Question 1

For a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:

Accepted Answer

A)  Only if the deficiency has a material effect on the auditor's assessment of control risk. 
B)  Unless the entity accepts that degree of risk because of cost-benefit considerations. 
C)  Only if the deficiency is considered a material weakness. 
D)  In writing, during the current audit. 
A)  Only if the deficiency has a material effect on the auditor's assessment of control risk. 
B)  Unless the entity accepts that degree of risk because of cost-benefit considerations. 
C)  Only if the deficiency is considered a material weakness. 
D)  In writing, during the current audit.

Question 2

Accepting an engagement to compile a financial projection for a publicly held company most likely would be inappropriate if the projection were to be distributed to:

Accepted Answer

A)  A bank with which the entity is negotiating for a loan. 
B)  A labor union with which the entity is negotiating a contract. 
C)  The principal stockholder, to the exclusion of the other stockholders. 
D)  All stockholders of record as of the report date. 
A)  A bank with which the entity is negotiating for a loan. 
B)  A labor union with which the entity is negotiating a contract. 
C)  The principal stockholder, to the exclusion of the other stockholders. 
D)  All stockholders of record as of the report date.

Question 3

This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below. Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure. Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft. Accountant's Review Report We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co. A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose. The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date. Jordan and Stone, CPAs March 1, 20X3 Supervisor's Review Notes The accountant's review and audit responsibilities should follow management's responsibilities in the first (introductory) paragraph.

Accepted Answer

A)  Correct 
B)  Incorrect 
A)  Correct 
B)  Incorrect

Question 4

Which of the following information discovered during an audit most likely would raise a question concerning possible illegal acts?

Accepted Answer

A)  Related party transactions, although properly disclosed, were pervasive during the year. 
B)  The entity prepared several large checks payable to cash during the year. 
C)  Material internal control weaknesses previously reported to management were not corrected. 
D)  The entity was a campaign contributor to several local political candidates during the year. 
A)  Related party transactions, although properly disclosed, were pervasive during the year. 
B)  The entity prepared several large checks payable to cash during the year. 
C)  Material internal control weaknesses previously reported to management were not corrected. 
D)  The entity was a campaign contributor to several local political candidates during the year.

Question 5

Management of Eva Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated a material weakness previously noted in its assessment of internal control, and has hired Henna and Company, CPAs, to attest to the improvements in internal control. Which of the following is true of this engagement?

Accepted Answer

A)  It is required by PCAOB standards. 
B)  It is only required if Eva Industries elects to have an audit in accordance with PCAOB standards. 
C)  Eva's management must provide a written report to accompany Henna and Company's report. 
D)  It is required by generally accepted auditing standards. 
A)  It is required by PCAOB standards. 
B)  It is only required if Eva Industries elects to have an audit in accordance with PCAOB standards. 
C)  Eva's management must provide a written report to accompany Henna and Company's report. 
D)  It is required by generally accepted auditing standards.

Question 6

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of:

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 7

Which of the following items does not pertain to the control environment?

Accepted Answer

A)  Management's philosophy and operating style. 
B)  Participation of those charged with governance. 
C)  The accounting records. 
D)  Personnel policies and practices. 
A)  Management's philosophy and operating style. 
B)  Participation of those charged with governance. 
C)  The accounting records. 
D)  Personnel policies and practices.

Question 8

Which of the following services performed by another entity would not be considered to be part of the client's information system?

Accepted Answer

A)  Processing of the client's accounting transactions by an electronic data processing service center. 
B)  Preparation of the client's financial statements by an outside accounting organization. 
C)  Initiation of the client's weekly payroll transactions by a payroll processing organization. 
D)  Sale (specifically authorized by the client) of investment securities by an external broker. 
A)  Processing of the client's accounting transactions by an electronic data processing service center. 
B)  Preparation of the client's financial statements by an outside accounting organization. 
C)  Initiation of the client's weekly payroll transactions by a payroll processing organization. 
D)  Sale (specifically authorized by the client) of investment securities by an external broker.

Question 9

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:

Accepted Answer

A)  Report on internal control. 
B)  Special report. 
C)  Management representation letter. 
D)  Letter for underwriters. 
A)  Report on internal control. 
B)  Special report. 
C)  Management representation letter. 
D)  Letter for underwriters.

Question 10

The most likely explanation why the auditor's examination cannot reasonably be expected to bring all illegal acts by the client to the auditor's attention is that:

Accepted Answer

A)  Illegal acts are perpetrated by management override of internal accounting controls. 
B)  Illegal acts by clients often relate to operating aspects rather than accounting aspects. 
C)  The client's system of internal accounting control may be so strong that the auditor performs only minimal substantive testing. 
D)  Illegal acts may be perpetrated by the only person in the client's organization with access to both assets and the accounting records. 
A)  Illegal acts are perpetrated by management override of internal accounting controls. 
B)  Illegal acts by clients often relate to operating aspects rather than accounting aspects. 
C)  The client's system of internal accounting control may be so strong that the auditor performs only minimal substantive testing. 
D)  Illegal acts may be perpetrated by the only person in the client's organization with access to both assets and the accounting records.

Question 11

Negative assurance may be expressed when an accountant is requested to report on the:

Accepted Answer

A)  Compilation of prospective financial statements. 
B)  Compliance with the provisions of the Foreign Corrupt Practices Act. 
C)  Results of performing a review of management's assertion. 
D)  Audit of historical financial statements. 
A)  Compilation of prospective financial statements. 
B)  Compliance with the provisions of the Foreign Corrupt Practices Act. 
C)  Results of performing a review of management's assertion. 
D)  Audit of historical financial statements.

Question 12

An auditor scans a client's investment records for the period just before and just after the year-end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertions of:

Accepted Answer

A)  Rights and obligations, and existence. 
B)  Valuation and accuracy, and rights and obligations. 
C)  Existence, and understandability and classification. 
D)  Understandability and classification, and valuation and accuracy. 
A)  Rights and obligations, and existence. 
B)  Valuation and accuracy, and rights and obligations. 
C)  Existence, and understandability and classification. 
D)  Understandability and classification, and valuation and accuracy.

Question 13

An accountant's standard report on a compilation of a projection should not include a:

Accepted Answer

A)  Statement that a compilation of a projection is limited in scope. 
B)  Disclaimer of responsibility to update the report for events occurring after the report's date. 
C)  Statement that the accountant expresses only limited assurance that the results may be achieved. 
D)  Separate paragraph that describes the limitations on the presentation's usefulness. 
A)  Statement that a compilation of a projection is limited in scope. 
B)  Disclaimer of responsibility to update the report for events occurring after the report's date. 
C)  Statement that the accountant expresses only limited assurance that the results may be achieved. 
D)  Separate paragraph that describes the limitations on the presentation's usefulness.

Question 14

Which of the following procedures is not usually performed by the accountant during a review engagement of a nonissuer?

Accepted Answer

A)  Inquiring about actions taken at meetings of the board of directors that may affect the financial statements. 
B)  Issuing a report stating that the review was performed in accordance with standards established by the AICPA. 
C)  Reading the financial statements to consider whether they conform with generally accepted accounting principles. 
D)  Communicating any material weaknesses discovered during the consideration of internal control. 
A)  Inquiring about actions taken at meetings of the board of directors that may affect the financial statements. 
B)  Issuing a report stating that the review was performed in accordance with standards established by the AICPA. 
C)  Reading the financial statements to consider whether they conform with generally accepted accounting principles. 
D)  Communicating any material weaknesses discovered during the consideration of internal control.

Question 15

This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below. Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure. Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft. Accountant's Review Report We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co. A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose. The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date. Jordan and Stone, CPAs March 1, 20X3 Supervisor's Review Notes There should be a statement that no opinion is expressed on the current year's financial statements in the second (scope) paragraph.

Accepted Answer

A)  Correct 
B)  Incorrect 
A)  Correct 
B)  Incorrect

Question 16

Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an:

Accepted Answer

A)  Unqualified opinion. 
B)  Opinion qualified because of a lack of consistency. 
C)  Opinion qualified because of a departure from GAAP. 
D)  Adverse opinion. 
A)  Unqualified opinion. 
B)  Opinion qualified because of a lack of consistency. 
C)  Opinion qualified because of a departure from GAAP. 
D)  Adverse opinion.

Question 17

How do the scope, procedures, and purpose of an engagement to express a separate opinion on a nonissuer's internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 18

Snow, CPA, was engaged by Master Co., a nonissuer, to examine and report on management's written assertion about the effectiveness of Master's internal control over financial reporting. Snow's report should state that:

Accepted Answer

A)  Because of inherent limitations of any internal control, errors or fraud may occur and not be detected. 
B)  Management's assertion is based on criteria established by the American Institute of Certified Public Accountants. 
C)  The results of Snow's tests will form the basis for Snow's opinion on the fairness of Master's financial statements in conformity with GAAP. 
D)  The purpose of the engagement is to enable Snow to plan an audit and determine the nature, timing, and extent of tests to be performed. 
A)  Because of inherent limitations of any internal control, errors or fraud may occur and not be detected. 
B)  Management's assertion is based on criteria established by the American Institute of Certified Public Accountants. 
C)  The results of Snow's tests will form the basis for Snow's opinion on the fairness of Master's financial statements in conformity with GAAP. 
D)  The purpose of the engagement is to enable Snow to plan an audit and determine the nature, timing, and extent of tests to be performed.

Question 19

To which of the following matters would materiality limits not apply when obtaining written client representations?

Accepted Answer

A)  Losses from sales commitments. 
B)  Unasserted claims and assessments. 
C)  Fraud involving management. 
D)  Noncompliance with contractual agreements. 
A)  Losses from sales commitments. 
B)  Unasserted claims and assessments. 
C)  Fraud involving management. 
D)  Noncompliance with contractual agreements.

Question 20

In which of the following circumstances would an auditor most likely add an explanatory paragraph to the standard report while not affecting the auditor's unqualified opinion?

Accepted Answer

A)  The auditor is asked to report on the balance sheet, but not on the other basic financial statements. 
B)  There is substantial doubt about the entity's ability to continue as a going concern. 
C)  Management's estimates of the effects of future events are unreasonable. 
D)  Certain transactions cannot be tested because of management's records retention policy. 
A)  The auditor is asked to report on the balance sheet, but not on the other basic financial statements. 
B)  There is substantial doubt about the entity's ability to continue as a going concern. 
C)  Management's estimates of the effects of future events are unreasonable. 
D)  Certain transactions cannot be tested because of management's records retention policy.

Exam 1: CPA Auditing and Attestation Exam

For a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:

Accepting an engagement to compile a financial projection for a publicly held company most likely would be inappropriate if the projection were to be distributed to:

Which of the following information discovered during an audit most likely would raise a question concerning possible illegal acts?

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of:

Which of the following items does not pertain to the control environment?

Which of the following services performed by another entity would not be considered to be part of the client's information system?

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:

The most likely explanation why the auditor's examination cannot reasonably be expected to bring all illegal acts by the client to the auditor's attention is that:

Negative assurance may be expressed when an accountant is requested to report on the:

An accountant's standard report on a compilation of a projection should not include a:

Which of the following procedures is not usually performed by the accountant during a review engagement of a nonissuer?

Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an:

How do the scope, procedures, and purpose of an engagement to express a separate opinion on a nonissuer's internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit?

Snow, CPA, was engaged by Master Co., a nonissuer, to examine and report on management's written assertion about the effectiveness of Master's internal control over financial reporting. Snow's report should state that:

To which of the following matters would materiality limits not apply when obtaining written client representations?

In which of the following circumstances would an auditor most likely add an explanatory paragraph to the standard report while not affecting the auditor's unqualified opinion?

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