University of Maryland, University College

ACCT 612

1)Which of the following statements best describes the distinction between the auditor's responsibilities and management's responsibilities?

1. Management has responsibility for maintaining and adopting sound accounting policies, and the auditor has responsibility for internal control.

2. Management has responsibility for the basic data underlying financial statements, and the auditor has responsibility for drafting the financial statements.

3. The auditor's responsibility is confined to the audited portion of the financial statements, and management's responsibility is confined to the unaudited portions.

4. The auditor's responsibility is confined to expressing an opinion, but the financial statements remain the responsibility of management.

2. Eagle Company's financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is

1. Qualified and describe the departure in a separate paragraph.

2. Unmodified but not mention the departure in the auditor's report.

3. Qualified or adverse, depending on materiality, and describe the departure in an other-matter paragraph.

4. Unmodified and describe the departure in an other-matter paragraph.

3. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

1. It is difficult to prepare financial statements that fairly present a company's financial position, results of operations, and cash flows without the expertise of an independent

auditor.

2. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements.

3. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.

4. It is a customary courtesy that all shareholders of a company receive an independent report on management's stewardship in managing the affairs of the business.

4. The opinion of a suitably qualified, independent, outside party lends credibility to the financial statements and provides some protection to third parties who may rely upon them when making investment decisions. The opinion contained in the audit report, which accompanies audited financial statements, is the result of the auditor's performance of the attest function, that is, the gathering of evidence during the audit and the issuance of an opinion on the fairness of the presentation of the statements. The securities of Ralph Corporation are listed on a regional stock exchange and registered with the Securities and Exchange Commission (SEC).

The management of Ralph engages a CPA to perform an independent audit of Ralph's financial statements. The primary objective of this audit is to provide assurance to the

1. Regional stock exchange.

2. Board of directors of Ralph Corporation.

3. SEC.

4. Investors in Ralph securities.

5. The opinion of a suitably qualified, independent, outside party lends credibility to the financial statements and provides some protection to third parties who may rely upon them when making investment decisions. Some users have the authority to obtain any information desired, but most investors do not....

The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of

1. Quality control.

2. Generally accepted auditing standards, which include the concept of materiality.

3. The auditor's assessment of the risk of material misstatement.

4. Generally accepted accounting principles.

6. Reporting standards require the auditor to state whether the audited entity's financial statements are presented in conformity with GAAP. Without an applicable reporting framework, the auditor would have no uniform standard for judging fairness of presentation....

The auditor's opinion refers to U.S. generally accepted accounting principles (U.S. GAAP). Which of the following best describes U.S. GAAP?

1. The interpretations of accounting rules and procedures by certified public accountants on audit engagements.

2. The pronouncements of the Financial Accounting Standards Board.

3. The guidelines set forth by various governmental agencies that derive their authority from Congress.

4. Principles issued by bodies designated by the Council of the AICPA.

7. GAAP are issued by bodies designated by the AICPA Council in accordance with Rules of Conduct 202 and 203. For nongovernmental financial accounting purposes, these standards setters include the FASB for U.S. GAAP and the International Accounting Standards Board (IASB) for international financial reporting standards. Moreover, pronouncements of the SEC must be followed by registrants.

The financial statements include a separate statement of changes in equity. This statement should

1. Not be identified in the introductory paragraph but should be reported on separately in the opinion paragraph.

2. Be excluded from both the introductory and opinion paragraphs.

3. Be identified in the introductory paragraph of the report but need not be reported on separately in the opinion paragraph.

4. Be identified in the introductory paragraph of the report and must be reported on separately in the opinion paragraph.

8. The balance sheet, statement of income, statement of changes in equity, and statement of cash flows are the financial statements upon which the auditor customarily reports.

The introductory paragraph identifies the titles of the entity's financial statements. However, the statement of changes in equity and a separate statement of comprehensive income are not separately reported on the opinion paragraph. The

reason is that changes in equity and comprehensive income are included in financial position, results of operations, and cash flows.

A major purpose of the auditor's report on financial statements is to

1. Assure investors of the complete accuracy of the financial statements.

2. Clarify for the public the nature of the auditor's responsibility and performance.

3. Deter creditors from extending loans in high-risk situations.

4. Describe the specific auditing procedures undertaken to gather evidence for the opinion.

9. One of the highest priorities of the AICPA has been to reduce the gap between the nature of the auditor's responsibility and performance and the public's perception of the audit function. The auditor's report issued in accordance with auditing standards clarifies the role of the auditor with the intention of diminishing the gap.

If financial statements are to meet the requirements of adequate disclosure,

1. All information pertaining to the company must be disclosed in the statements or related notes, even though some of the disclosures are potentially detrimental to the company or its shareholders.

2. All information believed by the auditor to be essential to the fair presentation of the financial statements must be disclosed, no matter how confidential management believes the data to be.

3. Statement notes should be written in very technical language to avoid misinterpretation by the reader.

4. A statement note must clearly detail any deficiencies contained in the financial statements themselves.

10. Adequate disclosure means that sufficient information is presented so that financial statements are not misleading. The decisions about adequate disclosure should reflect the needs of

1. Users with a reasonable knowledge of business.

2. All readers of the financial statements.

3. Experts in accounting and finance.

4. Governmental regulatory agencies.

11. Without affecting the CPA's willingness to express an unmodified opinion on the client's U.S.-GAAP-based financial statements, corporate management may refuse a request to

1. Authorize its attorney to confirm that a list of pending or threatened litigation prepared by management includes all items known to the attorney.

2. Change its basis of accounting for inventories from FIFO to LIFO because, in the opinion of the CPA, the FIFO method fails to give adequate recognition to the extraordinary increases in prices of merchandise acquired and held by the company.

3. Write down to salvage value certain equipment that is no longer useful.

4. Allow the CPA to examine tax returns for years prior to that of the financial statements being audited.

12. A client makes test counts on the basis of a statistical plan. The auditor observes such counts as are deemed necessary and is able to become satisfied as to the reliability of the client's procedures. In reporting on the results of the audit, the auditor

1. Can express an unmodified opinion.

2. Must comment in the auditor's responsibility section as to the inability to observe year-end inventories.

3. Is required to disclaim an opinion if the inventories were material.

4. Must qualify the opinion if the inventories were material.

13. The auditor's report may be addressed to the company whose financial statements are being audited or to that company's

1. Chief operating officer.

2. President.

3. Board of directors.

4. Chief financial officer.

14. An auditor has been engaged by the State Bank to audit the XYZ Corporation in conjunction with a loan commitment. The report would most likely be addressed to

1. The shareholders, XYZ Corporation.

2. The State Bank.

3. The board of directors, XYZ Corporation.

4. Whom it may concern.

15. On February 13, Year 2, Fox, CPA, met with the audit committee of the Gem Corporation to review the draft of Fox's report on the company's financial statements as of and for the year ended December 31, Year 1. On February 16, Year 2, Fox completed all remaining field work and obtained sufficient appropriate evidence to support the opinion on the financial statements. On February 28, Year 2, the final report was mailed to Gem's audit committee. What date most likely would be used on Fox's report?

1. December 31, Year 1.

2. February 13, Year 2.

3. February 16, Year 2.

4. February 28, Year 2.

16. The report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence. February 16, Year 2, is the date that Fox obtained sufficient appropriate evidence to support the opinion on the financial statements. The auditor is not responsible for making any inquiries or carrying out any audit procedures for the period after the date of the report (but see AU-C 925).

The date of the audit report is important because

1. The auditor cannot date the report earlier than the date on which sufficient appropriate evidence to support the opinion has been obtained.

2. The auditor bills time to the client up to and including the audit report date, and the statement to the client should reflect this date.

3. Auditing standards require all audits to be performed on a timely basis.

4. It should coincide with the date of the financial statements.

17. "When read in conjunction with Note X" | "With the Foregoing Explanation"

1. Yes, No

2. No,Yes

3. Yes, Yes

4. No, No

18. The auditor should use the phrase "except for" to qualify an opinion, followed by the basis for the qualification and a reference to the basis for qualified opinion paragraph preceding the opinion paragraph. Given a qualification because of a material misstatement related to specific amounts in the financial statements, the basis paragraph should describe the matter resulting in the qualification. It also should include

(1) a description and quantification of the financial effects, if practicable; (2) an explanation of how narrative disclosures are misstated; or (3) omitted information, if practicable, and a description of its nature. However, if financial-effects disclosures are made in a note to the statements, the basis paragraph may refer to it. Furthermore, the notes are part of the financial statements, and a phrase such as "when read in conjunction with Note X" in the opinion paragraph is likely to be misunderstood. Also, wording such as "with the foregoing explanation" is neither clear nor forceful enough. An auditor may reasonably express a "subject to" qualified opinion for

Departure from an Applicable Financial Reporting Framework | Lack of Consistency

1. Yes, Yes
2. Yes,No
3. No ,Yes
4. No ,No

19. The phrase "subject to" should not be used in any report. It is not clear or forceful enough (AU-C 705).

An auditor may express a qualified opinion for which of the following reasons? Circumstances Related to the Work | Limitations Imposed by Management

1. Yes, Yes
2. Yes, No
3. No,Yes
4. No ,No

20. In which of the following circumstances would an auditor usually choose between expressing a qualified opinion or disclaiming an opinion?

1. Material misstatement.

2. Inadequate disclosure of accounting policies.

3. Inability to obtain sufficient appropriate audit evidence.

4. Unreasonable justification for a change in accounting principle.

21. Auditor's Responsibility Section | Notes to Financial Statements

1. Yes, Yes
2. Yes, No
3. No, Yes
4. No, No

22. 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 field work 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(n)

1. Unmodified opinion.

2. Unmodified opinion with an emphasis-of-matter paragraph.

3. Qualified opinion because of a scope limitation.

4. Qualified opinion because of a departure from auditing standards.

23. In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?

1. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures.

2. The financial statements fail to disclose information that is required by the applicable reporting framework.

3. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.

4. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

24. An auditor may not express a qualified opinion when

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

2. The auditor's report refers to the work of a specialist.

3. An accounting principle at variance with the applicable financial reporting framework is used.

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

25. When the financial statements contain a misstatement, the effect of which is material but not pervasive, the auditor should