32. After the fieldwork is completed, a partner of the CPA firm who has not been involved in the audit performs a second-partner documentation review. This second review usually focuses on
A) The fair presentation of the financial statements in conformity with GAAP.
B) Irregularities involving the client's management and its employees.
C) The materiality of the adjusting entries proposed by the audit staff.
D) The communication of internal control deficiencies to the client's audit committee.
33. An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this irregularity by
A) Tracing a sample of journal entries to the general ledger.
B) Evaluating the effectiveness of the internal control policies and procedures.
C) Investigating the reconciliations between controlling accounts and subsidiary records.
D) Performing analytical procedures designed to disclose differences from expectations.
34. The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor with
A) The probable outcome of asserted claims and pending or threatened litigation.
B) Corroboration of the information furnished by management about litigation, claims, and assessments.
C) The attorneys' opinions of the client's historical experiences in recent similar litigation.
D) A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date.
35. Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next
A) Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
B) Request that management disclose the newly discovered information by issuing revised financial statements.
C) Issue revised pro forma financial statements taking into consideration the newly discovered information.
D) Give public notice that the auditor is no longer associated with financial statements.
36. Analytical procedures used in the overall review stage of an audit generally include
A) Considering unusual or unexpected account balances that were not previously identified.
B) Performing tests of transactions to corroborate management's financial statement assertions.
C) Gathering evidence concerning account balances that have not changed from the prior year.
D) Retesting control procedures that appeared to be ineffective during the assessment of control risk.
37. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?
A) Accounts receivable.
B) Interest expense.
C) Accounts payable.
D) Travel and entertainment expense.
38. On March 15, 2006, Kent, CPA, issued an unqualified opinion on a client's audited financial statements for the year ended December 31, 2005. On May 4, 2006, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first
A) Advise management to disclose to the stockholders that Kent's unqualified opinion should not be relied on.
B) Undertake to apply alternative procedures that would provide a satisfactory basis for the unqualified opinion.
C) Reissue the auditor's report and add an explanatory paragraph describing the departure from generally accepted auditing standards.
D) Compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level.
39. 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 receivable confirmation requests.
C) Communicate material weaknesses in internal control to the client's audit committee.
D) Review the cut-off bank statements for several months after the year-end.
40. 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 payroll checks that were recorded before year-end but cashed after year-end.
D) Investigate changes in long-term debt occurring after year-end.
41. Which of the following pairs of accounts would an auditor most likely analyze on the same audit documentation?
A) Notes receivable and interest income.
B) Accrued interest receivable and accrued interest payable.
C) Notes payable and notes receivable.
D) Interest income and interest expense.
42. Reference in a principal auditor's report to the fact that part of the audit was performed by another auditor most likely would be an indication of
A) divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.
B) lack of materiality of the portion of the financial statements audited by the other auditor.
C) principal auditor's recognition of the other auditor's competence, reputation, and professional certification.
D) different opinions the auditors are expressing on the components of the financial statements that each audited.
43. 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
A) is considered an "except for" qualification of the opinion.
B) violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
C) necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
D) is appropriate and would not otherwise affect the unqualified opinion.
44. 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
A) refer to the change in an explanatory paragraph.
B) explicitly concur that the change is preferred.
C) not refer to consistency in the auditor's report.
D) refer to the change in the opinion paragraph.
45. When financial statements contain a departure from GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should explain the unusual circumstances in a separate paragraph and express an opinion that is
D) qualified or adverse, depending on materiality.
46. 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 structure is so poor that it cannot be relied upon.
C) The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.
D) Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern.
47. 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 substantial doubt about the entity's ability to continue as a going concern.
C) Management's estimates of the effects of future events are unreasonable.
D) Certain transactions cannot be tested because of management's records retention policy.
48. 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)
A) unqualified opinion.
B) unqualified opinion with an explanatory paragraph.
C) qualified opinion due to a scope limitation.
D) qualified opinion due to a departure from generally accepted auditing standards.
49. In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion?
A) The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other audit procedures.
B) The financial statements fail to disclose information that is required by generally accepted accounting principles.
C) The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.
D) Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.
50. 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(an)
A) adverse opinion or a disclaimer of opinion.
B) qualified opinion or an adverse opinion.
C) disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph.
D) unqualified opinion with a separate explanatory paragraph or a qualified opinion.
32. A) is a very general definition of what a partner review accomplishes, but it is better than the other answers.
33. D) Analytical procedures include ratio analysis, trend analysis and reasonableness tests. Any one of the procedures should disclose errors as mentioned.
34. A) The probable outcome of asserted claims and pending or threatened litigation. B is also a good answer but A tells the auditor whether contingent events need to be recorded and disclosed.
35. B) Request that management disclose the newly discovered information by issuing revised financial statements.
36. A) Considering unusual or unexpected account balances that were not previously identified. The reviewer asks hard questions about whether the company's results make sense in relationship to industry and economic ...
The solution presents a sentence or two for each question. As is usually true with auditing, answers can involve judgment. The comments discuss differing opinions or qualifications about the available multiple choice answers, but decisions are made about the best answer.