BUSINESS ACCOUNTING EXAM 4
QUESTIONS WITH CORRECT
ANSWERS
A public 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. The client's financial statements contain no material
misstatements and the auditor concurs that this change is justified. If the change is
disclosed in the notes to the financial statements, the auditor should issue a report
with a - Answer-Unqualified opinion
An auditor includes a separate paragraph in an otherwise unmodified financial
statement audit report to emphasize that the entity being reported upon had
significant transactions with related parties. The inclusion of this separate paragraph
- Answer-Is appropriate and would not negate the unmodified opinion
Eagle Company, a public company, had a computer failure and lost part of its
financial data. As a result, the auditor was unable to obtain sufficient audit evidence
relating to Eagle's inventory account. Assuming the inventory account is at least
material, the auditor would most likely choose either - Answer-A qualified opinion or
a disclaimer of opinion
Tech Company has appropriately disclosed an uncertainty due to pending litigation.
However, the auditor was unable to satisfy herself that all pending litigation had been
identified. The auditor's decision to issue a qualified opinion on Tech's financial
statements would most likely result from - Answer-A lack of sufficient evidence
In which of the following circumstances would an auditor usually choose between
issuing a qualified opinion or a disclaimer of opinion on a client's financial
statements? - Answer-Inability of the auditor to obtain sufficient competent evidence.
King, CPA, was engaged to audit the financial statements of Chang Company, a
private company, after its fiscal year had ended. King neither observed the inventory
count nor confirmed the receivables by direct communication with debtors but was
satisfied that both were fairly stated after applying appropriate alternative
procedures. King's financial statement audit report most likely contained a(n) -
Answer-Unmodified opinion
Comparative financial statements for a public company include the prior year's
statements, which were audited by a predecessor auditor. The predecessor's report
is not presented along with the comparative financial statements. If the
predecessor's report was unqualified, the successor should - Answer-Indicate in the
auditor's report that the predecessor auditor expressed an unqualified opinion
When reporting on comparative financial statements, which of the following
circumstances should ordinarily cause the auditor to change the previously issued
, opinion on the prior year's financial statements? - Answer-A departure from generally
accepted accounting principles caused an adverse opinion on the prior year's
financial statements, and those prior year statements have been properly restated
Which of the following best described the auditor's responsibility for "other
information" included in the annual report to stockholders that contains financial
statements and the auditor's report? - Answer-The auditor has no obligation to
corroborate the "other information" but should read the "other information" to
determine whether it is materially consistent with the financial statements
When reporting on financial statements prepared on the basis of accounting used for
income tax purposes, the auditor should include in the report a paragraph that -
Answer-States that the income tax basis of accounting is a basis of accounting other
than GAAP
When an auditor is asked to express an opinion on an entity's rent and royalty
revenues, he or she may - Answer-Accept the engagement, provided the auditor's
opinion is expressed in a special report that clearly states that only these specific
accounts were audited
Which of the following statements best explains why public accounting, as a
profession, promulgates ethical standards and establishes means for ensuring their
observance? - Answer-Ethical standards are established so that users of accounting
services know what to expect and accounting professionals know what behaviors are
acceptable, and so that discipline can be applied when necessary
All of the following nonaudit services are identified by the SEC as generally impairing
an auditor's independence with respect to an audited entity except - Answer-Some
specific tax functions
Under the SEC's rules regarding independence, which of the following must an entity
disclose? - Answer-Fees for the external audit, audit-related fees, tax fees, and fees
for other nonaudit services performed by the audit firm
The AICPA Code of Professional Conduct contains both general ethical principles
that are aspirational in character and a - Answer-Set of specific, mandatory rules
describing minimum levels of conduct a CPA must maintain
In which of the following situations would a CPA's independence be considered
impaired according to the Code of Professional Conduct?
1. The CPA has a car loan from a bank that is an audit entity. The loan was made
under the same terms available to all customers
2. The CPA has direct financial interest in an audit entity, but the investment is
maintained in a blind trust
3. The CPA owns a commercial building and leases it to an audit entity. The rental
income is material to the CPA - Answer-2 and 3
An audited company has not paid its 2018 audit fees. According to the AICPA Code
of Professional Conduct, for the auditor to be considered independent with respect to
QUESTIONS WITH CORRECT
ANSWERS
A public 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. The client's financial statements contain no material
misstatements and the auditor concurs that this change is justified. If the change is
disclosed in the notes to the financial statements, the auditor should issue a report
with a - Answer-Unqualified opinion
An auditor includes a separate paragraph in an otherwise unmodified financial
statement audit report to emphasize that the entity being reported upon had
significant transactions with related parties. The inclusion of this separate paragraph
- Answer-Is appropriate and would not negate the unmodified opinion
Eagle Company, a public company, had a computer failure and lost part of its
financial data. As a result, the auditor was unable to obtain sufficient audit evidence
relating to Eagle's inventory account. Assuming the inventory account is at least
material, the auditor would most likely choose either - Answer-A qualified opinion or
a disclaimer of opinion
Tech Company has appropriately disclosed an uncertainty due to pending litigation.
However, the auditor was unable to satisfy herself that all pending litigation had been
identified. The auditor's decision to issue a qualified opinion on Tech's financial
statements would most likely result from - Answer-A lack of sufficient evidence
In which of the following circumstances would an auditor usually choose between
issuing a qualified opinion or a disclaimer of opinion on a client's financial
statements? - Answer-Inability of the auditor to obtain sufficient competent evidence.
King, CPA, was engaged to audit the financial statements of Chang Company, a
private company, after its fiscal year had ended. King neither observed the inventory
count nor confirmed the receivables by direct communication with debtors but was
satisfied that both were fairly stated after applying appropriate alternative
procedures. King's financial statement audit report most likely contained a(n) -
Answer-Unmodified opinion
Comparative financial statements for a public company include the prior year's
statements, which were audited by a predecessor auditor. The predecessor's report
is not presented along with the comparative financial statements. If the
predecessor's report was unqualified, the successor should - Answer-Indicate in the
auditor's report that the predecessor auditor expressed an unqualified opinion
When reporting on comparative financial statements, which of the following
circumstances should ordinarily cause the auditor to change the previously issued
, opinion on the prior year's financial statements? - Answer-A departure from generally
accepted accounting principles caused an adverse opinion on the prior year's
financial statements, and those prior year statements have been properly restated
Which of the following best described the auditor's responsibility for "other
information" included in the annual report to stockholders that contains financial
statements and the auditor's report? - Answer-The auditor has no obligation to
corroborate the "other information" but should read the "other information" to
determine whether it is materially consistent with the financial statements
When reporting on financial statements prepared on the basis of accounting used for
income tax purposes, the auditor should include in the report a paragraph that -
Answer-States that the income tax basis of accounting is a basis of accounting other
than GAAP
When an auditor is asked to express an opinion on an entity's rent and royalty
revenues, he or she may - Answer-Accept the engagement, provided the auditor's
opinion is expressed in a special report that clearly states that only these specific
accounts were audited
Which of the following statements best explains why public accounting, as a
profession, promulgates ethical standards and establishes means for ensuring their
observance? - Answer-Ethical standards are established so that users of accounting
services know what to expect and accounting professionals know what behaviors are
acceptable, and so that discipline can be applied when necessary
All of the following nonaudit services are identified by the SEC as generally impairing
an auditor's independence with respect to an audited entity except - Answer-Some
specific tax functions
Under the SEC's rules regarding independence, which of the following must an entity
disclose? - Answer-Fees for the external audit, audit-related fees, tax fees, and fees
for other nonaudit services performed by the audit firm
The AICPA Code of Professional Conduct contains both general ethical principles
that are aspirational in character and a - Answer-Set of specific, mandatory rules
describing minimum levels of conduct a CPA must maintain
In which of the following situations would a CPA's independence be considered
impaired according to the Code of Professional Conduct?
1. The CPA has a car loan from a bank that is an audit entity. The loan was made
under the same terms available to all customers
2. The CPA has direct financial interest in an audit entity, but the investment is
maintained in a blind trust
3. The CPA owns a commercial building and leases it to an audit entity. The rental
income is material to the CPA - Answer-2 and 3
An audited company has not paid its 2018 audit fees. According to the AICPA Code
of Professional Conduct, for the auditor to be considered independent with respect to
