AUDIT PRELIM EXAM PART 2

All CPA firms registered with the PCAOB are required to undergo a peer review annually.

A. True

B. False

The form that must be completed and filed with the Securities and Exchange Commission whenever a
company experiences a significant event that is of interest to public investors is the:

A. Form S-1

B. Form 8-K

C. Form 10-K

D. Form 10-Q

The form that must be filed with the Securities and Exchange Commission whenever a company plans to
issue new securities to the public is the:

A. Form S-1

B. Form 8-K

C. Form 10-K

D. Form 10-Q

A
The AICPA has authority to establish standards and rules in all but which of the following areas?

A. Auditing standards applicable to financial statements of private companies.

B. Compilation and review standards.

C. Professional conduct.

D. Auditing standards applicable to financial statements of private and public companies.

Which of the following are audit standards used in professional practice by audit firms?

A. International Standards on Auditing, but not U.S. GAAS and not PCAOB Auditing Standards.

B. International Standards on Auditing, U.S. GAAS, but not PCAOB Auditing Standards.

C. International Standards on Auditing, U.S. GAAS, and PCAOB Auditing Standards.

D. Not International Standards on Auditing, but U.S. GAAS, but not PCAOB Auditing Standards.

For privately held companies who is responsible for establishing auditing standards?

A. Securities and Exchange Commission

B. Public Company Accounting Oversight Board

C. Auditing Standards Board

D. National Association of Accounting

Standards issued by the PCAOB must be followed by CPAs who audit:

B. public companies only.

C. private companies, public companies, and nonprofit entities.

D. private companies only.

The International Standards on Auditing:

A. are issued by the AICPA.

B. override a country's regulations governing the audit of a company.

C. has many of the same standards as the Auditing Standards Board.

D. must be followed by companies whose stock is traded in the U.S.

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If an auditor of a public company cannot find guidance issued by the PCAOB on a particular audit matter,
the auditor should generally seek guidance from which of the following sources?

A. Statements on Auditing Standards

B. Statements on Standards for Accounting and Review Services

C. Regulations issued by the Securities and Exchange Commission

D. The AICPA Code of Professional Conduct

A
Which of the following is a true statement regarding auditing standards?

A. Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for U.S. public
companies.

B. PCAOB auditing standards are applicable to entities outside the U.S.

C. There are no similarities between PCAOB standards and International Standards on Auditing.

D. The Auditing Standards Board has revised most of its standards to converge with the international
standards.

Auditing standards require that the audit report must be titled and that the title must:

A. include the word "independent."

B. indicate if the auditor is a CPA.

C. indicate if the auditor is a proprietorship, partnership, or corporation.

D. indicate the type of audit opinion issued.

The auditor's responsibility section of the standard unqualified audit report states that the audit is
designed to:

A. discover all errors and/or irregularities.

B. discover material errors and/or irregularities.

C. conform to generally accepted accounting principles.

D. obtain reasonable assurance whether the statements are free of material misstatement.

D
Which of the following is NOT explicitly stated in the standard unqualified audit report?

A. The financial statements are the responsibility of management.

B. The audit was conducted in accordance with generally accepted accounting principles.

C. The auditors believe that the audit evidence provides a reasonable basis for their opinion.

D. An audit includes assessing the accounting estimates used.

The management's responsibility section of the standard audit report for a non-public company states
that the financial statements are:

A. the responsibility of the auditor.

B. the responsibility of management.

C. the joint responsibility of management and the auditor.

D. none of the above.

Which of the following statements are true for the audit report of a non-public entity?

I. The introductory paragraph states that management is responsible for the preparation and content of
the financial statements.

II. The scope paragraph states that the auditor evaluates the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates made by management.

A. I only

B. II only

C. I and II
D. Neither I nor II

The auditor's responsibility section of the standard audit report states that the auditor is:

A. responsible for the financial statements and the opinion on them.

B. responsible for the financial statements.

C. responsible for the opinion on the financial statements.

D. jointly responsible for the financial statements with management.

The appropriate audit report date for a standard nonqualified audit report for a non-public entity should
be the:

A. date the financial statements are given to the Board of Directors.

B. date of the financial statements.

C. date the auditor completed the auditing procedures in the field.

D. 60 days after the date of the financial statements as required by the SEC.

In which of the following situations would the auditor most likely issue an unqualified report?

A. The client valued ending inventory by using the replacement cost method.

B. The client valued ending inventory by using the Next-In-First-Out (NIFO) method.

C. The client valued ending inventory at selling price rather than historical cost.

D. The client valued ending inventory by using the First-In-First-Out (FIFO) method, but showed the
replacement cost of inventory in the Notes to the Financial Statements.

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The standard unqualified audit report:

A. is sometimes called a clean opinion.

B. can be issued only with an explanatory paragraph.

C. can be issued if only a balance sheet and income statement are included in the financial statements.

D. is sometimes called a disclaimer report.

Examples of unqualified opinions which contain modified wording (without adding an explanatory
paragraph) include:

A. the use of other auditors.

B. material uncertainties.

C. substantial doubt about the audited company (or the entity) continuing as a going concern.

D. lack of consistent application of GAAP.

A CPA may wish to emphasize specific matters regarding the financial statements even though an
unqualified opinion will be issued. Normally, such explanatory information is:

A. included in the scope paragraph.

B. included in the opinion paragraph.

C. included in a separate paragraph in the report.

D. included in the introductory paragraph.

All of the following are causes for the addition of an explanatory paragraph under both AICPA and
PCAOB standards EXCEPT for:

A. emphasis of a matter.

B. reports involving other auditors.

C. lack of consistent application of generally accepted accounting principles.

D. auditor agrees with a departure from promulgated accounting principles.

The term "explanatory paragraph" was replaced in the AICPA auditing standards with:

A. going concern paragraph.

B. emphasis-of-matter paragraph.

C. departure from principles paragraph.

D. consistency paragraph.

When a company's financial statements contain a departure from GAAP with which the auditor concurs,
the departure should be explained in:

A. the scope paragraph.

B. an explanatory paragraph that appears before the opinion paragraph.

C. the opinion paragraph.

D. an explanatory paragraph after the opinion paragraph.

William Gregory, 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.
Gregory 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 his report on the consolidated financial
statements, taken as a whole, Gregory:

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. must refer to the examination of the other auditors along with the percentage off consolidated assets
and revenue that they audited.

A company has changed its method of inventory valuation from an unacceptable one to one in
conformity with generally accepted accounting principles. The auditor's report on the financial
statements of the year of the change should include:

A. no reference to consistency.

B. a reference to a prior period adjustment in the opinion paragraph.

C. an explanatory paragraph that justifies the change and explains the impact of the change on reported
net income.

D. an explanatory paragraph explaining the change.

Which of the following modifications of the auditor's report does NOT include an explanatory
paragraph?

A. A qualified report is due to a GAAP departure.

B. The report includes an emphasis of a matter.

C. There is a very material scope limitation.

D. A principal auditor accepts the work of an other auditor.

No reference is made in the auditor's report to the auditors who perform a portion of the audit when:

I. The other auditor audited an immaterial portion of the audit.

II. The other auditor is well known or closely supervised by the principle auditor.

III. The principle auditor has thoroughly reviewed the work of the other auditor.

A. I and II

B. I and III

C. II and III

D. I, II and III

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When an auditor is trying to determine how changes can affect consistency and and/or comparability,
he should keep in mind that:

A. changes that affect comparability but not consistency require an explanatory paragraph.

B. items that materially affect the comparability of financial statements require an explanatory
paragraph.

C. changes that affect consistency require an explanatory paragraph if they are material.

D. changes that involve either comparability or consistency only need to be mentioned in the footnotes.

All of the following would require an emphasis of matter paragraph EXCEPT for:

A. the existence of material related party transactions.

B. the lack of auditor independence.

C. important events occurring subsequent to the balance sheet date.

D. material uncertainties disclosed in the footnotes.

Which of the following is false concerning the principal CPA firm's alternatives when issuing a report
when another CPA firm performs part of the audit?

A. Issue a joint report signed by both CPA firms.

B. Make no reference to the other CPA firm in the audit report, and issue the standard unqualified
opinion.

C. Make reference to the other auditor in the report by using modified wording (a shared opinion or
report).

D. A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not
willing to assume any responsibility for the work of the other auditor.
A

Which of the following requires recognition in the auditor's opinion as to consistency?

A. The correction of an error in the prior year's financial statements resulting from a mathematical
mistake in capitalizing interest.

B. A change in the estimate of provisions for warranty costs.

C. The change from the cost method to the equity method of accounting for investments in common
stock.

D. A change in depreciation method which has no effect on current year's financial statements but is
certain to affect future years.

An adverse opinion is issued when the auditor believes:

A. some parts of the financial statements are materially misstated or misleading.

B. the financial statements would be found to be materially misstated if an investigation were

C. the auditor is not independent.

D. the overall financial statements are so materially misstated that they do not present fairly the
financial position or results of operations and cash flows in conformity with GAAP.

A qualified opinion can be issued for which of the following?

I. When a limitation on the scope of the audit has occurred.

II. When the auditor lacks independence.

A. I and II

B. I and III

C. II and III

D. I, II and III

If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued
a(n):

A. adverse opinion.

B. disclaimer of opinion.

C. unqualified opinion.

D.qualified opinion.

A client has changed their method of valuing inventory from FIFO to LIFO and the change has a material
effect on the financial statements. If the auditor does not concur with the appropriateness of the
change, the auditor should issue a(n):

A. disclaimer.

B. adverse opinion.

C. unqualified opinion.

D. qualified opinion.

B
Items that materially affect the comparability of financial statements generally require disclosure in the
footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue:

A. a disclaimer.

B. an unqualified opinion.

C. a qualified opinion.

D. an adverse opinion.

Which of the following scenarios does NOT result in a qualified opinion?

A. A scope limitation prevents the auditor from completing an important audit procedure.

B. Circumstances exist that prevent the auditor from conducting a complete audit.

C. The auditor lacks independence with respect to the audited entity.

D. An accounting principle at variance with GAAP is used.

Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned
that management may be trying to prevent discovery of misstatements. In such cases, the auditor will
likely issue a:

A. disclaimer of opinion in all cases.

B. qualification of both scope and opinion in all cases.

C. disclaimer of opinion whenever materiality is in question.

D. qualification of bother scope and opinion whenever materiality is in question.

C.
In which of the following circumstances would an auditor most likely express an adverse opinion?

A. The CEO refuses to let the auditor have access to the board of director meeting minutes.

B. The financial statements are not in conformity with the FASB statement on loss contingencies.

C. Information comes to the auditor's attention that raises substantial doubt about the ability for the
client to continue as a going concern.

D. Tests of controls shows that the internal control structure is so poor that the auditor has to assess
control risk at the maximum.

Which of the following is NOT one of the four parts of the AICPA's Code of Professional Conduct?

A. Principles

B. Rules of Conduct

C. Interpretations

D. Definitions

According to the Principles section of the Code of Professional Conduct, all members:

A. should be independent in fact and in appearance at all times.

B. in public practice should be independent in fact and in appearance at all times.

C. in public practice should be independent in fact and in appearance when providing auditing and other
attestations services.

D. in public practice should be independent in fact and in appearance when providing auditing, tax, and
other attestation services.

C
Of the four parts of the AICPA's Code of Professional Conduct, which part is enforceable?

A. Ethical Rulings

B. Rules of conduct

C. Principles

D. Interpretations