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Auditing mc questions_with_solutions1 Auditing mc questions_with_solutions1 Document Transcript

  • Following are multiple choice questions recently released by the AICPA. Thesequestions were released by the AICPA with letter answers only. Our editorial boardhas provided the accompanying explanations.Please note that the AICPA generally releases questions that it does NOT intend touse again. These questions and content may or may not be representative ofquestions you may see on any upcoming exams.
  • 2007 AICPA Newly Released Questions – Auditing11. CPA-05465Which of the following categories is included in generally accepted auditing standards?a. Standards of review.b. Standards of planning.c. Standards of fieldwork.d. Standards of evidence.ANSWER:Choice "c" is correct. Generally accepted auditing standards include three categories: general standards,standards of fieldwork, and standards of reporting.Choices "a", "b", and "d" are incorrect, based on the above explanation.
  • 2007 AICPA Newly Released Questions – Auditing22. CPA-05466A retailing entity uses the Internet to execute and record its purchase transactions. The entitys auditorrecognizes that the documentation of details of transactions will be retained for only a short period oftime. To compensate for this limitation, the auditor most likely would:a. Compare a sample of paid vendors invoices to the receiving records at year-end.b. Plan for a large measure of tolerable misstatement in substantive tests.c. Perform tests several times during the year, rather than only at year-end.d. Increase the sample of transactions to be selected for cutoff tests.ANSWER:Choice "c" is correct. When an entity transmits, processes, maintains, or accesses significant informationelectronically, some accounting data and source documents may be available only in electronic form, oronly at a certain point in time. The auditor would generally perform tests of controls several times duringthe year to compensate for this limitation.Choice "a" is incorrect. Comparing a sample of paid vendors invoices to receiving records providesevidence that the company received the goods for which it paid, but only if records are available insufficient detail to make such a comparison. If detailed records are retained for only a short period oftime, such comparisons would need to be performed throughout the year, not just at year-end.Choice "b" is incorrect. The auditors judgment as to an appropriate level of tolerable misstatement isbased on considerations of materiality and audit risk. Increasing this level implies that the auditor iswilling to accept a larger error, which would not be an appropriate response to the limitation described.Choice "d" is incorrect. Increasing the sample size related to cutoff testing will not provide evidence abouttransactions occurring throughout the period under audit, since cutoff testing relates to year-end.
  • 2007 AICPA Newly Released Questions – Auditing33. CPA-05467 (Adapted)After testing a clients internal control activities, an auditor discovers a number of significant deficienciesin the operation of a clients internal controls. Under these circumstances the auditor most likely woulda. Issue a disclaimer of opinion about the internal controls as part of the auditors report.b. Increase the assessment of control risk and increase the extent of substantive tests.c. Issue a qualified opinion of this finding as part of the auditors report.d. Withdraw from the audit because the internal controls are ineffective.ANSWER:Choice "b" is correct. The auditor uses tests of controls to evaluate control risk. In situations where thereare a number of significant deficiencies in the operation of the clients internal controls, the auditor wouldincrease the assessment of control risk (and the risk of material misstatement) and revise substantivetesting accordingly (for example, by increasing the extent of substantive tests).Choice "a" is incorrect. An auditor is required to communicate significant deficiencies to managementand those charged with governance, and a disclaimer of opinion on the effectiveness of controls would beincluded in this communication. However, such disclaimer would not be part of the auditors report on thefinancial statements.Choice "c" is incorrect. Since the auditors report provides an opinion on the financial statements (and noton internal control), significant deficiencies in internal control do not result in a qualified opinion.Choice "d" is incorrect. The auditor need not withdraw from an audit simply because internal controls areineffective, but rather would increase the assessment of control risk and revise substantive testingaccordingly.
  • 2007 AICPA Newly Released Questions – Auditing44. CPA-05468Which of the following procedures would be most effective in reducing attestation risk?a. Discussion with responsible individuals.b. Examination of evidence.c. Inquiries of senior management.d. Analytical procedures.ANSWER:Choice "b" is correct. Evidence obtained directly by the accountant (e.g., through physical examination)provides more persuasive evidence than evidence obtained through inquiry, discussion, or analyticalprocedures, and therefore reduces attestation risk.Choices "a", "c", and "d" are incorrect, based on the above explanation.
  • 2007 AICPA Newly Released Questions – Auditing55. CPA-05469Which of the following is an inherent limitation in internal control?a. Incompatible duties.b. Lack of segregation of duties.c. Faulty human judgment.d. Lack of an audit committee.ANSWER:Choice "c" is correct. Inherent limitations in internal control are limitations that exist despiteimplementation of appropriate controls. For example, faulty human judgment may result in errors in thedesign or use of internal controls.Choice "a" is incorrect. Assigning incompatible duties to a particular individual indicates a missingcontrol, rather than an inherent limitation in internal control.Choice "b" is incorrect. Lack of segregation of duties indicates a missing control, rather than an inherentlimitation in internal control.Choice "d" is incorrect. Lack of an audit committee indicates a missing control, rather than an inherentlimitation in internal control.
  • 2007 AICPA Newly Released Questions – Auditing66. CPA-05470Which of the following statements is correct regarding a review engagement of a nonpublic companysfinancial statements performed in accordance with the Statements on Standards for Accounting andReview Services (SSARS)?a. An accountant must establish an understanding with the client in an engagement letter.b. An accountant must obtain an understanding of the clients internal control when performing a review.c. A review provides an accountant with a basis for expressing limited assurance on the financialstatements.d. A review report contains an accountants opinion of the financial statements taken as a whole.ANSWER:Choice "c" is correct. A review report is issued when inquiry and analytical procedures provide areasonable basis for the expression of limited assurance on the financial statements.Choice "a" is incorrect. While the accountant is required to establish an understanding with the client,preferably in writing, an engagement letter is not required.Choice "b" is incorrect. When performing a review under SSARS, the accountant is not required to obtainan understanding of the clients internal control.Choice "d" is incorrect. A review results in the expression of limited assurance that no materialmodifications are necessary for the financial statements to be in conformity with generally acceptedaccounting principles. The limited nature of the work performed during a review does not providesufficient evidence for an opinion on the financial statements taken as a whole.
  • 2007 AICPA Newly Released Questions – Auditing77. CPA-05471Which of the following procedures does a CPA normally perform first in a review engagement inaccordance with Statements on Standards for Accounting and Review Services (SSARS)?a. Inquiry regarding the clients principles and practices and the method of applying them.b. Inquiry concerning the effectiveness of the clients system of internal control.c. Inquiry to identify transactions between related parties and management.d. Inquiry of the clients professional advisors, including bankers, insurance agents, and consultants.ANSWER:Choice "a" is correct. In performing a review engagement in accordance with SSARS, the accountantshould inquire of management regarding the accounting principles and practices used, and the method ofapplying them.Choice "b" is incorrect. When performing a review under SSARS, the accountant is not required to makeinquiries concerning the clients system of internal control.Choice "c" is incorrect. The accountant may inquire about the existence of related party transactions, butwould likely make a more basic inquiry, about the clients accounting principles and practices, first.Choice "d" is incorrect. In performing a review engagement in accordance with SSARS, the accountantgenerally directs his/her inquiries to members of management, not to external parties.
  • 2007 AICPA Newly Released Questions – Auditing88. CPA-05472 (Adapted)Which of the following cash transfers results in a misstatement of cash at December 31, 20X1?Bank Transfer ScheduleDisbursement date Receipt dateTransfers per books per bank per books per banka. 12 /31/X1 01/05/X2 12/31/X1 01/04/X2b. 01/04/X2 01/11/X2 01/04/X2 01/04/X2c. 12/31/X1 01/04/X2 12/31/X1 12/31/X1d. 01/04/X2 01/05/X2 12/31/X1 01/04/X2ANSWER:Choice "d" is correct. Since the disbursement was not recorded until January 20X2 while the receipt wasrecorded in December 20X1, cash will be overstated at December 31, 20X1.Choices "a" and "c" are incorrect. Both the disbursement and the receipt are recorded in 20X1, so therewill be no misstatement of cash at December 31, 20X1.Choice "b" is incorrect. Both the disbursement and the receipt are recorded in 20X2, so there will be nomisstatement of cash at December 31, 20X1.
  • 2007 AICPA Newly Released Questions – Auditing99. CPA-05473Which of the following describes how the objective of a review of financial statements differs from theobjective of a compilation engagement?a. The primary objective of a review engagement is to test the completeness of the financial statementsprepared, but a compilation tests for reasonableness.b. The primary objective of a review engagement is to provide positive assurance that the financialstatements are fairly presented, but a compilation provides no such assurance.c. In a review engagement, accountants provide limited assurance, but a compilation expresses noassurance.d. In a review engagement, accountants provide reasonable or positive assurance that the financialstatements are fairly presented, but a compilation provides limited assurance.ANSWER:Choice "c" is correct. A review provides limited assurance that there are no material modifications thatshould be made to the financial statements in order for them to be in conformity with generally acceptedaccounting principles, whereas a compilation provides no assurance.Choice "a" is incorrect. A review does not test for completeness, nor does a compilation test forreasonableness. A review provides limited assurance about the financial statements based on inquiryand analytical review procedures, while a compilation provides no assurance and includes no testing forreasonableness.Choice "b" is incorrect. A review provides limited assurance that there are no material modifications thatshould be made to the financial statements in order for them to be in conformity with generally acceptedaccounting principles, and it is based on inquiry and analytical review procedures. Positive assurance(such as an audit opinion) is only provided when more extensive procedures have been performed.Choice "d" is incorrect. A review provides limited assurance that there are no material modifications thatshould be made to the financial statements in order for them to be in conformity with generally acceptedaccounting principles, and it is based on inquiry and analytical review procedures. Positive or reasonableassurance (such as an audit opinion) is only provided when more extensive procedures have beenperformed. A compilation provides no assurance at all.
  • 2007 AICPA Newly Released Questions – Auditing1010. CPA-05474 (Adapted)Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the clientsmanagement. Which of the following matters do the auditor and management agree upon at this time?a. The appropriateness of the entitys plans for dealing with adverse economic conditions.b. The determination of the fraud risk factors that exist within the clients operations.c. The control weaknesses to be included in the communication with those charged with governance.d. The coordination of the assistance of the clients personnel in data preparation.ANSWER:Choice "d" is correct. Prior to commencing fieldwork, an auditor would establish an understanding withthe client as to the services to be performed and the overall audit strategy. This understanding mayinclude arrangements involving the conduct of the engagement, such as timing, client assistance, and theavailability of documents.Choice "a" is incorrect. The auditor does not evaluate the appropriateness of the entitys plans for dealingwith adverse economic conditions prior to commencing fieldwork. The auditor might consider this as partof evaluating the clients ability to continue as a going concern, but this would not occur prior tocommencing fieldwork.Choice "b" is incorrect. Determination of existing fraud risk factors is generally made during the fieldworkstage of the audit, as information and evidence is obtained. Also, fraud risk factors are assessed by theauditor, and would not necessarily be agreed upon with management.Choice "c" is incorrect. Identification and evaluation of control weaknesses generally occurs during thefieldwork stage of the audit, as information and evidence is obtained. Only those weaknesses that rise tothe level of being significant deficiencies (or material weaknesses) are required to be communicated tothose charged with governance.
  • 2007 AICPA Newly Released Questions – Auditing1111. CPA-05475 (Adapted)An auditors engagement letter most likely would include a statement that:a. Lists potential significant deficiencies discovered during the prior years audit.b. Explains the analytical procedures that the auditor expects to apply.c. Describes the auditors responsibility to evaluate going concern issues.d. Limits the auditors responsibility to detect errors and fraud.ANSWER:Choice "d" is correct. An auditors engagement letter typically includes discussion of limitations of theengagement, such as the fact that the auditor will obtain only reasonable assurance, and therefore amaterial misstatement may remain undetected.Choice "a" is incorrect. An auditors engagement letter typically covers the objectives of the engagement,managements responsibilities, the auditors responsibilities, limitations of the engagement, and othermatters involving the conduct of the audit. Potential significant deficiencies discovered during the prioryears audit would not typically be included in the engagement letter.Choice "b" is incorrect. While the auditors engagement letter might include a discussion of the overallaudit strategy, it typically would not include specific audit procedures.Choice "c" is incorrect. While the auditors engagement letter might include a discussion of the auditorsresponsibilities, this is usually discussed in fairly general terms. An engagement letter would not describethe auditors responsibility with respect to specific issues (such as going concern issues).
  • 2007 AICPA Newly Released Questions – Auditing1212. CPA-05476Which of the following factors most likely would cause a CPA to decline to accept a new auditengagement?a. The CPA does not understand the entitys operations and industry.b. Management acknowledges that the entity has had recurring operating losses.c. The CPA is unable to review the predecessor auditors working papers.d. Management is unwilling to permit inquiry of its legal counsel.ANSWER:Choice "d" is correct. If a prospective client is unwilling to permit inquiry of its legal counsel, the CPAmust consider the implications of this refusal. Such refusal may indicate a lack of cooperativeness on thepart of management, or an attempt to be less than forthright with respect to litigation, claims, andassessments. Furthermore, a clients refusal to permit inquiry of its legal counsel ordinarily would result ina disclaimer of opinion. It would be unlikely that a CPA would accept a new engagement under thesecircumstances.Choice "a" is incorrect. An understanding of the clients operations and industry should be obtainedduring the planning stage of the audit. It does not necessarily need to be obtained before acceptance ofthe engagement.Choice "b" is incorrect. The fact that the entity has had recurring operating losses may increase theauditors assessment of risk on the engagement, but it would not preclude acceptance of theengagement.Choice "c" is incorrect. Although the predecessors audit documentation provides some audit evidencewith respect to opening balances, consistency of accounting principles, and other matters of continuingsignificance, alternative means of obtaining such evidence generally do exist.
  • 2007 AICPA Newly Released Questions – Auditing1313. CPA-05477An enterprise engaged a CPA to audit its financial statements in accordance with Government AuditingStandards (the Yellow Book) because of the provisions of government grant funding agreements. Underthese circumstances, the CPA is required to report on the enterprises internal controls either in the reporton the financial statements or in:a. The report on the performance audit.b. The notes to the financial statements.c. A letter to the government funding agency.d. A separate report.ANSWER:Choice "d" is correct. The report on the audit of the financial statements should describe the scope of theauditors testing of compliance with laws and regulations and internal control over financial reporting, andshould either present the results of those tests or refer to a separate report containing that information.Choice "a" is incorrect. The CPA was engaged to audit financial statements in accordance with theYellow Book, not to perform a performance audit.Choice "b" is incorrect. The notes to the financial statements are a management representation andwould not be used by the CPA to comply with requirements to either report or opine in conformity withYellow Book requirements.Choice "c" is incorrect. Governmental Auditing Standards require that the auditor describe the scope ofthe auditors testing of compliance with laws and regulations and internal control over financial reportingand present the results of those tests as part of their report or in a separate report, not simply in a letter tothe funding agency.
  • 2007 AICPA Newly Released Questions – Auditing1414. CPA-05478An auditor determines that the entity is presenting certain supplementary financial disclosures of pensioninformation that are required by the GASB. Under these circumstances, the auditor should:a. Add an explanatory paragraph to the auditors report that refers to the required supplementaryinformation.b. State that the audit is not being performed in accordance with generally accepted auditing standards.c. Document in the working papers that the required supplementary information is presented, but shouldnot apply any procedures to the information.d. Compare the required supplementary information for consistency with the audited financialstatements.ANSWER:Choice "d" is correct. The auditor should perform certain limited procedures on supplementaryinformation accompanying the financial statements, including evaluating whether the information isconsistent with the audited financial statements.Choice "a" is incorrect. Generally, the auditors report on the financial statements would not include areference to required supplementary information unless there were a problem with it (e.g., it was omitted,inappropriately prepared, or the auditor was unable to satisfactorily complete required procedures).Choice "b" is incorrect. An audit can and should be performed in accordance with generally acceptedauditing standards even when required supplementary information is presented.Choice "c" is incorrect. The auditor should perform certain limited procedures on supplementaryinformation accompanying the financial statements.
  • 2007 AICPA Newly Released Questions – Auditing1515. CPA-05479Comfort letters ordinarily are:Addressed to the clients Signed by the clientsa. Audit committee Independent auditorb. Underwriter of securities Senior managementc. Audit committee Senior managementd. Underwriter of securities Independent auditorANSWER:Choice "d" is correct. A comfort letter is a letter from the independent auditor to the named underwriterjust before the registration of the clients securities.Choices "a", "b", and "c" are incorrect, based on the above explanation.
  • 2007 AICPA Newly Released Questions – Auditing1616. CPA-05480Which of the following factors would most likely influence an auditors consideration of the reliability ofdata when performing analytical procedures?a. Whether the data were developed in a computerized or a manual accounting system.b. Whether the data were prepared on the cash basis or in conformity with GAAP.c. Whether the data were developed under a system with adequate controls.d. Whether the data were processed in an online system or a batch entry system.ANSWER:Choice "c" is correct. Strong, effective internal controls improve the reliability of data.Choice "a" is incorrect. The type of accounting system used does not affect the reliability of data. Bothcomputerized and manual accounting systems can provide reliable data, as long as there are appropriatecontrols in place.Choice "b" is incorrect. The accounting basis used does not affect the reliability of data. Reliable datamay be provided regardless of whether the cash basis or accrual basis (GAAP) is used, as long as thereare appropriate controls in place.Choice "d" is incorrect. The type of processing system used does not affect the reliability of data. Bothonline systems and batch systems can provide reliable data, as long as there are appropriate controls inplace.
  • 2007 AICPA Newly Released Questions – Auditing1717. CPA-05481When an auditor tests the internal controls of a computerized accounting system, which of the following istrue of the test data approach?a. Test data are coded to a dummy subsidiary so they can be extracted from the system under actualoperating conditions.b. Test data programs need not be tailor-made by the auditor for each clients computer applications.c. Test data programs usually consist of all possible valid and invalid conditions regarding compliancewith internal controls.d. Test data are processed with the clients computer and the results are compared with the auditorspredetermined results.ANSWER:Choice "d" is correct. The test data approach refers to a technique in which the clients applicationprogram is used to process a set of test data, the results of which are already known by the auditor. If theclients program is operating effectively, it should generate the same results determined by the auditor.Choice "a" is incorrect. An integrated test facility (not a test data approach) utilizes dummy accounts. Forexample, using an integrated test facility (ITF) approach, test data is initially commingled with live data,but coding to a dummy account allows later extraction from the system under actual operating conditions.Choice "b" is incorrect. Test data programs should be tailor-made by the auditor for each clientscomputer applications, to ensure that the data is in an appropriate form for that clients system, and that itincludes the types of invalid conditions in which the auditor is interested.Choice "c" is incorrect. Test data contains the types of valid and invalid conditions in which the auditor isinterested (it is not necessary to test all combinations of valid and invalid conditions).
  • 2007 AICPA Newly Released Questions – Auditing1818. CPA-05482Under which of the following circumstances would an auditors expression of an unqualified opinion beinappropriate?a. The auditor is unable to obtain the audited financial statements of a significant subsidiary.b. The financial statements are prepared on the entitys income tax basis.c. There are significant deficiencies in the design and operation of the entitys internal control.d. Analytical procedures indicate that many year-end account balances are not comparable with theprior years balances.ANSWER:Choice "a" is correct. If the auditor is unable to obtain the audited financial statements of a significantsubsidiary, a scope limitation exists. Assuming the effect is material, the auditor would issue either aqualified opinion or a disclaimer of opinion.Choice "b" is incorrect. Financial statements prepared on an entitys income tax basis are "othercomprehensive basis of accounting" (OCBOA) financial statements. The auditor may issue a specialreport, which can include an unqualified opinion, on OCBOA financial statements.Choice "c" is incorrect. Significant deficiencies in the design and operation of an entitys internal controldo not preclude issuance of an unqualified opinion, although they do increase the risk of materialmisstatement and will likely result in modifications to the nature, timing, and extent of the auditors testing.Choice "d" is incorrect. An unqualified opinion may still be expressed when there are significant changesin year-end account balances as compared to prior year balances, as long as the auditor has obtainedsufficient appropriate audit evidence about the current balances.
  • 2007 AICPA Newly Released Questions – Auditing1919. CPA-05483An auditors principal objective in analyzing repairs and maintenance expense accounts is to:a. Determine that all obsolete plant and equipment assets were written off before the year-end.b. Verify that all recorded plant and equipment assets actually exist.c. Discover expenditures that were expensed but should have been capitalized.d. Identify plant and equipment assets that cannot be repaired and should be written off.ANSWER:Choice "c" is correct. The auditor reviews repair and maintenance expense accounts to test forcompleteness of asset additions (i.e., the auditor is looking for items recorded as repairs or maintenancethat would more properly have been capitalized as betterment of an asset).Choice "a" is incorrect. Analyzing the repairs and maintenance account does not provide evidence aboutobsolete assets. The auditor might review asset records for old assets, or observe assets that are notbeing used, in an effort to determine whether obsolete plant and equipment assets were written off beforeyear-end.Choice "b" is incorrect. Analyzing the repairs and maintenance account does not provide evidence aboutthe existence of assets. The auditor might select recorded plant and equipment assets, and thenphysically locate and observe them, in order to verify existence.Choice "d" is incorrect. Analyzing the repairs and maintenance account does not provide evidence aboutassets that cannot be repaired. The auditor might review asset records for old assets, or observe assetsthat are not being used, in an effort to determine whether assets that cannot be repaired have beenproperly written off.
  • 2007 AICPA Newly Released Questions – Auditing2020. CPA-05484Which of the following statements is correct concerning materiality in a financial statement audit?a. Analytical procedures performed during an audits review stage usually decrease materiality levels.b. If the materiality amount used in evaluating audit findings increases from the amount used inplanning, the auditor should apply additional substantive tests.c. The auditors materiality judgments generally involve quantitative, but not qualitative, considerations.d. Materiality levels are generally considered in terms of the smallest aggregate level of misstatementthat could be considered material to any one of the financial statements.ANSWER:Choice "d" is correct. Because the financial statements are interrelated, materiality levels are generallyconsidered in terms of the smallest level of misstatement that could be material to any one of the financialstatements.Choice "a" is incorrect. Analytical procedures are performed during an audits review stage to evaluatethe overall financial statement presentation and to assess the conclusions reached. They generallywould not result in a change in materiality levels.Choice "b" is incorrect. If the materiality amount used in evaluating audit findings increases from theamount used in planning, the auditor should consider whether the audit plan needs to be modified.Typically, an increase in materiality levels would result in a decrease in audit risk, which would result inless substantive testing, not more.Choice "c" is incorrect. Qualitative considerations may lead to situations in which misstatements that donot exceed materiality limits are still likely to influence the economic decisions of users. In such cases, anotherwise immaterial misstatement is deemed to be material.
  • 2007 AICPA Newly Released Questions – Auditing2121. CPA-05485As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment mostlikely occurred because:a. Control risk based on the auditors sample is less than the true operating effectiveness of the clientscontrol activity.b. The auditor believes that the control activity relates to the clients assertions when, in fact, it does not.c. The auditor believes that the control activity will reduce the extent of substantive testing when, in fact,it will not.d. Control risk based on the auditors sample is greater than the true operating effectiveness of theclients control activity.ANSWER:Choice "d" is correct. The risk of assessing control risk too high is the risk that the assessed level ofcontrol risk based on the sample is greater than the true risk based on the actual operating effectivenessof the control.Choice "a" is incorrect. The risk of assessing control risk too low is the risk that the assessed level ofcontrol risk based on the sample is less than the true risk based on the actual operating effectiveness ofthe control.Choice "b" is incorrect. Assessing control risk too high relates to an incorrect evaluation of risk by theauditor, not to whether the control activity relates to the clients assertions.Choice "c" is incorrect. If the auditor believes that a control activity will reduce the extent of substantivetesting when, in fact, it will not, this implies that the control risk based on the auditors sample was lessthan the true risk based on the actual operating effectiveness of the control. This would be an example ofassessing control risk too low, not too high.
  • 2007 AICPA Newly Released Questions – Auditing2222. CPA-05486At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financialstatements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained isnot sufficient to support managements representations. Which of the following actions is the auditor mostlikely to take?a. Consult with the audit committee and issue a disclaimer of opinion.b. Consult with the audit committee and issue a qualified opinion.c. Obtain additional evidence regarding the valuation of inventory.d. Obtain a statement from management supporting their inventory valuation.ANSWER:Choice "c" is correct. If an auditor has doubts about a material assertion (such as the valuation ofinventory), he/she should gather sufficient evidence to eliminate the doubt.Choices "a" and "b" are incorrect. The auditor would not consult with the audit committee regarding thesufficiency of audit evidence obtained, as this is determined based on the auditors own judgment. Inaddition, if the auditor is able to obtain additional evidence, it might be possible to issue an unqualifiedopinion. Finally, even if no additional evidence is available, the auditor will still need to decide whether aqualified opinion or a disclaimer of opinion is more appropriate, depending on materiality.Choice "d" is incorrect. Since management representations are in fact "statements from management,"obtaining additional statements from management would not provide additional support.
  • 2007 AICPA Newly Released Questions – Auditing2323. CPA-05487An audit supervisor reviewed the work performed by the staff to determine if the audit was adequatelyperformed. The supervisor accomplished this by primarily reviewing which of the following?a. Checklists.b. Working papers.c. Analytical procedures.d. Financial statements.ANSWER:Choice "b" is correct. Audit documentation, or working papers, comprises the principal record of auditprocedures performed, evidence obtained, and conclusions reached. Reviewing the working papersallows a supervisor to understand the work performed and the evidence obtained, and to evaluatewhether the audit was adequately performed.Choice "a" is incorrect. Checklists might be used within the audit documentation, but checklists alonewould not provide a comprehensive record of the audit procedures performed, the evidence obtained, andconclusions reached.Choice "c" is incorrect. Analytical procedures might be documented within the working papers, but suchprocedures alone would not provide a comprehensive record of the audit procedures performed, theevidence obtained, and conclusions reached.Choice "d" is incorrect. Reviewing the financial statements would provide no information regarding theaudit procedures performed, the evidence obtained, or conclusions reached, and therefore would provideno basis on which to review the work performed by the staff.
  • 2007 AICPA Newly Released Questions – Auditing2424. CPA-05488The auditors inventory observation test counts are traced to the clients inventory listing to test for whichof the following financial statement assertions?a. Completeness.b. Rights and obligations.c. Allocation and valuation.d. Understandability and classification.ANSWER:Choice "a" is correct. The auditor should test the physical inventory report by tracing test counts taken bythe auditor to the report, thereby verifying its completeness.Choice "b" is incorrect. Tracing from test counts to the clients inventory listing does not test rights andobligations. Rights and obligations might be tested by examining paid vendors invoices, inspectingconsignment agreements and contracts, or by confirming inventory held at outside locations.Choice "c" is incorrect. Tracing from test counts to the clients inventory listing does not test allocationand valuation. Allocation and valuation might be tested by examining paid vendors invoices, evaluatingdirect labor rates, recalculating overhead rates, or examining an analysis of inventory turnover.Choice "d" is incorrect. Tracing from test counts to the clients inventory listing does not testunderstandability and classification. Understandability and classification might be tested by confirminginventories pledged under loan agreements, examining drafts of the financial statements for appropriatebalance sheet classification, etc.
  • 2007 AICPA Newly Released Questions – Auditing2525. CPA-05489Which of the following is an analytical procedure that an auditor most likely would perform when planningan audit?a. Confirming bank balances with the financial institutions.b. Scanning accounts receivable for amounts over credit limits.c. Recalculating inventory extensions of physical inventory counts.d. Comparing the current-year account balances for conformity with predictable patterns.ANSWER:Choice "d" is correct. During planning, analytical procedures consist of a review of data aggregated at ahigh level, with an objective of enhancing the auditors understanding of the client. Comparing thecurrent-year account balances for conformity with predictable patterns would fulfill this purpose.Choice "a" is incorrect. Confirmation of bank balances is a substantive audit procedure (not an analyticalprocedure) that would be performed during the fieldwork stage of the audit.Choice "b" is incorrect. Scanning accounts receivable for amounts over credit limits is a detailedprocedure related to one specific account, and it would be performed during the fieldwork stage of theaudit.Choice "c" is incorrect. Recalculating inventory extensions of physical inventory counts is a detailedprocedure related to one specific account, and it would be performed during the fieldwork stage of theaudit.
  • 2007 AICPA Newly Released Questions – Auditing2626. CPA-05490In which of the following circumstances is substantive testing of accounts receivable before the balancesheet date most appropriate?a. The client has a new sales incentive program in place.b. Internal controls during the remaining period are effective.c. There is a high turnover of senior management.d. It is a first engagement of a new client.ANSWER:Choice "b" is correct. The higher the auditors risk assessment, the closer to period end substantiveprocedures should be performed. Conversely, effective controls reduce control risk and reduce the risk ofmaterial misstatement, allowing more interim testing to occur.Choice "a" is incorrect. A new sales incentive program results in an increase in the risk of materialmisstatement, making it less likely that interim testing will be performed.Choice "c" is incorrect. High turnover of senior management results in an increase in the risk of materialmisstatement, making it less likely that interim testing will be performed.Choice "d" is incorrect. In the first engagement of a new client, the auditor will have less knowledge of theclient and therefore would be less inclined to utilize interim testing, which increases audit risk.
  • 2007 AICPA Newly Released Questions – Auditing2727. CPA-05491An auditor reads the letter of transmittal accompanying a countys comprehensive annual financial reportand identifies a material inconsistency with the financial statements. The auditor determines that thefinancial statements do not require revision. Which of the following actions should the auditor take?a. Request that the client revise the letter of transmittal.b. Include an explanatory paragraph in the auditors report.c. Consider withdrawing from the engagement.d. Request a client representation letter acknowledging the inconsistency.ANSWER:Choice "a" is correct. When information accompanies audited financial statements in a client-prepareddocument, the auditor is required to read the information. If such information is materially inconsistentwith the financial statements and the financial statements do not require revision, the auditor shouldrequest that the information (in this case the letter of transmittal) be revised.Choice "b" is incorrect. The auditor would only revise the report to include discussion of the materialinconsistency if the client were unwilling to revise the transmittal letter appropriately.Choice "c" is incorrect. The auditor would only consider withdrawing from the engagement if the clientwere unwilling to revise the transmittal letter appropriately.Choice "d" is incorrect. The auditor would not request a client representation letter acknowledging theinconsistency, as correction (and not simply acknowledgment) of the error is desired.
  • 2007 AICPA Newly Released Questions – Auditing2828. CPA-05492An analysis of which of the following accounts would best aid in verifying that all fixed assets have beencapitalized?a. Cash.b. Depreciation expense.c. Property tax expense.d. Repairs and maintenance.ANSWER:Choice "d" is correct. An analysis of the repairs and maintenance account would best aid the auditor inverifying that all fixed assets have been capitalized. This account is generally analyzed to test forcompleteness of asset additions (i.e., the auditor is looking for items recorded as repairs or maintenancethat would more properly have been capitalized as betterment of an asset).Choice "a" is incorrect. An analysis of cash would not identify fixed assets that were not properlycapitalized, since cash would be paid for the purchase regardless of whether the item were expensed orcapitalized.Choice "b" is incorrect. An analysis of depreciation expense would not identify fixed assets that were notproperly capitalized, since no depreciation would be included for items not already classified as assets.Choice "c" is incorrect. An analysis of property tax expense would not identify fixed assets that were notproperly capitalized, since no property tax would be included for items not already classified as assets.
  • 2007 AICPA Newly Released Questions – Auditing2929. CPA-05493When companies use information technology (IT) extensively, evidence may be available only inelectronic form. What is an auditors best course of action in such situations?a. Assess the control risk as high.b. Use audit software to perform analytical procedures.c. Use generalized audit software to extract evidence from client databases.d. Perform limited tests of controls over electronic data.ANSWER:Choice "c" is correct. When companies use information technology (IT) extensively and evidence isavailable only in electronic form, generalized audit software packages generate the programs necessaryto interrogate the files and extract and analyze the data.Choice "a" is incorrect. The use of information technology does not automatically imply that control risk ishigh. The auditor would need to evaluate the clients controls to make this determination.Choice "b" is incorrect. Although audit software might be used to perform analytical procedures, the datawould first need to be extracted from the clients system. A generalized audit software package is thebest way to do this.Choice "d" is incorrect. If information technology is used extensively, the auditor would likely performmore than limited tests of controls over electronic data.
  • 2007 AICPA Newly Released Questions – Auditing3030. CPA-05494The ultimate purpose of assessing control risk is to contribute to the auditors evaluation of the risk that:a. Specific internal control activities are not operating as designed.b. The collective effect of the control environment may not achieve the control objectives.c. Tests of controls may fail to identify activities relevant to assertions.d. Material misstatements may exist in the financial statements.ANSWER:Choice "d" is correct. The auditors ultimate purpose assessing control risk is to evaluate the risk offinancial statement misstatement.Choice "a" is incorrect. The auditors evaluation of whether or not specific internal control activities areoperating as designed is part of his/her assessment of control risk; however, the ultimate purpose ofmaking this assessment is to evaluate the risk of financial statement misstatement.Choice "b" is incorrect. The auditors evaluation of the collective effect of the control environment is partof his/her assessment of control risk; however, the ultimate purpose of making this assessment is toevaluate the risk of financial statement misstatement.Choice "c" is incorrect. Tests of controls are not used to identify activities relevant to assertions. Tests ofcontrols are used to evaluate the operating effectiveness of internal control in preventing or detectingmaterial misstatements.
  • 2007 AICPA Newly Released Questions – Auditing3131. CPA-05495After making inquiries about credit granting policies, an auditor selects a sample of sales transactions andexamines evidence of credit approval. This test of controls most likely supports managements financialstatement assertion(s) of:Rights and Allocation andobligations valuationa. Yes Yesb. Yes Noc. No Yesd. No NoANSWER:Choice "c" is correct. By ensuring that credit approval is obtained before goods are shipped tocustomers, the auditor is testing managements assertion that accounts receivable are collectible(allocation and valuation). Ensuring that credit approval is obtained before goods are shipped does notsupport the rights and obligations assertion.Choices "a", "b", and "d" are incorrect, based on the above explanation.
  • 2007 AICPA Newly Released Questions – Auditing3232. CPA-05496Which of the following characteristics most likely would be an advantage of using classical variablessampling rather than probability-proportional-to-size (PPS) sampling?a. The selection of negative balances requires no special design considerations.b. The sampling process can begin before the complete population is available.c. The auditor need not consider the preliminary judgments about materiality.d. The sample will result in a smaller sample size if few errors are expected.ANSWER:Choice "a" is correct. Inclusion of negative balances requires special design considerations with PPSsampling, but it does not require special design considerations with classical variables sampling.Choice "b" is incorrect. All items in the population should have an equal chance to be included in thesample. Therefore, the sampling process should not begin before the complete population is available,regardless of whether classical variables sampling or PPS sampling is used.Choice "c" is incorrect. When planning a particular sample for a substantive test of details, the auditorshould consider preliminary estimates of materiality.Choice "d" is incorrect. If no errors are expected, PPS sampling generally requires a smaller sample thanother methods.
  • 2007 AICPA Newly Released Questions – Auditing3333. CPA- 05497Which of the following matters is an auditor required to communicate to those charged with governance?a. Adjustments that were suggested by the auditor and recorded by management that have a significanteffect on the entitys financial reporting process.b. The auditors consideration of risk factors in assessing the risk of material misstatement arising fromthe misappropriation of assets.c. The results of the auditors analytical procedures performed in the review stage of the engagementthat indicate significant variances from expected amounts.d. Changes in the auditors preliminary judgment about materiality that were caused by projecting theresults of statistical sampling for tests of transactions.ANSWER:Choice "a" is correct. The auditor is required to communicate significant audit findings to those chargedwith governance. Significant audit findings include material, corrected misstatements brought tomanagements attention as a result of the audit. Unless all of those charged with governance are alsoinvolved with managing the entity, such findings should be communicated by the auditor.Choice "b" is incorrect. The auditor is not required to communicate with those charged with governanceregarding his/her fraud risk assessment.Choice "c" is incorrect. The auditor is not required to communicate with those charged with governanceregarding the results of specific audit procedures.Choice "d" is incorrect. The auditor is not required to communicate with those charged with governanceregarding changes to his/her preliminary judgment about materiality.
  • 2007 AICPA Newly Released Questions – Auditing3434. CPA-05498For which of the following audit tests would a CPA most likely use attribute sampling?a. Identifying entries posted to incorrect accounts.b. Estimating the amount in an expense account.c. Evaluating the reasonableness of depreciation expense.d. Selecting receivables for confirmation of account balances.ANSWER:Choice "a" is correct. Attribute sampling is used to estimate a rate of occurrence, and often involves ayes-no question. Attribute sampling could be used to determine the error rate in posting journal entries,perhaps by asking, "Is the entry posted to the proper account?"Choice "b" is incorrect. Variables sampling is typically used to estimate a numerical quantity, such as theamount in an expense account.Choice "c" is incorrect. Variables sampling is typically used to estimate a numerical quantity, such as areasonable amount for depreciation expense.Choice "d" is incorrect. Attribute sampling is used to estimate a rate of occurrence, not to select the itemsto include in a sample.
  • 2007 AICPA Newly Released Questions – Auditing3535. CPA-05499Which of the following strategies most likely could improve the response rate of the confirmations ofaccounts receivable?a. Restrict the selection of accounts to be confirmed to those customers with large balances.b. Include a list of items or invoices that constitute the customers account balances.c. Explain to customers that discrepancies will be investigated by an independent third party.d. Ask customers to respond to the confirmation requests directly to the auditor by fax.ANSWER:Choice "b" is correct. The auditor should consider the types of information respondents will be readilyable to confirm. For instance, some accounting systems facilitate the confirmation of single transactionsrather than entire balances. In such cases, the auditor might consider including a client-preparedstatement of account showing details of the customers account balance being confirmed. By making iteasier for customers to determine which items are included in the balance being confirmed, the auditoralso makes it more likely that those customers will respond.Choice "a" is incorrect. Restricting the selection of accounts to be confirmed to those customers withlarge balances doesnt improve response rates, as customers with large balances are not necessarilymore likely to respond than customers with small balances.Choice "c" is incorrect. Explaining to customers that discrepancies will be investigated by an independentthird party would not necessarily encourage them to respond, as they might be reluctant to set off thisinvestigation.Choice "d" is incorrect. Responses received by fax should be verified by calling the senders andrequesting that the original confirmations be mailed back. Asking customers to respond by fax mightactually reduce the response rate for receiving the original confirmation, since customers may decide thatsince they already sent the fax, they dont need to send the original back as well.
  • 2007 AICPA Newly Released Questions – Auditing3636. CPA-05500Which of the following procedures would an auditor most likely perform in auditing the statement of cashflows?a. Reconcile the amounts included in the statement of cash flows to the other financial statementsamounts.b. Vouch a sample of cash receipts and disbursements for the last few days of the current year.c. Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year-end cashbalance.d. Confirm the amounts included in the statement of cash flows with the entitys financial institution.ANSWER:Choice "a" is correct. To audit the statement of cash flows, the auditor reconciles the amounts on thestatement to amounts on other financial statements.Choice "b" is incorrect. Vouching a sample of cash receipts and disbursements is a procedure used toaudit the cash balance, rather than the statement of cash flows.Choice "c" is incorrect. Reconciling the cutoff bank statement to the proof of cash to verify the accuracyof the year-end cash balance is a procedure used to audit the cash balance, rather than the statement ofcash flows.Choice "d" is incorrect. Confirming cash amounts with the entitys financial institution is a procedure usedto audit the cash balance, rather than the statement of cash flows.
  • 2007 AICPA Newly Released Questions – Auditing3737. CPA-05501In establishing the existence and ownership of long-term investments in the form of publicly-traded stock,an auditor most likely would inspect the securities or:a. Correspond with the investee company to verify the number of shares owned.b. Confirm the number of shares owned that are held by an independent custodian.c. Apply analytical procedures to the dividend income and investments accounts.d. Inspect the cash receipts journal for amounts that could represent the sale of securities.ANSWER:Choice "b" is correct. Confirmations should be requested from the custodian for securities that are in thepossession of third parties.Choice "a" is incorrect. The investee company may not have timely information regarding the ownershipof its stock, nor would an investee typically want to correspond with all of its shareholders in this manner.Choice "c" is incorrect. Analytical procedures might be used to test the reasonableness of dividendincome, but this would not provide evidence about the existence and ownership of the investments.Choice "d" is incorrect. Inspecting the cash receipts journal for amounts that could represent the sale ofsecurities might provide evidence regarding sales (and gains or losses on sales), but would not provideevidence about the existence and ownership of the investments.
  • 2007 AICPA Newly Released Questions – Auditing3838. CPA-05502The standard report issued by an accountant after reviewing the financial statements of a nonpublic entityshould state that:a. A review is limited to presenting in the form of financial statements information that is therepresentation of management.b. A review consists of inquiries of company personnel and analytical procedures applied to financialdata.c. The accountant does not express an opinion or any other form of assurance on the financialstatements.d. The accountant did not obtain an understanding of the entitys internal control or assess control risk.ANSWER:Choice "b" is correct. The standard report issued by an accountant after reviewing the financialstatements of a nonpublic entity states that a review consists of inquiries of company personnel andanalytical procedures applied to financial data.Choice "a" is incorrect. A compilation report uses language similar to this, stating that a compilation islimited to presenting, in the form of financial statements, information that is the representation ofmanagement.Choice "c" is incorrect. A compilation report uses language similar to this, stating that the accountantdoes not express an opinion or any other form of assurance on the financial statements. A reviewprovides negative assurance.Choice "d" is incorrect. While it is true that a review of the financial statements of a nonpublic entity doesnot require the accountant to obtain an understanding of the entitys internal control or assess control risk,the report does not explicitly state this.
  • 2007 AICPA Newly Released Questions – Auditing3939. CPA-05503When an accountant compiles projected financial statements, the accountants report should include aseparate paragraph that:a. Explains the difference between a compilation and a review.b. Documents the assessment of the risk of material misstatement due to fraud.c. Expresses limited assurance that the actual results may be within the projected range.d. Describes the limitations on the projections usefulness.ANSWER:Choice "d" is correct. The accountants report on compiled projected financial statements should includea separate paragraph that describes the limitations on the projections usefulness. For example, theparagraph states that there will usually be differences between projected and actual results, and indicatesthat the accountant has no responsibility to update the report for events occurring after the date of thereport.Choice "a" is incorrect. The accountants report on compiled projected financial statements does notinclude an explanation of the difference between a compilation and a review.Choice "b" is incorrect. The accountants report on compiled projected financial statements does notdocument the assessment of the risk of material misstatement due to fraud.Choice "c" is incorrect. The accountants report on compiled projected financial statements does notexpress limited assurance that the actual results may be within the projected range. In fact, it specificallystates that no opinion or any other form of assurance is expressed, and that there usually will bedifferences between projected and actual results.
  • 2007 AICPA Newly Released Questions – Auditing4040. CPA-05504 (Adapted)An auditor intends to use the work of an actuary who has a relationship with the client. Under thesecircumstances, the auditor:a. Is required to disclose the contractual relationship in the auditors report.b. Should assess the risk that the actuarys objectivity might be impaired.c. Is not permitted to rely on the actuary because of a lack of independence.d. Should communicate this matter to those charged with governance as a significant deficiency ininternal control.ANSWER:Choice "b" is correct. While a specialist who is unrelated to the client will provide the auditor with greaterassurance of reliability, a specialist who is related to the client may be acceptable in certaincircumstances. In such situations, the auditor would likely perform additional procedures to verifyobjectivity.Choice "a" is incorrect. If the auditor is expressing a standard unqualified opinion, no reference would bemade to the specialist in the auditors report.Choice "c" is incorrect. While a specialist who is unrelated to the client will provide the auditor withgreater assurance of reliability, a specialist who is related to the client may be acceptable in certaincircumstances.Choice "d" is incorrect. The fact that the actuary has a relationship with the client is not considered to bea significant deficiency in internal control.
  • 2007 AICPA Newly Released Questions – Auditing4141. CPA-05505Before applying principal substantive tests to an entitys accounts receivable at an interim date, an auditorshould:a. Consider the likelihood of assessing the risk of incorrect rejection too low.b. Project sampling risk at the maximum for tests covering the remaining period.c. Ascertain that accounts receivable are immaterial to the financial statements.d. Assess the difficulty in controlling the incremental audit risk.ANSWER:Choice "d" is correct. When audit procedures are performed before year-end, the auditor must assessthe incremental risk involved and determine whether sufficient alternative procedures exist to extend theinterim conclusions to year-end.Choice "a" is incorrect. The risk of incorrect rejection relates to the efficiency of audit testing, since anitem that is initially (and erroneously) rejected will be subject to additional audit testing that should correctthe error. The likelihood of assessing this risk lower than it should be does not affect the auditorsdecision regarding the appropriate timing of audit work.Choice "b" is incorrect. When audit procedures are performed before year-end, the auditor must assessthe incremental risk involved, but this risk would not necessarily be assessed at the maximum level.Choice "c" is incorrect. Interim testing may be performed on material accounts, as long as the auditorassesses the incremental risk involved and determines whether sufficient alternative procedures exist toextend the interim conclusions to year-end. Immaterial accounts would not need to be tested.
  • 2007 AICPA Newly Released Questions – Auditing4242. CPA-05506 (Adapted)Which of the following procedures would a CPA most likely perform in the planning stage of a financialstatement audit?a. Obtain representations from management regarding the availability of all financial records.b. Communicate with those charged with governance concerning the prior years audit adjustments.c. Make inquiries of the clients attorney regarding pending and threatened litigation and assessments.d. Compare recorded financial information with anticipated results from budgets and forecasts.ANSWER:Choice "d" is correct. The planning process should include application of analytical procedures, such ascomparison of the financial statements with budgeted or anticipated results.Choice "a" is incorrect. Management representations are typically obtained at the end of the audit, notduring the planning stage.Choice "b" is incorrect. Assuming all of those charged with governance are not also involved withmanaging the entity, the auditor is required to communicate with those charged with governanceconcerning adjustments arising from the current years audit, not adjustments from the previous year.Choice "c" is incorrect. Inquiries are typically made of the clients attorney during the fieldwork stage ofthe audit, not during the planning stage.
  • 2007 AICPA Newly Released Questions – Auditing4343. CPA-05507A CPA is engaged to examine managements assertion that the entitys schedule of investment returns ispresented in accordance with specific criteria. In performing this engagement, the CPA should complywith the provisions of:a. Statements on Standards for Accounting and Review Services (SSARS).b. Statements on Auditing Standards (SAS).c. Statements on Standards for Consulting Services (SSCS).d. Statements on Standards for Attestation Engagements (SSAE).ANSWER:Choice "d" is correct. Statements on Standards for Attestation Engagements apply to engagements inwhich a practitioner is engaged to issue or does issue an examination, a review, or an agreed-uponprocedures report on subject matter, or on an assertion about the subject matter, which is theresponsibility of another party. An engagement to examine managements assertion that the entitysschedule of investment returns is presented in accordance with specific criteria would fall within thisscope.Choice "a" is incorrect. Statements on Standards for Accounting and Review Services apply toengagements involving the unaudited financial statements of a nonpublic entity. An engagement toexamine managements assertion that the entitys schedule of investment returns is presented inaccordance with specific criteria does not fall within this scope.Choice "b" is incorrect. Statements on Auditing Standards apply to audits of financial statements. Anengagement to examine managements assertion that the entitys schedule of investment returns ispresented in accordance with specific criteria does not fall within this scope.Choice "c" is incorrect. Statements on Standards for Consulting Services apply to a broad range ofconsulting services. An engagement to examine managements assertion that the entitys schedule ofinvestment returns is presented in accordance with specific criteria is not a consulting service.
  • 2007 AICPA Newly Released Questions – Auditing4444. CPA-05508While auditing the financial statements of a nonpublic entity, a CPA was requested to change theengagement to a review in accordance with Statements on Standards for Accounting and ReviewServices (SSARS) because of a scope limitation. If the CPA believes the clients request is reasonable,the CPAs review report should:I. Refer to the scope limitation that caused the change.II. Describe the auditing procedures that have already been applied.a. I only.b. II onlyc. Both I and II.d. Neither I nor II.ANSWER:Choice "d" is correct. If the CPA believes the clients request is reasonable, he/she must comply with thestandards for a review and issue an appropriate report. The report should not refer to the originalengagement, to any auditing procedures performed, or to the scope limitation.Choices "a", "b", and "c" are incorrect, based on the above explanation.
  • 2007 AICPA Newly Released Questions – Auditing4545. CPA-05509Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differfrom reporting under generally accepted auditing standards in that Government Auditing Standardsrequire the auditor to:a. Provide positive assurance that control activities regarding segregation of duties are consistent withthe entitys control objectives.b. Present the results of the auditors tests of controls.c. Provide negative assurance that the auditor discovered no evidence of intentional override of internalcontrols.d. Describe the scope of the auditors principal substantive tests.ANSWER:Choice "b" is correct. The report on the audit of financial statements should describe the scope of theauditors testing of compliance with laws and regulations and internal control over financial reporting, andpresent the results of those tests.Choice "a" is incorrect. The auditors report on internal controls indicates whether or not materialweaknesses were found, but it does not provide assurance that specific internal control activities areconsistent with the entitys objectives.Choice "c" is incorrect. The auditor is not required to provide negative assurance regarding the overrideof internal control, although the audit report will provide negative assurances regarding internal controlover financial reporting and its operations that may involve a material weakness.Choice "d" is incorrect. There is no requirement that the auditor describe the scope of substantive tests.However, under Government Auditing Standards, the report on the audit of financial statements shoulddescribe the scope of the auditors testing of compliance with laws and regulations and internal controlover financial reporting.
  • 2007 AICPA Newly Released Questions – Auditing4646. CPA-05510To obtain assurance that all inventory items in a clients inventory listing are valid, an auditor most likelywould trace:a. Inventory tags noted during the auditors observation to items listed in receiving reports and vendorsinvoices.b. Items listed in receiving reports and vendors invoices to the inventory listing.c. Inventory tags noted during the auditors observation to items in the inventory listing.d. Items in the inventory listing to inventory tags and the auditors recorded count sheets.ANSWER:Choice "d" is correct. Tracing from the inventory listing to the inventory tags and the auditors recordcount sheets verifies the validity (existence) of the items.Choice "a" is incorrect. Tracing inventory tags noted during the auditors observation to items listed inreceiving reports and vendors invoices might be used to verify completeness of purchases or payables.Choice "b" is incorrect. Tracing from receiving reports and vendors invoices to the inventory listing arecut-off procedures used to verify completeness of the inventory listing.Choice "c" is incorrect. Tracing from inventory tags to the inventory listing schedule verifies thecompleteness of the schedule, not the existence (or validity) of the items.
  • 2007 AICPA Newly Released Questions – Auditing4747. CPA- 05511 (Adapted)What is the most likely course of action that an auditor would take after determining that performingsubstantive tests on inventory will take less time than performing tests of controls?a. Assess control risk at a low level.b. Perform both tests of controls and substantive tests on inventory.c. Perform only substantive tests on inventory.d. Perform only tests of controls on inventory.ANSWER:Choice "c" is correct. If it would take less time to perform substantive tests than it would to perform testsof controls, and if there is no other reason to test controls (i.e., if there is not a high degree of electronicprocessing), the auditor would not be likely to test controls.Choice "a" is incorrect. In order to assess control risk at a low level, tests of controls would need to beperformed. However, if it is more efficient to perform substantive tests, the auditor would not be likely totest controls.Choice "b" is incorrect. If it would take less time to perform substantive tests than it would to performtests of controls, and if there is no other reason to test controls (i.e., if there is not a high degree ofelectronic processing), the auditor would not be likely to test controls.Choice "d" is incorrect. Substantive procedures are always be necessary for all assertions relevant tomaterial transaction classes, account balances, and disclosures. Assuming inventory is material, tests ofcontrols alone would not be sufficient.
  • 2007 AICPA Newly Released Questions – Auditing4848. CPA-05512Which of the following characteristics most likely would heighten an auditors concern about the risk ofmaterial misstatement arising from fraudulent financial reporting?a. There is a lack of interest by management in maintaining an earnings trend.b. Computer hardware is usually sold at a loss before being fully depreciated.c. Management had frequent disputes with the auditor on accounting matters.d. Monthly bank reconciliations usually include several large checks outstanding.ANSWER:Choice "c" is correct. Frequent disputes between management and the auditor is a fraud risk factor thatwould heighten an auditors concern about the risk of material misstatement arising from fraudulentfinancial reporting.Choice "a" is incorrect. Managements excessive interest in maintaining or increasing the stock price andearnings trend is a fraud risk factor, but managements lack of interest in maintaining an earnings trendwould not constitute a fraud risk factor.Choice "b" is incorrect. Since depreciation does not adjust an asset to market value, the sale of computerhardware at a loss before being fully depreciated is not unusual and would not heighten an auditorsconcern.Choice "d" is incorrect. Bank reconciliations with outstanding checks are not unusual and would notheighten the auditors concern about the risk of material misstatement. Outstanding checks can also beverified with the bank at a later date, when the checks clear.
  • 2007 AICPA Newly Released Questions – Auditing4949. CPA-05513 (Adapted)An accountant may accept an engagement to apply agreed-upon procedures to prospective financialstatements provided the:a. Provisions of Statements on Standards for Accounting and Review Services (SSARS) are followed.b. Accountant also examines the prospective financial statements.c. Distribution (use) of the report is restricted to the specified users.d. The accountant takes responsibility for the adequacy of the procedures performed.ANSWER:Choice "c" is correct. In an agreed-upon procedures engagement, use of the report is restricted to thespecified users.Choice "a" is incorrect. Statements on Standards for Accounting and Review Services apply to theunaudited financial statements of a nonpublic entity, not to engagements to apply agreed-uponprocedures to prospective financial statements.Choice "b" is incorrect. There is no requirement that the accountant also examine prospective financialstatements in an agreed-upon procedures engagement.Choice "d" is incorrect. In an agreed-upon procedures engagement, the specified parties (and not theaccountant) take responsibility for the sufficiency of the procedures for their purposes.
  • 2007 AICPA Newly Released Questions – Auditing5050. CPA-05514Which of the following statements is correct regarding the auditors consideration of the possibility ofillegal acts by clients?a. The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance that noillegal acts have been committed by clients.b. The auditors training, experience, and understanding of the client should be used to provide a basisfor the determination as to whether illegal acts have occurred.c. If specific information concerning an illegal act comes to the auditors attention, the auditor shouldapply audit procedures specifically directed to ascertaining whether an illegal act has occurred.d. If an illegal act has occurred, the auditor should express a qualified opinion or an adverse opinion onthe financial statements taken as a whole.ANSWER:Choice "c" is correct. If specific information concerning a possible illegal act comes to the auditorsattention, the auditor should apply additional audit procedures to determine whether an illegal act has infact occurred.Choice "a" is incorrect. The auditor has a responsibility to plan and perform the audit to obtainreasonable assurance that the financial statements are free of material misstatement. This is a differentlevel of assurance than stating that "no illegal acts" have been committed by clients, since it is possiblefor an immaterial illegal act (for example a theft of a few dollars from the petty cash fund) to occur and notbe identified by the auditor.Choice "b" is incorrect. The auditors training, experience, and understanding of the client may not besufficient to provide a basis for the determination as to whether illegal acts (especially indirect effectillegal acts) have occurred.Choice "d" is incorrect. If an illegal act has occurred, but the act has been properly accounted for and/ordisclosed, there would be no need to express a qualified opinion or an adverse opinion.