Items 1 - 10 are based on the following independent situations for which you will recommend an appropriate audit opinion.

A - Unmodified

B - Unmodified with Emphasis of a matter paragraph

C - Modified / Qualified

D - Adverse

E - Disclaimer

During the course of his audit of the financial statements of a corporation for the purpose of expressing an opinion on the statements, a CPA is refused permission to inspect the minutes book. The corporation secretary instead offers to give the CPA a certified copy of resolutions and actions relating to accounting matters.

During 2015, the research staff of Maligalig Research Corporation devoted its entire efforts toward developing a new pollution-control device. All costs that could be attributed directly to the projects were accounted for as deferred charges and classified on the balance sheet at December 31, 2015, as a non-current assets. In the course of his audit of the corporation's 2015 financial statements, Sam, CPA, found persuasive evidence that the research conducted to date would probably result in a marketable product. The deferred research charges are significantly material in relation to both income and total assets. 3

On January 2, 2016, the Reebook Auto Supply Company received a notice from its primary supplier that effective immediately, all wholesale prices would be increased 10 percent. On the basis of the notice, Reebook Auto Supply revalued its December 31, 2015, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; however, the effect of the revaluation was material to current assets but not to total assets or net income. The increase in valuation is adequately disclosed in the notes to financial statements.

You were engaged to audit Stealman Company's financial statements after the close of the company's fiscal year. Because you were not engaged until after the balance sheet date, you were not able to physically observe inventory, which is highly material. On the completion of your audit, you are satisfied that Stealman's financial statements are presented fairly, including inventory about which you were able to satisfy yourself by the use of alternative audit procedures.

A CPA has completed his audit of the financial statements of a bus company for the year ended December 31, 2015. Prior to 2015, the company had been depreciating its buses over a 10-year period. During 2015, the company determined that a more realistic estimated life for its buses was 12 years and computed the 2015 depreciation on the basis of the revised estimate. The CPA has satisfied himself that the 12-year life is reasonable. The company has adequately disclosed the change in accounting estimate of its buses and the effect of the change on 2015 income in a note to the financial statement.

As discussed in Note 9 to the financial statements, the company is defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements.

Miller Company, a trader, uses the first-in, first-out method of costing for its international subsidiary's inventory and the last-in, first-out method of costing for its domestic inventory. Both inventories are significantly material to total current assets but not to the total assets of the company.

Kim, an independent auditor, was engaged to perform an examination of the financial statements of Sue Incorporated, one month after its fiscal year had ended. Although the inventory count was not observed by Kim, and accounts receivable were not confirmed by direct communication with debtors, Kim was able to gain satisfaction by applying alternative auditing procedures. After the financial statements was issued, Sue decided to sell shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income.

X company issued a 10% mortgage note on October 1, 2015, with a term of 10 years. Terms of the note give the holder the right to demand immediate payment if the entity fails to make a monthly interest payment within 10 days from the date the payment is due. On December 31, 2018, the entity is 6 months behind in making the required payment which constitute a material part of its cash flows. Furthermore, the management's plan of action for next accounting period includes the disposal of assets and obtaining additional capital in order to pay the loan. This matter was adequately disclosed in the notes to financial statement.

A Company, a major and principal supplier of Z Company, has recently filed for bankruptcy and will not be anymore to continue supplying starting January 1 of the next accounting period. Z Company imports 90% of its supplies from A Company which constitute 80% of its current assets and 60% of its total assets. The independent auditor of Z Company has advised Z to report the financial statement at year-end at their liquidation values. However, Z's management refuses to do so because it believes that it can find another major supplier before the year ends.

11. Which of the following procedures is most likely relevant to obtain an information about events or conditions that cast significant doubt on the entity's ability to continue as a going concern beyond the period assessed by management?

a. Inspection

b. Inquiry

c. Observing

d. Analysis

12. If the auditor believes that the entity will not be able to continue as a going concern and the financial statements are prepared on a going concern, the auditor's report should include

a. Unqualified opinion with emphasis of a matter paragraph

b. Adverse opinion

c. Qualified opinion

d. Disclaimer of opinion

13. The management denied the auditor's request that management has to extend its assessment of its going concern ability. However, the auditor's other procedures are sufficient to assess the appropriateness of management use of the going concern assumption in the preparation of the financial statements. The auditor should issue:

a. unqualified opinion

b. adverse opinion

c. unqualified opinion with emphasis of a matter paragraph

d. disclaimer of opinion

14. A representation letter issued by a client

a. is essential for the preparation of the audit program

b. is a substitute for testing

c. does not reduce the auditor's responsibility

d. reduces the auditor's responsibility only to the extent it is relied upon.

15. Sampling risk occurs when the auditor

a. uses an inappropriate audit procedure

b. fails to recognize exceptions

c. tests less than the entire population

d. identifies weaknesses in client's internal control system

16. When the auditor goes through a population and selects items for the sample without regard to their size, source or other distinguishing characteristics, this is called

a. block selection

b. systematic selection

c. haphazard selection

d. statistical selection

17. Which of the following would not be a method used to conduct tests of controls?

a. Inquiry

b. Confirmation

c. Walkthrough

d. Observation

18. This pertains to events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud?

A. Fraud

B. Fraud risk

C. Fraud risk factor

D. Fraud triangle

19. Which of the following statement is FALSE:

A. The auditor shall express a qualified opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements.

B. The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate is material to the financial statements.

C. The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

D. The auditor shall modify the opinion in the auditor's report when the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement.

20. Which of the following factors affect the form, content and extent of audit documentation:

I. The nature and extent of exceptions identified

II. Checklist

III. The identified risks of material misstatement

IV. Correspondence with Chief Finance Officer

V. The audit methodology and tools used

VI. The significance of the audit evidence obtained

A. I, II, III, IV, V, VI

B. I, III, IV, V, VI

C. I, III, V, VI

D. I, II, III, IV

21. Which of the following is true?

A. In documenting the nature, timing and extent of audit procedures performed, the auditor shall record who performed the audit work and the date such work was completed.

B. If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant requirement in a PSA, the auditor is only required to document how the alternative audit procedures performed achieve the aim of that requirement.

C. The auditor shall assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis after the date of the stockholders' meeting.

D. None of the above.

22. Which of the following fraudulent entries is most likely to be made to conceal the theft of an asset?

a. Debit expenses, and credit the asset.

b. Debit the asset, and credit another asset account.

c. Debit revenue, and credit the asset.

d. Debit another asset account, and credit the asset.

23.Which of the following circumstances may lead to the auditor to consider inclusion of Emphasis of Matter paragraph in the auditor's report?

A. Early application (where permitted) of a new accounting standard that has a pervasive effect on the financial statements in advance of its effective date.

B. Outcome of exceptional litigation or regulatory action affecting the entity is certain.

C. A major catastrophe that has had a minimal effect on the entity's financial position.

D. All of the above

24. In designing and performing tests of controls, the auditor shall perform other audit procedures in combination with inquiry to obtain audit evidence about the operating effectiveness of the controls, including which of the following?

A. By whom or by what means controls were applied

B. The errors encountered during the application of control for the past three years

C. Composition of the company's IT department

D. A and B only

25. Which of the following is false?

Statement I - A change in circumstances that affects the entity's requirements or a misunderstanding concerning the nature of the service originally requested is not considered a reasonable basis for requesting a change in the audit engagement.

Statement II - When there is a request from the entity for the auditor to change the terms of the audit engagement, the auditor shall consider the justification given for the request, particularly the implications of a restriction on the scope of the audit engagement.

A. Statement I

B. Statements I and II

C. Statement II

D. None of the above

26. Risk factors that relate to misstatements arising from misappropriation of assets are classified according to the three conditions generally present when fraud exists: incentives/pressures, opportunities, and attitudes/rationalization.Which of the following is not among the examples of risk factor classified as "opportunities"?

A. Inventory items that are small in size, of high value, or in high demand

B. Fixed assets which are small in size, marketable, or lacking observable identification of ownership

C. Promotions, compensation, or other rewards inconsistent with expectations

D. Large amounts of cash on hand or processed

27. Which of the following is an appropriate consideration in auditor's selection of sample size?

A. The auditor may select a voided or cancelled document in a sample.If the document has been properly voided, treat the item as deviation.

B. If the auditor encounters missing documents and he is unable to determine whether control has been properly performed, replace the document with another sample item.

C. The auditor may select a voided or cancelled document in a sample.If the document has been properly voided, replace the document with another sample item

D. If the auditor encounters missing documents and he is unable to determine whether control has been properly performed, treat the item as deviation and replace the document with another sample item.

28. Which of the following observations by an auditor is most likely to indicate the existence of control weaknesses over safeguarding of assets?

I. A service department's location is not well suited to allow adequate service to other units.

II. Employees hired for sensitive positions are not subjected to background checks.

III. Managers do not have access to reports that profile overall performance in relation to other benchmarked organizations.

IV. Management has not taken corrective action to resolve past engagement observations related to inventory controls.

A. I and II only.

B. I and IV only.

C. II and III only.

D. II and IV only.

29. Which of the following erroneous conclusions may result from sampling risk affecting audit efficiency?

A. In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a material misstatement does not exist when in fact it does.

B. In the case of a test of controls, that controls are less effective than they actually are, or in the case of a test of details, that a material misstatement exists when in fact it does not.

C. Both A and B.

D. Neither A nor B.

30. The audit report date is important to users because it indicates the

a. Last day of the fiscal period.

b. Last day of the auditor's responsibility for the review of significant events that occurred after

the date of the financial statements.

c. Date on which the financial statements were filed with the SEC.

d. Last day on which users may institute a lawsuit either client or auditor.

31. The inability of the client to prepare certain audit requirements may most likely lead the auditor

to

a. Withdraw from the engagement.

b. Express qualified opinion or a disclaimer.

c. Express qualified or adverse opinion.

d. Express unqualified opinion with explanatory paragraph.

32. The management of a client company believes that the statement of cash flow is not a useful document and refuses to include one in the annual report to stockholders.As a result, the auditor's opinion should be

a. Qualified due to inadequate disclosure.

b. Qualified due to a scope limitation.

c. Adverse.

d. Unqualified.

33. An auditor's opinion reads as follows:"In our opinion, except for the above-mentioned limitation on the scope of our audit..." This is an example of a(n)

a. Disclaimer.

b. Adverse.

c. Qualified opinion.

d. Unacceptable reporting practice.

34. An auditor's report includes a statement that "the financial statements do not present fairly the financial position in conformity with generally accepted accounting principles."This auditor's report was probably issued in connection with financial statements that were

a. Prepared on a comprehensive basis for accounting other than GAAP.

b. Restricted for use by management.

c. Misleading.

d. Condensed.

35. If the auditor believes there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n)

a. Qualified opinion.

b. Adverse opinion.

c. Unqualified opinion.

d. Disclaimer of opinion.

36. Under which of the following sets of circumstances might an auditor disclaim an opinion?

a. The financial statements contain a departure from GAAP, the effect of which is material.

b. The principal auditor decides to make reference to the report of another auditor who audited a subsidiary.

c. There has been a material change between periods in the method of the application of accounting principles.

d. There were significant limitations on the scope of the audit.

37. An audit report should be dated as of

the date the report is delivered to the entity audited.

the date of the last day of fieldwork.

the balance sheet date of the latest period reported on.

the date a letter of audit inquiry is received from the entity's attorney of record.

38. An auditor completed fieldwork on February 10, 2015 for a December 31, 2014 year-end client.A significant subsequent event occurred on February 22, 2015.In this case, which of the following report dates would not be appropriate?

February 10, 2015.

February 10, except Note 1, February 22, 2015.

February 22, 2015.

December 31, 2014.

39. Which of the following statements indicates a qualified opinion?

a. The financial statements do not present fairly in all material respects the financial position, results of operations, and cash flows in conformity with GAAP.

b. The auditor does not express an opinion on the financial statements.

c. The financial statements present fairly in all material respects the financial position, results ofoperations, and cash flows in conformity with GAAP.

d. Except for the effects of a matter, the financial statements present fairly in all material respects the financial position, results of operations, and cash flows in conformity with GAAP.

40.If the auditor believes that required disclosures are omitted from the financial statements, the auditor should decide between issuing

a. A qualified opinion or an adverse opinion.

b. A disclaimer of opinion or a qualified opinion.

c. An adverse opinion or a disclaimer of opinion.

d. An unqualified opinion or a qualified opinion.