A CPA Who Has Been Engaged to Audit Financial Statements

question 67

Multiple Choice

A CPA who has been engaged to audit financial statements that were prepared on a cash basis

• A) must ascertain that there is proper disclosure of the fact that the cash basis has been used.
• B) may not be associated with such statements which are not in accordance with generally accepted accounting principles.
• C) must render a qualified report explaining the departure from generally accepted accounting principles in the opinion paragraph.
• D) must restate the financial statements on an accrual basis and then render the standard (short-form) report.

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Definitions:

Economically Inefficient Outcomes

Situations where resources are not allocated optimally, leading to wasted potential or benefits.

Incentive Structures

Systems or processes designed to motivate individuals to perform certain actions by offering rewards or punishments.

Principal-Agent Problem

Refers to a situation in business where there is a conflict of interest between a principal (e.g., an owner or shareholder) and an agent (e.g., a CEO or manager) hired to act on the principal's behalf.

Stockholders

Individuals or entities that own shares in a corporation, giving them ownership interests and rights to dividends.