pending litigation claim would result B u s i n e s s F i n a n c e

Which of the following is not a substantive audit procedure for estimates of management?

Select one:

A. Comparing the estimates of management to subsequently discovered facts before the end of fieldwork.

B. Recalculating the mathematical estimate.C. Developing an independent estimate based on alternative assumptions.D. Observing whether estimates are prepared by qualified personnel.

Loan covenants are used for which of the following reasons?

Select one:

A. To protect the auditors from false information by the borrower.

B. To protect the lender from the borrower substantially weakening the borrower’s financial position

C. To protect the borrower from the lender calling the loan early.

D. To protect shareholders from management taking on too much debt.

A related party is a person or entity that

Select one:

A. does business with the company.

B. can exert significant influence over or be influenced by the company.

C. is a member of the company’s management.

D. has a family tie to a management member.

When auditing the valuation assertion of an equity method investment, which of the following is the auditor most likely to do?

Select one:

A. Obtain the market price of the stock as of year-end.

B. Obtain audited financial statements of the investee company.

C. Review management’s calculations.

D. Inspect stock certificates.

Near the end of an audit, the application of analytical procedures is

Select one:

A. recommended by auditing standards.

B. not mentioned by auditing standards.

C. required by auditing standards.

D. not useful, since detailed substantive procedures have already been performed.

Analytical procedures performed near the end of an audit generally include

Select one:

A. gathering evidence concerning account balances that have not changed from the prior year.

B. performing tests of transactions to corroborate management’s financial statement assertions.

C. considering unusual or unexpected account balances that were not previously identified.

D. retesting control activities that appeared to be ineffective during the assessment of control risk.

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?

Select one:

A. Accounts receivable

B. Accounts payable

C. Interest expense

D. Travel and entertainment expense

If an entity had litigation pending at the date of the financial statements and auditors learn of the outcome of this litigation following the date of their report (but prior to the audit report release date), this is known as a

Select one:

A. omitted procedure.

B. prior period adjustment.

C. subsequently discovered fact.

D. subsequent event.

Which of the following would not ordinarily be considered when using analytical procedures to verify the overall reasonableness of revenue and expense accounts?

Select one:

A. Expected balances using a statistical analysis or relationships among accounts

B. Internal budgets and reports

C. Prior-year balances

D. Current-year recorded (unaudited) balances

Auditors will issue an adverse opinion when

Select one:

A. a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.

B. a severe scope limitation has been imposed by the entity.

C. the entity’s ability to continue as a going concern is subject to substantial doubt.

D. a qualified opinion cannot be rendered because the auditors lack independence.

The issuance of a disclaimer of opinion generally indicates

Select one:

A. the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.

B. the auditors have observed a departure from generally accepted accounting principles but the departure is not of sufficient materiality to justify a qualified opinion.

C. the auditors have some uncertainties, but these uncertainties are not so material that they cannot form an opinion on the fairness of presentation of the financial statements as a whole.

D. the auditors have observed a departure from generally accepted accounting principles that is so material and pervasive that a qualified opinion is not justified.

In which of the following circumstances may auditors issue the standard (unmodified) report on the entity’s financial statements?

Select one:

A. The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation.

B. The auditors reference component auditors who examined a subsidiary of group financial statements.

C. The entity changed accounting principles having an immaterial effect on the entity’s financial position, results of operations, and cash flows.

D. The auditors wish to emphasize a matter regarding the financial statements.

Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity’s financial statements in an additional paragraph

Select one:

A. following the opinion paragraph.

B. preceding the Auditor’s Responsibility section.

C. within the footnotes to the financial statements.

D. preceding the opinion paragraph.

Auditors are required to reference consistency in their report when there are changes in

Select one:

A. accounting estimates.

B. the format of the Statement of Cash Flows.

C. accounting principles.

D. the classification of financial statement amounts.

When component auditors are involved in the audit of group financial statements, the group auditors are required to

Select one:

A. identify the extent of component auditors’ involvement if they choose not to rely on the component auditors’ work.

B. identify the component auditors by name in their report to appropriate limit their liability for the component auditors’ work.

C. disclaim an opinion on the portion of the financial statements examined by the component auditors.

D. consider the independence and professional reputation of the component auditors in deciding how to utilize their work.

If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a

Select one:

A. adverse opinion with reference to departure.

B. qualified opinion with reference to departure.

C. adverse opinion with scope limitation reference.

D. disclaimer of opinion.

A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?

Select one:

A. Unmodified opinion

B. Qualified opinion

C. Disclaimer of opinion

D. Adverse opinion

Which of the following scope limitations would ordinarily be of most concern to the auditors?

Select one:

A. The inability to obtain confirmation of year-end balances from customers because of different billing dates

B. The inability to observe inventories because auditors were appointed following the date of the financial statements

C. Management’s refusal to provide auditors with written representations

D. The use of the work of component auditors in the audit of group financial statements

Management determined it was probable that a pending litigation claim would result in a material loss. The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement. If the auditors believe an accrual should be made, what type of report should be issued?

Select one:

A. Standard (unmodified) report

B. Qualified opinion based on a circumstance-imposed scope limitation

C. Qualified or adverse opinion based on a departure from GAAP

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

When a circumstance-imposed scope limitation has a material but not pervasive effect on the sufficiency of the auditors’ evidence, the auditors’ report will

Select one:

A. modify the opinion paragraph.

B. modify the introductory and opinion paragraphs and omit the Auditor’s Responsibility section.

C. modify the introductory paragraph, Auditor’s Responsibility section, and opinion paragraphs.

D. modify the Auditor’s Responsibility section and opinion paragraph.

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a

Select one:

A. qualification.

B. scope limitation.

C. expansion of scope.

D. division of responsibility.

The standard (unmodified) report issued in the audit of a nonpublic entity includes a

Select one:

A. opinion paragraph providing the auditors’ conclusion as to the fair presentation of the financial statements.

B. internal control paragraph indicating the effectiveness of the entity’s internal control over financial reporting.

C. management’s responsibility section providing a general description of an audit conducted in accordance with the applicable auditing standards.

D. introductory paragraph identifying the responsibility of management and auditors in the financial reporting process.