Choice "c" is correct. Equipment acquisitions that are misclassified as maintenance expense most

likely would be detected by internal control procedures that provide for investigation of variances

within a formal budgeting system.

Choice "a" is incorrect. Segregation of duties of employees in the accounts payable department

would not prevent the misclassification of equipment acquisitions as maintenance expense.

Choice "b" is incorrect. Verifying invoices for disbursements already recorded as equipment

acquisitions would not include examining invoices for disbursements recorded as maintenance

expense.

Choice "d" is incorrect. Since the authorization by the board of directors occurs before the

disbursement is recorded, this control would not prevent any misclassification.

Choice "c" is correct. The auditor would most likely use the entity's financial statements of the prior

year in the preliminary determination of materiality. The prior year financial statements would be a

good starting point in estimating the current year's expected results, especially for a continuing

client.

Choice "a" is incorrect. The assessment of control risk affects the design of audit procedures but is

not relevant in determining materiality.

Choice "b" is incorrect. The anticipated sample size for planned substantive tests is set after the

preliminary materiality level is determined.

Choice "d" is incorrect. Management assertions embodied in the financial statements have little

relationship to materiality.

Choice "a" is correct. GAAP allows a company to use different methods for costing different

inventories as long as the methods are disclosed. Thus, the audit report would be unqualified; there

is no departure from GAAP.

Choice "b" is incorrect. The consistency standard refers to changes in application of accounting

practices between periods, affecting the comparability of financial statements. There is no indication

Digit made any change in methods.

Choice "c" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and

would not result in a qualification of the auditor's report.

Choice "d" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and

would not result in an adverse report.

Choice "b" is correct. When a qualified opinion is issued due to a lack of sufficient audit evidence, the

lack of evidence should be disclosed in an explanatory paragraph before the opinion paragraph.

Since insufficient evidence is a scope limitation, the scope paragraph should also be modified to refer

to the limitation and to the explanatory paragraph that discusses it.

Choices "a" and "c" are incorrect. Management (and not the auditor) prepares the notes to the

financial statements. The auditor therefore would not refer to this (or any other) situation in the

notes to the financial statements.

Choice "d" is incorrect. The auditor does refer to the situation in the scope paragraph.

Choice "a" is correct. When performing procedures regarding subsequent events, the auditor

generally will compare the latest available interim financial statements with the financial statements

being audited to determine if any significant subsequent event occurred that would need to be

reflected in the statements being audited.

Choice "b" is incorrect. Sending second requests to the client's customers who failed to respond to

initial A/R confirmation requests is a substantive procedure that provides evidence about receivables

existing at year end, not about subsequent events.

Choice "c" is incorrect. Internal control weaknesses should be communicated to those charged with

governance, but this communication provides no evidence about subsequent events.

Choice "d" is incorrect. Bank cut-off statements generally are reviewed for only a week to ten days

subsequent to year-end. Reviewing them for a longer period such as "several months" would provide

little additional audit evidence regarding the YE FS and thus would not be a cost beneficial procedure.

Choice "c" is correct. The auditor considers any of management's plans that might serve to mitigate

the adverse effects of particular conditions and events. Typically, plans to increase ownership equity,

to borrow money, to restructure debt, to sell assets, and/or to reduce or delay expenditures might all

be considered mitigating factors.

Choices "a", "b", and "d" are incorrect. Increasing dividend distributions, reducing lines of credit, and

purchasing assets would not improve a weak cash flow situation.

Choice "a" is correct. When rendering an opinion on the application of accounting principles to a specific transaction, the reporting CPA should consult with the continuing CPA to obtain information relevant to the transaction. Choice "b" is incorrect. The reporting CPA has no obligation to report the engagement's findings to the continuing CPA. Generally, the report would be addressed to the requesting party (e.g., management, the board of directors, etc.). Choice "c" is incorrect. There is no disclaimer in the report; however, the CPA does state that the preparers of the financial statements are responsible for proper accounting treatment. Choice "d" is incorrect. Use of the report is restricted to specified parties.

Choice "a" is correct. The auditors should address their report to the entity that engaged them. In

this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should

be addressed to Monday.

Choice "b" is incorrect. Wall Corp. did not engage the auditors and thus the report should not be

addressed to them.

Choices "c" and "d" are incorrect. Even though the bank will be relying on the audited financial

statements in determining whether to make the loan, the bank did not directly engage the auditing

firm and accordingly, the report should not be addressed to them.

Choice "b" is correct. Before accepting an engagement, the auditor should make specific inquiries of

the predecessor auditor in order to assist the auditor in deciding whether or not to accept the

engagement.

Inquiry should include the predecessor's understanding of the reasons for the change in auditors.

Choice "a" is incorrect. The predecessor generally does not provide an opinion on events occurring

subsequent to the issuance of the audit report.

Choice "c" is incorrect. The successor (and not the predecessor) evaluates the consistency in the

application of GAAP. This evaluation occurs after acceptance.

Choice "d" is incorrect. The predecessor generally allows the successor to review audit

documentation related to matters of continuing accounting significance, but this occurs subsequent

to acceptance.

Choice "c" is correct. If an accounting change has no material effect on the comparability of the

financial statements, the auditor does not need to recognize the change in the current year's audit

report.

Choice "a" is incorrect. The change would only be referred to in an explanatory paragraph if the

effect were material.

Choice "b" is incorrect. The auditor does not explicitly concur with the change in the report.

Choice "d" is incorrect. Even if the change had a material effect, the opinion paragraph would not be

affected. The explanatory paragraph would follow the opinion paragraph.