AUD Sample CPA Exam Questions

Weekly Review Quiz #362 - AUD: Qualified for Scope Limitation

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Question 1

Under which of the following circumstances would an auditor's expression of an unqualified opinion be inappropriate?

  1. The auditor is unable to obtain the audited financial statements of a significant subsidiary.
  2. The financial statements are prepared on the entity's income tax basis.
  3. There are significant deficiencies in the design and operation of the entity's internal control.
  4. Analytical procedures indicate that many year-end account balances are not comparable with the prior year's balances.

The correct answer is: A.

A. Correct! If the auditor is unable to obtain the audited financial statements of a significant subsidiary, the auditor has a scope limitation. As a result, a qualified or disclaimer opinion would be rendered (and an unmodified opinion would be inappropriate).

B. Incorrect… The auditor is allowed to express an opinion on financial statements prepared in accordance with a special purpose framework, such as the income tax basis. Assuming there were no problems with the audit, the auditor would be able to issue an unqualified (unmodified) opinion.

C. Incorrect… The presence of significant deficiencies means that the risk of a material misstatement in the financial statements is increased because the internal controls may not prevent or detect such a misstatement. As a result, the auditor must increase substantive testing to decrease the risk that any material misstatements present will not be discovered by the auditor. Assuming that is correctly accomplished, there is no effect on the audit report and the auditor would be able to issue an unqualified (unmodified) opinion.

D. Incorrect... If analytical procedures indicate that many year-end account balances differ from the prior year, the auditor must perform auditing procedures to discover why the balances differ and to ensure that such balances are fairly stated. Assuming that that is correctly accomplished, there is no effect on the audit report and the auditor would be able to issue an unqualified (unmodified) opinion.

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Question 2

In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion?

  1. Departure from generally accepted accounting principles.
  2. Inadequate disclosure of accounting policies.
  3. Inability to obtain sufficient appropriate evidential matter.
  4. Unreasonable justification for a change in accounting principles.

The correct answer is: C.

A. Incorrect... The choice between a qualified opinion and a disclaimer of opinion arises when a scope limitation has occurred. Departure from generally accepted accounting principles would result in either a qualified or an adverse opinion, not a disclaimer.

B. Incorrect… The choice between a qualified opinion and a disclaimer of opinion arises when a scope limitation has occurred. Inadequate disclosure of accounting policies is a type of GAAP departure. Departure from generally accepted accounting principles would result in either a qualified or an adverse opinion, not a disclaimer.

C. Correct! The choice between a qualified opinion and a disclaimer of opinion arises when a scope limitation has occurred. Inability to obtain sufficient appropriate evidential matter represents a scope limitation. Depending on the severity of the limitation, either a qualified opinion or a disclaimer would be issued.

D. Incorrect… The choice between a qualified opinion and a disclaimer of opinion arises when a scope limitation has occurred. Unreasonable justification for a change in accounting principle is a type of GAAP departure. Departure from generally accepted accounting principles would result in either a qualified or an adverse opinion, not a disclaimer.

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Question 3

Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion rather than an unqualified opinion with an explanatory paragraph most likely would be determined by the:

  1. Lack of sufficient evidence.
  2. Inability to estimate the amount of loss.
  3. Entity's lack of experience with such litigation.
  4. Lack of insurance coverage for possible losses from such litigation.

The correct answer is: A.

A. Correct! A qualified opinion is rendered when a GAAP departure or a scope limitation exists. The lack of sufficient evidence represents a scope limitation, which could result in a qualified opinion.

B. Incorrect… A qualified opinion is rendered when a GAAP departure or a scope limitation exists. The inability to estimate the amount of loss is neither a scope limitation nor a GAAP departure. The uncertainty must be disclosed, but it does not have to be estimated.

C. Incorrect... A qualified opinion is rendered when a GAAP departure or a scope limitation exists. The entity's lack of experience with such litigation is neither a scope limitation nor a GAAP departure.

D. Incorrect… A qualified opinion is rendered when a GAAP departure or a scope limitation exists. The lack of insurance coverage for possible losses from such litigation is neither a scope limitation nor a GAAP departure.

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Question 4

An auditor most likely would modify an unqualified opinion if the entity's financial statements include a footnote on related party transactions:

  1. Disclosing loans to related parties at interest rates significantly below prevailing market rates.
  2. Describing an exchange of real estate for similar property in a non-monetary related party transaction.
  3. Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction.
  4. Presenting the dollar volume of related party transactions and the effects of any change in the method of establishing terms from prior periods.

The correct answer is: C.

A. Incorrect… Disclosure of loans to related parties at interest rates significantly below prevailing market rates would NOT require modification of the auditor's opinion. Material related party transactions must be disclosed.

B. Incorrect… Inclusion of a description of an exchange of real estate for similar property in a non-monetary related party transaction would NOT result in modification of the auditor's opinion. Material related party transactions must be disclosed.

C. Correct! Material related party transactions must be disclosed.
In general, it is not possible to determine whether or not such transactions were conducted on terms equivalent to those in an arm's-length transaction. If the entity's financial statements include a footnote on related party transactions that states that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction, the auditor would have to be able to obtain sufficient evidence to verify arm's-length equivalence. If such evidence were not available, the auditor would require the statement to be removed. If the client refused to remove the footnote, the auditor would issue a qualified or adverse opinion, due to GAAP departure.

D. Incorrect… Presenting the dollar volume of related party transactions and the effects of any change in the method of establishing terms from prior periods would NOT result in modification of the auditor's opinion. Material related party transactions must be disclosed.

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Question 5

In which of the following circumstances would an auditor not express an unqualified opinion?

  1. There has been a material change in accounting principles between periods.
  2. Quarterly financial data required by the SEC has been omitted.
  3. The auditor wishes to emphasize an unusually important subsequent event.
  4. The auditor is unable to obtain audited financial statements of a consolidated investee.

The correct answer is: D.

A. Incorrect... A material change in accounting principles results in the addition of an explanatory paragraph. It does not modify the opinion.

B. Incorrect… The omission of quarterly financial data required by the SEC results in the addition of an explanatory paragraph. It does not modify the opinion.

C. Incorrect… An auditor may emphasize a matter by adding an explanatory paragraph. This addition does not modify the opinion.

D. Correct! An auditor may not express an unqualified (unmodified) opinion if the auditor is unable to obtain audited financial statements of a consolidated investee. This represents a scope limitation, which would require either a qualified opinion or a disclaimer.

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End of Quiz

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