Financial Accounting practice questions

Thank you for taking our Financial Accounting and Reporting (FAR) review quiz. Check back again for five new sample FAR CPA questions to help you prepare for the exam.

Question 1

Which of the following statements is correct concerning an auditor’s use of the work of a specialist?

1. The auditor need not obtain an understanding of the methods and assumptions used by the specialist..
2. The auditor may not use the work of a specialist in matters material to the fair presentation of the financial statements.
3. The reasonableness of the specialist’s assumptions and their applications are strictly the auditor’s responsibility.
4. The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.

The correct answer is: D.

A. Incorrect…An auditor is required to obtain an understanding of the methods and assumptions used by the specialist, ensure that appropriate tests of the data provided to the specialist are performed, and evaluate whether the specialist’s findings support the related assertions in the financial statements.

B. Incorrect…. An auditor is not precluded from using the work of a specialist in matters material to the fair presentation of the financial statements. In fact, the auditor would, normally, devote efforts primarily to material matters and, therefore, would call upon a specialist only if the matter were material.

C. Incorrect…Responsibility for the reasonableness of the methods and assumptions used and their application belongs to the specialist. The auditor is responsible for obtaining an understanding of the methods and assumptions used by the specialist, ensuring that the data provided to the specialist are tested, and evaluating whether the specialist’s findings support the related assertions in the financial statements.

D. Correct! An auditor may be allowed to use a specialist who has a relationship with the client, such as a contractual relationship, under certain circumstances. The auditor should assess the risk that the specialist’s objectivity is impaired. If the auditor believes that objectivity might be impaired, the auditor should take additional steps.

Question 2

When using the work of a specialist, an auditor may refer to and identify the specialist in the auditor’s report if the

1. Auditor expresses a qualified opinion as a result of the specialist’s findings.
2. Specialist is not independent of the client.
3. Auditor wishes to indicate a division of responsibility.
4. Specialist’s work provides the auditor greater assurance of reliability.

The correct answer is: A.

A. Correct!! The auditor may refer to (and, with the specialist’s permission, identify) the specialist in the report, if the opinion is modified as a result of the specialist’s findings, and the auditor believes that such a reference will be helpful to readers in understanding the reason(s) for the modification.

B. Incorrect…The auditor may refer to and identify the specialist in the report, if the report is modified as a result of the specialist’s findings. The fact that the specialist is not independent of the client would not, by itself, warrant reference to the specialist in the report. The specialist’s relationship with the client should be evaluated by the auditor and the risk of potential impairment of the specialist’s objectivity should be assessed.

C. Incorrect…The auditor would not refer to the specialist to indicate a division of responsibility. The auditor is not allowed to share responsibility with the specialist.

D. Incorrect… The auditor may refer to and identify the specialist in the report, if the report is modified as a result of the specialist’s findings. The auditor should not, otherwise, refer to the specialist as it might imply that use of the specialist resulted in greater assurance of reliability.

Question 3

An auditor who uses the work of a specialist may refer to the specialist in the auditor’s report if the

1. Specialist’s findings provide the auditor greater assurance of reliability about management’s representations.
2. Auditor issues a modified opinion because of a matter related to the specialist’s findings.
3. Auditor’s use of the specialist’s findings is different from that of prior years.
4. Specialist is a related party whose findings fully corroborate management’s financial statement assertions.