Question 1

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding:

Accepted Answer

A)  Disagreements the predecessor had with the client concerning auditing procedures and accounting principles. 
B)  The predecessor's evaluation of matters of continuing accounting significance. 
C)  The degree of cooperation the predecessor received concerning the inquiry of the client's lawyer. 
D)  The predecessor's assessments of inherent risk and judgments about materiality. 
A)  Disagreements the predecessor had with the client concerning auditing procedures and accounting principles. 
B)  The predecessor's evaluation of matters of continuing accounting significance. 
C)  The degree of cooperation the predecessor received concerning the inquiry of the client's lawyer. 
D)  The predecessor's assessments of inherent risk and judgments about materiality.

Question 2

Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonissuer?

Accepted Answer

A)  Communicating significant deficiencies discovered during the assessment of control risk. 
B)  Obtaining a client representation letter from members of management. 
C)  Sending bank confirmation letters to the entity's financial institutions. 
D)  Examining cash disbursements in the subsequent period for unrecorded liabilities. 
A)  Communicating significant deficiencies discovered during the assessment of control risk. 
B)  Obtaining a client representation letter from members of management. 
C)  Sending bank confirmation letters to the entity's financial institutions. 
D)  Examining cash disbursements in the subsequent period for unrecorded liabilities.

Question 3

In auditing accounts receivable, the negative form of confirmation request most likely would be used when:

Accepted Answer

A)  The total recorded amount of accounts receivable is immaterial to the financial statements taken as a whole. 
B)  Response rates in prior years to properly designed positive confirmation requests were inadequate. 
C)  Recipients are likely to return positive confirmation requests without verifying the accuracy of the information. 
D)  The combined assessed level of inherent risk and control risk relative to accounts receivable is low. 
A)  The total recorded amount of accounts receivable is immaterial to the financial statements taken as a whole. 
B)  Response rates in prior years to properly designed positive confirmation requests were inadequate. 
C)  Recipients are likely to return positive confirmation requests without verifying the accuracy of the information. 
D)  The combined assessed level of inherent risk and control risk relative to accounts receivable is low.

Question 4

When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission, such statements should be:

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 5

The third general standard states that due care is to be exercised in the performance of an audit. This standard is ordinarily interpreted to require:

Accepted Answer

A)  Thorough review of the existing safeguards over access to assets and records. 
B)  Limited review of the indications of employee fraud and illegal acts. 
C)  Objective review of the adequacy of the technical training and proficiency of firm personnel. 
D)  Critical review of the judgment exercised at every level of supervision. 
A)  Thorough review of the existing safeguards over access to assets and records. 
B)  Limited review of the indications of employee fraud and illegal acts. 
C)  Objective review of the adequacy of the technical training and proficiency of firm personnel. 
D)  Critical review of the judgment exercised at every level of supervision.

Question 6

The refusal of a client's attorney to provide information requested in an inquiry letter generally is considered:

Accepted Answer

A)  Grounds for an adverse opinion. 
B)  A limitation on the scope of the audit. 
C)  Reason to withdraw from the engagement. 
D)  Equivalent to a significant deficiency in internal control. 
A)  Grounds for an adverse opinion. 
B)  A limitation on the scope of the audit. 
C)  Reason to withdraw from the engagement. 
D)  Equivalent to a significant deficiency in internal control.

Question 7

This question presents independent factual situations an auditor might encounter in conducting an audit. List B represents the report modifications (if any) that would be necessary. Select as the best answer for each item, the action the auditor normally would take. The report modifications in List B may be selected once, more than once, or not at all. Assume: - The auditor is independent. - The auditor previously expressed an unqualified opinion on the prior year's financial statements. - Only single-year (not comparative) statements are presented for the current year. - The conditions for an unqualified opinion exist unless contradicted in the factual situations. - The conditions stated in the factual situations are material. - No report modifications are to be made except in response to the factual situation. Item to Be Answered Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate. List B Report Modifications

Accepted Answer

A)  Describe the circumstances in an explanatory paragraph preceding the opinion paragraph without modifying the three standard paragraphs. 
B)  Describe the circumstances in an explanatory paragraph following the opinion paragraph without modifying the three standard paragraphs. 
C)  Describe the circumstances in an explanatory paragraph preceding the opinion paragraph and modify the opinion paragraph. 
D)  Describe the circumstances in an explanatory paragraph following the opinion paragraph and modify the opinion paragraph. 
E)  Describe the circumstances in an explanatory paragraph preceding the opinion paragraph and modify the scope and opinion paragraphs.
F) Describe the circumstances in an explanatory paragraph following the opinion paragraph and modify the scope and opinion paragraphs.
G) Describe the circumstances within the scope paragraph without adding an explanatory paragraph.
H) Describe the circumstances within the opinion paragraph without adding an explanatory paragraph.
I) Describe the circumstances within the scope and opinion paragraphs without adding an explanatory paragraph.
J) Issue the standard auditor's report without modification. 
A)  Describe the circumstances in an explanatory paragraph preceding the opinion paragraph without modifying the three standard paragraphs. 
B)  Describe the circumstances in an explanatory paragraph following the opinion paragraph without modifying the three standard paragraphs. 
C)  Describe the circumstances in an explanatory paragraph preceding the opinion paragraph and modify the opinion paragraph. 
D)  Describe the circumstances in an explanatory paragraph following the opinion paragraph and modify the opinion paragraph. 
E)  Describe the circumstances in an explanatory paragraph preceding the opinion paragraph and modify the scope and opinion paragraphs.
F) Describe the circumstances in an explanatory paragraph following the opinion paragraph and modify the scope and opinion paragraphs.
G) Describe the circumstances within the scope paragraph without adding an explanatory paragraph.
H) Describe the circumstances within the opinion paragraph without adding an explanatory paragraph.
I) Describe the circumstances within the scope and opinion paragraphs without adding an explanatory paragraph.
J) Issue the standard auditor's report without modification.

Question 8

When a principal auditor decides to make reference to another auditor's examination, the principal auditor's report should always indicate clearly, in the introductory, scope, and opinion paragraphs, the:

Accepted Answer

A)  Magnitude of the portion of the financial statements examined by the other auditor. 
B)  Disclaimer of responsibility concerning the portion of the financial statements examined by the other auditor. 
C)  Name of the other auditor. 
D)  Division of responsibility. 
A)  Magnitude of the portion of the financial statements examined by the other auditor. 
B)  Disclaimer of responsibility concerning the portion of the financial statements examined by the other auditor. 
C)  Name of the other auditor. 
D)  Division of responsibility.

Question 9

Green, CPA, is requested to render an opinion on the application of accounting principles by an entity that is audited by another CPA. Green may:

Accepted Answer

A)  Not accept such an engagement because to do so would be considered unethical. 
B)  Not accept such an engagement because Green would lack the necessary information on which to base an opinion without conducting an audit. 
C)  Accept the engagement but should form an independent opinion without consulting with the continuing CPA. 
D)  Accept the engagement but should consult with the continuing CPA to ascertain all the available facts relevant to forming a professional judgment. 
A)  Not accept such an engagement because to do so would be considered unethical. 
B)  Not accept such an engagement because Green would lack the necessary information on which to base an opinion without conducting an audit. 
C)  Accept the engagement but should form an independent opinion without consulting with the continuing CPA. 
D)  Accept the engagement but should consult with the continuing CPA to ascertain all the available facts relevant to forming a professional judgment.

Question 10

"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a (an):

Accepted Answer

A)  Client engagement letter. 
B)  Report on compliance with laws and regulations. 
C)  Management representation letter. 
D)  Attestation report on internal control. 
A)  Client engagement letter. 
B)  Report on compliance with laws and regulations. 
C)  Management representation letter. 
D)  Attestation report on internal control.

Question 11

When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an understanding of the nature of the act to:

Accepted Answer

A)  Evaluate the effect on the financial statements. 
B)  Determine the reliability of management's representations. 
C)  Consider whether other similar acts may have occurred. 
D)  Recommend remedial actions to those charged with governance. 
A)  Evaluate the effect on the financial statements. 
B)  Determine the reliability of management's representations. 
C)  Consider whether other similar acts may have occurred. 
D)  Recommend remedial actions to those charged with governance.

Question 12

An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that:

Accepted Answer

A)  Use of the report is restricted to the specified parties. 
B)  The prospective financial statements are also examined. 
C)  Responsibility for the adequacy of the procedures performed is taken by the accountant. 
D)  Negative assurance is expressed on the prospective financial statements taken as a whole. 
A)  Use of the report is restricted to the specified parties. 
B)  The prospective financial statements are also examined. 
C)  Responsibility for the adequacy of the procedures performed is taken by the accountant. 
D)  Negative assurance is expressed on the prospective financial statements taken as a whole.

Question 13

Which of the following is an inherent limitation in internal control?

Accepted Answer

A)  Incompatible duties. 
B)  Lack of segregation of duties. 
C)  Faulty human judgment. 
D)  Lack of an audit committee. 
A)  Incompatible duties. 
B)  Lack of segregation of duties. 
C)  Faulty human judgment. 
D)  Lack of an audit committee.

Question 14

In an attest engagement, use of the accountant's report should be restricted to specified parties in all of the following situations, except:

Accepted Answer

A)  When the criteria used to evaluate the subject matter are appropriate for only a limited number of parties. 
B)  When reporting on an assertion about the subject matter instead of reporting directly on the subject matter. 
C)  When reporting directly on the subject matter and a written assertion has not been provided. 
D)  When reporting on an agreed-upon procedures engagement. 
A)  When the criteria used to evaluate the subject matter are appropriate for only a limited number of parties. 
B)  When reporting on an assertion about the subject matter instead of reporting directly on the subject matter. 
C)  When reporting directly on the subject matter and a written assertion has not been provided. 
D)  When reporting on an agreed-upon procedures engagement.

Question 15

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables:

Accepted Answer

A)  Valuation. 
B)  Classification. 
C)  Existence. 
D)  Completeness. 
A)  Valuation. 
B)  Classification. 
C)  Existence. 
D)  Completeness.

Question 16

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Accepted Answer

A)  Review the cash receipts journal for the month prior to the year-end. 
B)  Intensify the study of the internal control structure concerning the revenue cycle. 
C)  Increase the assessed level of detection risk for the existence assertion. 
D)  Inspect the shipping records documenting the merchandise sold to the debtors. 
A)  Review the cash receipts journal for the month prior to the year-end. 
B)  Intensify the study of the internal control structure concerning the revenue cycle. 
C)  Increase the assessed level of detection risk for the existence assertion. 
D)  Inspect the shipping records documenting the merchandise sold to the debtors.

Question 17

When communicating internal control related matters noted in an audit of a nonissuer, an auditor's report issued on significant deficiencies should indicate that:

Accepted Answer

A)  Errors or fraud may occur and not be detected because there are inherent limitations in any internal control. 
B)  The issuance of an unqualified opinion on the financial statements may be dependent on corrective follow-up action. 
C)  A material weakness exists when the deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. 
D)  The purpose of the audit was to report on the financial statements and not to provide assurance on internal control. 
A)  Errors or fraud may occur and not be detected because there are inherent limitations in any internal control. 
B)  The issuance of an unqualified opinion on the financial statements may be dependent on corrective follow-up action. 
C)  A material weakness exists when the deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. 
D)  The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

Question 18

Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?

Accepted Answer

A)  Confirmations of receivables verifying account balances. 
B)  Letters of representation corroborating inventory pricing. 
C)  Attorneys' responses to the auditor's inquiries. 
D)  Client records documenting the use of EDP programs. 
A)  Confirmations of receivables verifying account balances. 
B)  Letters of representation corroborating inventory pricing. 
C)  Attorneys' responses to the auditor's inquiries. 
D)  Client records documenting the use of EDP programs.

Question 19

An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(an):

Accepted Answer

A)  "Except for" qualified opinion. 
B)  Explanatory paragraph. 
C)  Unqualified opinion. 
D)  Consistency modification. 
A)  "Except for" qualified opinion. 
B)  Explanatory paragraph. 
C)  Unqualified opinion. 
D)  Consistency modification.

Question 20

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

Accepted Answer

A)  Attribute sampling. 
B)  Stop-or-go sampling. 
C)  Variables sampling. 
D)  Random-number sampling. 
A)  Attribute sampling. 
B)  Stop-or-go sampling. 
C)  Variables sampling. 
D)  Random-number sampling.

Exam 1: CPA Auditing and Attestation Exam