facilities currently being leased from a related party.
d. Postpone expenditures for research and development projects.
Explanation
Which of the following statements is a basic element of the auditor's standard report under U.S. auditing
standards?
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 estimates made by management.
d. The financial statements are consistent with those of the prior period.
Explanation
An auditor may not issue a qualified opinion when:
a. An accounting principle at variance with GAAP is used.
b. The auditor lacks independence with respect to the audited entity.
c. A scope limitation prevents the auditor from completing an important audit procedure.
d. The auditor's report refers to the work of a specialist
An auditor would express an unqualified opinion with an explanatory paragraph added to the auditor's report
for:
A material weakness
An unjustified in internal
accounting change control
a. Yes Yes
b. Yes No
c. No Yes
d. No No
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
a. The auditor is unable to determine the amounts associated with an employee fraud scheme.
b. Management does not provide reasonable justification for a change in accounting principles.
c. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative
procedures to verify their balances.
d. The chief executive officer is unwilling to sign the management representation letter.
inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an:
a. Unqualified opinion.
b. Opinion qualified because of a lack of consistency.
c. Opinion qualified because of a departure from GAAP.
d. Adverse opinion.
Explanation
Choice
for a reasonable period of time. If Lima's financial statements adequately disclose its financial difficulties,
Kane's auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s):
"Possible "Reasonable period
discontinuance of time, not to
of operations" exceed one year"
a. Yes Yes
b. Yes No
c. No Yes
d. No No
Explanation