AUD Sample CPA Exam Questions

Weekly Review Quiz #370 – AUD: F/S with Special Purpose Frameworks

Thank you for taking our Auditing and Attestation (AUD) review quiz. Check back again for five new sample AUD CPA questions to help you prepare for the exam.

 

Question 1

Which of the following items should be included in an auditor’s report for financial statements prepared in conformity with another comprehensive basis of accounting (OCBOA)?

  1. A sentence stating that the auditor is responsible for the financial statements.
  2. A title that includes the word “independent.”
  3. The signature of the company controller.
  4. A paragraph stating that the audit was conducted in accordance with OCBOA.

The correct answer is: B.

A. Incorrect… Management is responsible for the financial statements regardless of the financial reporting framework involved, whether GAAP or OCBOA (a special purpose framework).

B. Correct! The auditor’s report should include the word “independent,” regardless of the financial reporting framework used in preparing the entity’s financial statements.

C. Incorrect… The auditor’s report is specifically the responsibility of the auditor, and would never include the signature of the entity’s controller.

D. Incorrect… OCBOA refers to an accounting framework, other than GAAP, used in preparing the entity’s financial statements. An audit is never conducted in accordance with OCBOA. The term OCBOA has been replaced with special purpose framework.

Question 2

When reporting on financial statements prepared on the same basis of accounting as that used for income tax purposes, the auditor should include in the report a paragraph that

  1. States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.
  2. Justifies the use of the income tax basis of accounting.
  3. Emphasizes that the financial statements are not intended to have been audited in accordance with generally accepted auditing standards.
  4. Refers to the authoritative pronouncements that explain the income tax basis of accounting being used.

The correct answer is: A.

A. Correct! The report should include a paragraph stating that the income tax basis of accounting is a basis of accounting other than GAAP. The paragraph would also state the basis of presentation and refer to a note to the financial statements describing the basis.

B. Incorrect… Justification of the use of the income tax basis of accounting (or any other special purpose framework that is not GAAP) is not required.

C. Incorrect… The report should indicate that the audit WAS conducted in accordance with GAAS.

D. Incorrect… The report refers to the note to the financial statements that describes the basis of accounting utilized. While the note may reference authoritative pronouncements that explain the income tax basis of accounting being used, the auditor’s report does not.

Question 3

When an auditor reports on financial statements prepared on an entity’s income tax basis, the auditor’s report should

  1. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards.
  2. Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used.
  3. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.
  4. State that the basis of presentation is a comprehensive basis of accounting other than GAAP.

The correct answer is: D.

A. Incorrect… An auditor’s report on financial statements prepared on an income tax basis would not require a disclaimer to be issued. Instead the report should refer to the fact that the basis of presentation is a comprehensive basis of accounting (a special purpose framework) other than GAAP.

B. Incorrect… An auditor’s report on financial statements prepared on an income tax basis would not omit an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used. Instead the report should refer to the fact that the basis of presentation is a comprehensive basis of accounting (a special purpose framework) other than GAAP.

C. Incorrect… An auditor’s report on financial statements prepared on an income tax basis would not include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting. Instead the report should refer to the fact that the basis of presentation is a comprehensive basis of accounting (a special purpose framework) other than GAAP.

D. Correct! When an auditor reports on financial statements prepared on an entity’s income tax basis, the auditor’s report should state that the basis of presentation is a comprehensive basis of accounting (a special purpose framework) other than GAAP.

Question 4

An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the

  1. Notes to the financial statements.
  2. Auditor’s engagement letter.
  3. Management representation letter.
  4. Introductory paragraph of the auditor’s report.

The correct answer is: A.

A. Correct! The financial statements would contain a footnote that describes the basis of the financial statement presentation and how it differs from GAAP.

B. Incorrect… The engagement letter would identify the specific financial statements to be audited, but would not contain a description of how the basis of presentation differs from GAAP.

C. Incorrect… The management representation letter would identify the specific financial statements associated with the audit, but it would not contain a description of how the basis of presentation differs from GAAP.

D. Incorrect… The introductory paragraph would identify the specific financial statements being reported on, but the introductory paragraph would not comment on the basis of presentation or how it differs from GAAP. The auditor’s report would contain a basis of accounting paragraph following the opinion paragraph which would reference the note to the financial statements describing the basis of presentation.

Question 5

An auditor’s special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph after the opinion paragraph that

  1. An auditor’s special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph after the opinion paragraph that describes the basis of accounting.
  2. States whether the financial statements are fairly presented in conformity with another basis of accounting.
  3. Refers to the note to the financial statements that describes the basis of accounting.
  4. Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.

The correct answer is: C.

A. Incorrect… The auditor does not have to justify the reasons for departing from GAAP. The basis of presentation utilized, however, should be fully described.

B. Incorrect… The statement as to fair presentation in conformity with another comprehensive basis of accounting belongs in the opinion paragraph, not in the explanatory paragraph.

C. Correct! The separate explanatory paragraph should refer to the note that describes the basis of accounting.

D. Incorrect… The auditor is not required to explain how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.

End of Quiz

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