External auditing midterm exam possible questions and answer updated solution

External auditing midterm exam possible questions and answer updated solution An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report for: Mead, CPA, had sub ...

External auditing midterm exam possible questions and answer updated solution An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report for: 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, Year 4. That doubt has been removed in Year 5. What is Mead's reporting responsibility if Tech is presenting its financial statements for the year ended June 30, Year 5, on a comparative basis with those of Year 4? The Auditor's Responsibility 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 percent and 29 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors. These sentences: March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to: . 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 pervasiveness of the effect on the financial statements, the auditor should express either a(an): The group auditor decides not to refer to the component auditor who audited a subsidiary of the group auditor's client. In this situation, the group auditor most likely would: When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an): 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? When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond: 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 to: Reference in a group engagement partner's report to the fact that part of the audit was performed by another auditor most likely would be an indication of the: 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 paragraph: When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should: When single-year financial statements are presented, an auditor ordinarily would express an unmodified opinion with no emphasis of matter or other matter paragraph if the: Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, Year 3. Park obtained sufficient audit evidence for all of Tech's financial statement items except Tech's opening inventory. Due to inadequate financial records, Park could not verify Tech's January 1, Year 3, inventory balances. Park's opinion on Tech's Year 3 financial statements most likely will be: Management believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the auditor should express a(an): In which of the following circumstances would an auditor be most likely to express an adverse opinion? When qualifying an opinion due to an inability to obtain sufficient appropriate audit evidence, an auditor should refer to the situation in the: Kane, CPA, concludes that there is substantial doubt about Lima Co.'s ability to continue as a going concern for a reasonable period of time. If Lima's financial statements adequately disclose its financial difficulties, Kane's auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s): March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to: 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 pervasiveness of the effect on the financial statements, the auditor should express either a(an): The group auditor decides not to refer to the component auditor who audited a subsidiary of the group auditor's client. In this situation, the group auditor most likely would: 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? Which paragraphs of an auditor's report on financial statements under U.S. auditing standards should refer to generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP)? When disclaiming an opinion due to a client-imposed scope limitation, an auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards. The auditor should also omit the: An auditor decides to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to: When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate paragraph and modify the: 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 disclosed in the notes to the financial statements, the auditor should issue a report with a(an): If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an): In which of the following circumstances would an auditor most likely add an emphasis-of-matter paragraph to the report while not affecting the auditor's unmodified opinion? 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 emphasis-of-matter paragraph added to the auditor's report. This paragraph should identify the nature of the change and: Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of fieldwork made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditor's report most likely contained a(an): 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, Hill's plans to: In the auditor's report under U.S. GAAS, the group engagement partner decides not to make reference to another CPA who audited a client's subsidiary. The group engagement partner could justify this decision if, among other requirements, the group engagement partner: A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when management: In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion? When an auditor expresses an adverse opinion, the opinion paragraph should include: Under which of the following circumstances would a disclaimer of opinion not be appropriate? 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 under U.S. auditing standards should: When a CPA concludes that there is substantial doubt about an entity's ability to continue as a going concern and the entity adequately discloses its financial difficulties, an unmodified opinion is appropriate. An emphasis-of-matter paragraph (following the opinion paragraph) should be used to highlight the situation. This paragraph should include the phrases "substantial doubt" and "going concern." Under ISAs, the report uses the phrase "significant doubt", rather than "substantial doubt." Choices "b", "d", and "c" are incorrect, per above. An auditor may reasonably issue an "except for" qualified opinion for a(an): The following paragraph was included in an auditor's report to indicate a lack of consistency: "As discussed in note T to the financial statements, the company changed its method of computing depreciation in Year 2." How should the auditor report on this matter if the auditor concurred with the change? How does an auditor make the following representations when issuing the auditor's report on comparative financial statements under U.S. auditing standards? An auditor was unable to obtain sufficient appropriate audit evidence concerning certain transactions due to an inadequacy in the entity's accounting records. The auditor would choose between issuing a(an): Under U.S. GAAS, in which of the following situations would a group engagement partner least likely make reference to component auditor who audited a subsidiary of the entity? Under U.S. auditing standards, in which of the following situations would an auditor ordinarily issue an unmodified audit opinion without an emphasis-of-matter paragraph?