AAS1

1st SEM

1. A post-audit review, conducted by another audit partner,

discovered that the audit team had failed to examine or
confirm securities held in safekeeping. The amounts
involved were material in relation to reported net assets.
The unqualified audit report, along with the audited
financial statements, had been released two months earlier.
Based on this information, the audit team should
a. Request the client for permission to examine or confirm
the securities.
b. Notify persons known to be relying on the audit report
that the report can no longer be relied upon.
c. Draft a revised audit report containing an opinion
qualified for a scope restriction.
d. Ignore the finding inasmuch as the financial statements
and audit report have already been released.

2. The auditor's report should be dated as of the date on which

the
a. Report is delivered to the client.
b. Field work is completed.
c. Fiscal period under audit ends.
d. Review of the working papers is complete.

3. After issuing the audit report, the auditor may become aware
of information that would have affected the audit report had
it been known at the time. Given discovery of such
information, the auditor must take appropriate action. Which
of the following actions would be considered inappropriate
under these circumstances?
a. Determine whether the information is reliable and
whether the facts existed at the date of the audit
report.
b. Request the client to disclose, to financial statement
users, the newly discovered facts and their impact on
the financial statements.
c. If the client refuses to inform third parties, the
auditor should notify the board of directors and
regulatory agencies having jurisdiction over the client
that the auditors' report can no longer be relied upon.
d. Draft a revised audit report expressing a qualified or
adverse opinion, depending on the materiality of the
effect, and transmit the report to the stockholders.
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1st SEM

4. Which of the following best describes the auditor's

responsibility for "other information" included in the
annual report to stockholders which contains financial
statements and the auditor's report?
a. The auditor has no obligation to read the "other
information."
b. The auditor has no obligation to corroborate the
"other information," but should read the "other
information" to determine whether it is materially
inconsistent with the financial statements.
c. The auditor should extend the examination to the
extent necessary to verify the "other information."
d. The auditor must modify the auditor's report to state
that the "other information is unaudited" or "not
covered by the auditor's report."

5. When an auditor conducts an examination in accordance with

generally accepted auditing standards and concludes that the
financial statements are fairly presented in accordance with
a comprehensive basis of accounting other than generally
accepted accounting principles such as the cash basis of
accounting, the auditor should issue a
a. Disclaimer of opinion.
b. Review report.
c. Qualified opinion.
d. Special report.

6. In which of the following circumstances would an auditor be

most likely to express an adverse opinion?
a. The statements are not in conformity with the FASB
Statements regarding the capitalization of leases.
b. Information comes to the auditor's attention that
raises substantial doubt about the entity's ability to
continue in existence.
c. The chief executive officer refuses the auditor access
to minutes of board of directors' meetings.
d. Control tests show that the entity's internal control
is so poor that the financial records cannot be
relied upon.
7. Under which of the following circumstances would an
unqualified audit opinion, followed by an explanatory
paragraph, not be appropriate?
a. The auditor wishes to emphasize that the client has
entered into material transactions with related
parties. The substance of the related party
AAS1
1st SEM

transactions is properly disclosed in the

audited
financial statements.
b.
The client has completed material transactions with
related parties and the auditor is unable to
persuade management to properly reflect the economic
substance of the transactions in the financial
statements.
c. The client has used a method of revenue recognition
that is at variance with promulgated accounting
standards. The auditor, however, agrees with
the departure on the basis that use of the promulgated
standard would make the financial statements
materially misleading.
d. The auditor believes that substantial doubt exists
concerning the ability of the client to continue
as a going concern.

8. Doe, an independent auditor, was engaged to perform an

examination of the financial statements of Ally Incorporated
one month after its fiscal year had ended. Although the
inventory count was not observed by Doe, and accounts
receivable were not confirmed by direct communication with
debtors, Doe was able to gain satisfaction by applying
alternative auditing procedures. Doe's auditor's report
will probably contain
a. A standard unqualified opinion.
b. An unqualified opinion and an explanatory middle
paragraph.
c. Either a qualified opinion or a disclaimer of opinion.
d. An "except for" qualification.

9. The adverse effects of events causing an auditor to believe

there is substantial doubt about an entity's ability to
continue as a going concern would most likely be mitigated
by evidence relating to the
a. Ability to expand operations into new product lines in
the future.
b. Feasibility of plans to purchase leased equipment at
less than market value.
c. Marketability of assets that management plans to sell.
d. Committed arrangements to convert preferred stock to
long-term debt.

10. Comparative financial statements include the financial

statements of a prior period which were examined by a
predecessor auditor whose report is not presented. If the
AAS1
1st SEM

predecessor auditor's report was qualified, the successor

auditor must
a. Obtain written approval from the predecessor auditor to
include the prior year's financial statements.
b. Issue a standard comparative audit report indicating
the division of responsibility.
c. Express an opinion on the current year statements alone
and make no reference to the prior year statements.
d. Disclose the reasons for any qualification in the
predecessor auditor's opinion.

11. When reporting on financial statements prepared on a

comprehensive basis of accounting other than generally
accepted accounting principles, the independent auditor
should include in the report a paragraph that
a. States that the financial statements are not intended
to be in conformity with generally accepted accounting
principles.
b. States that the financial statements are not intended
to have been examined in accordance with generally
accepted auditing standards.
c. Refers to the authoritative pronouncements that explain
the comprehensive basis of accounting being used.
d. Justifies the comprehensive basis of accounting being
used.

12. After an audit report containing an unqualified opinion on a

non-public client's financial statements was issued, the
client decided to sell the shares of a subsidiary that
accounts for 30% of its revenue and 25% of its net income.
The auditor should
a. Determine whether the information is reliable and, if
determined to be reliable, request that revised
financial statements be issued.
b. Notify the entity that the auditor's report may no
longer be associated with the financial statements.
c. Describe the effects of this subsequently discovered
information in a communication with persons known to be
relying on the financial statements.
d. Take no action because the auditor has no obligation
to make any further inquiries.

13. An audit report contained the following wording: "In our

opinion, except for the omission of the segment information
referred to in the preceding paragraph..." This excerpt was
taken from a(n)
AAS1
1st SEM

a. Unqualified audit opinion with an explanatory paragraph

added to emphasize a matter.
b. Unqualified audit opinion with an explanatory paragraph
added to describe a material uncertainty.
c. Audit opinion qualified due to a departure from GAAP.
d. Adverse audit opinion.

14. An auditor includes a separate paragraph in an otherwise

unqualified report to emphasize that the entity being
reported upon had significant transactions with related
parties. The inclusion of this separate paragraph
a. Violates generally accepted auditing standards if this
information is already disclosed in footnotes to the
financial statements.
b. Necessitates a revision of the opinion paragraph to
include the phrase "with the foregoing explanation."
c. Is appropriate and would not negate the unqualified
opinion.
d. Is considered an "except for" qualification of the
report.

15. An audit report contains the following paragraph: "Since

the company did not take physical inventories and we were
not able to apply auditing procedures to satisfy ourselves
as to inventory quantities and the cost of property and
equipment, the scope of our work was not sufficient to
enable us to express, and we do not express, an opinion on
these financial statements." This paragraph illustrates
a(n)
a. Disclaimer of opinion due to uncertainty.
b. Disclaimer of opinion due to scope restrictions.
c. Adverse audit opinion.
d. Audit opinion qualified for material scope
restrictions.

16. An auditor's examination reveals a misstatement in segment

information that is material in relation to the financial
statements taken as a whole. If the client refuses to make
modifications to the presentation of segment information,
the auditor should issue a(n)
a. "Except for" opinion.
b. Adverse opinion.
c. Unqualified opinion.
d. Disclaimer of opinion.
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1st SEM

17. An auditor's report on financial statements that are

prepared in accordance with a comprehensive basis of
accounting other than generally accepted accounting
principles should preferably include all of the following,
except
a. Disclosure of the fact that the financial statements
are not intended to be presented in conformity with
generally accepted accounting principles.
b. An opinion as to whether the use of the disclosed
method is appropriate.
c. An opinion as to whether the financial statements are
presented fairly in conformity with the basis of
accounting described.
d. A description of a change in accounting principles.

18. When the financial statements are prepared on the going

concern basis but the auditor concludes there is substantial
doubt whether the client can continue in existence and also
believes there are uncertainties about the recoverability of
recorded asset amounts on the financial statements, the
auditor may issue a(an)
a. Adverse opinion.
b. "Except for" qualified opinion for scope limitation.
c. "Except for" qualified opinion for departure from GAAP.
d. Unqualified opinion with an explanatory separate
paragraph.

19. Client A reports property, plant, and equipment at appraisal

values and records depreciation based on the appraised
amounts. Also, the company does not defer income taxes for
temporary differences arising from using the installment
method of recognizing gross profit for tax purposes. The
company uses the accrual method for financial reporting
purposes. Under these circumstances, the auditor will
probably issue a(n)
a. Audit opinion qualified for a departure from GAAP.
b. Adverse audit opinion.
c. Disclaimer of opinion.
d. Unqualified audit opinion with an explanatory paragraph
describing the client's unique accounting practices.
AAS1
1st SEM

20. A CPA engaged to examine financial statements observes that

the accounting for a certain material item is not in
conformity with generally accepted accounting principles,
and that this fact is prominently disclosed in a footnote to
the financial statements. The CPA should
a. Express an unqualified opinion and insert a middle
paragraph emphasizing the matter by reference to the
footnote.
b. Disclaim an opinion.
c. Not allow the accounting treatment for this item to
affect the type of opinion because the deviation from
generally accepted accounting principles was disclosed.
d. Qualify the opinion because of the deviation from
generally accepted accounting principles.