Question 1

Which of the following statements is true regarding an accountant's consideration of fraud/illegal acts in compilation and review engagements?

Accepted Answer

A)  The accountant is not required to perform procedures designed to detect material misstatements due to fraud or illegal acts. 
B)  The accountant must inform an appropriate level of management of all instances of fraud or illegal acts. 
C)  The accountant must report only definite instances of fraud or an illegal act, but need not report information indicating that fraud or an illegal act may have occurred. 
D)  Information indicating that fraud or an illegal act may have occurred should be reported in writing to an appropriate level of management. 
A)  The accountant is not required to perform procedures designed to detect material misstatements due to fraud or illegal acts. 
B)  The accountant must inform an appropriate level of management of all instances of fraud or illegal acts. 
C)  The accountant must report only definite instances of fraud or an illegal act, but need not report information indicating that fraud or an illegal act may have occurred. 
D)  Information indicating that fraud or an illegal act may have occurred should be reported in writing to an appropriate level of management.

Question 2

An auditor reviews a client's accounting policies and procedures when considering which of the following planning matters?

Accepted Answer

A)  Method of sampling to be used. 
B)  Preliminary judgments about materiality levels. 
C)  Nature of reports to be rendered. 
D)  Understanding the client's operations and business. 
A)  Method of sampling to be used. 
B)  Preliminary judgments about materiality levels. 
C)  Nature of reports to be rendered. 
D)  Understanding the client's operations and business.

Question 3

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should:

Accepted Answer

A)  Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. 
B)  Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used. 
C)  Include an Explanation: of how the results of operations differ from the cash receipts and disbursements basis of accounting. Include an Explanation: of how the results of operations differ from the cash receipts and disbursements basis of accounting. 
D)  State that the basis of presentation is a comprehensive basis of accounting other than GAAP. 
A)  Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. 
B)  Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used. 
C)  Include an Explanation: of how the results of operations differ from the cash receipts and disbursements basis of accounting. Include an Explanation: of how the results of operations differ from the cash receipts and disbursements basis of accounting. 
D)  State that the basis of presentation is a comprehensive basis of accounting other than GAAP.

Question 4

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations. You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 1 the required sample size from population 1 is:

Accepted Answer

A)  Larger than the required sample size from population 2. 
B)  Equal to the required sample size from population 2. 
C)  Smaller than the required sample size from population 2. 
D)  Indeterminate relative to the required sample size from population 2. 
A)  Larger than the required sample size from population 2. 
B)  Equal to the required sample size from population 2. 
C)  Smaller than the required sample size from population 2. 
D)  Indeterminate relative to the required sample size from population 2.

Question 5

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of:

Accepted Answer

A)  Valuation and allocation. 
B)  Rights and obligations. 
C)  Existence. 
D)  Understandability and classification. 
A)  Valuation and allocation. 
B)  Rights and obligations. 
C)  Existence. 
D)  Understandability and classification.

Question 6

An auditor may issue a qualified opinion under which of the following circumstances?

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

The likelihood of assessing control risk too high is the risk that the sample selected to test controls:

Accepted Answer

A)  Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment. 
B)  Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes. 
C)  Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist in the balance or class as a whole. 
D)  Does not support the tolerable error for some or all of management's assertions. 
A)  Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment. 
B)  Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes. 
C)  Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist in the balance or class as a whole. 
D)  Does not support the tolerable error for some or all of management's assertions.

Question 8

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. In planning the sampling application, was appropriate consideration given to the relationship of the sample to the audit objective and to preliminary judgments about materiality levels?

Accepted Answer

A)  Practitioner's report on management's assertion about an entity's compliance with specified requirements. 
B)  Auditor's communications on significant deficiencies in internal control. 
C)  Audit inquiry letter to legal counsel. 
D)  Lawyer's response to audit inquiry letter. 
E)  Communication from those charged with governance to the auditor.
F) Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control
G) Report on the application of accounting principles.
H) Auditor's engagement letter.
I) Letter for underwriters.
J) Accounts receivable confirmation request.
K) Request for bank cutoff statement.
L) Explanatory paragraph of an auditor's report on financial statements.
M) Partner's engagement review notes.
N) Management representation letter.
O) Successor auditor's communication with predecessor auditor.
P) Predecessor auditor's communication with successor auditor. 
A)  Practitioner's report on management's assertion about an entity's compliance with specified requirements. 
B)  Auditor's communications on significant deficiencies in internal control. 
C)  Audit inquiry letter to legal counsel. 
D)  Lawyer's response to audit inquiry letter. 
E)  Communication from those charged with governance to the auditor.
F) Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control
G) Report on the application of accounting principles.
H) Auditor's engagement letter.
I) Letter for underwriters.
J) Accounts receivable confirmation request.
K) Request for bank cutoff statement.
L) Explanatory paragraph of an auditor's report on financial statements.
M) Partner's engagement review notes.
N) Management representation letter.
O) Successor auditor's communication with predecessor auditor.
P) Predecessor auditor's communication with successor auditor.

Question 9

Silver, CPA, has been hired by Andrews Co., a publicly held company, to conduct a review of its interim financial information. While performing review procedures, Silver becomes aware of a significant change in the control activities at one of Andrew's branch locations. Which of the following might Silver consider performing in response to this situation?

Accepted Answer

A)  Making additional inquiries, such as whether management has monitored the changes and considered whether they were operating as intended. 
B)  Employing analytical procedures with a less precise expectation. 
C)  Both "a" and "b" above. 
D)  Neither "a" nor "b" above. 
A)  Making additional inquiries, such as whether management has monitored the changes and considered whether they were operating as intended. 
B)  Employing analytical procedures with a less precise expectation. 
C)  Both "a" and "b" above. 
D)  Neither "a" nor "b" above.

Question 10

Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonissuer. Before the completion of the audit, Tech requested Davis to change the engagement to a compilation of financial statements. Before Davis agrees to change the engagement, Davis is required to consider the:

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 11

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an attest engagement to examine the effectiveness of a nonissuer's internal control?

Accepted Answer

A)  The auditor must communicate both significant deficiencies and material weaknesses. 
B)  The auditor must communicate material weaknesses, but need not disclose significant deficiencies. 
C)  The auditor must communicate significant deficiencies, but need not separately identify material weaknesses. 
D)  Neither significant deficiencies nor material weaknesses are required to be communicated. 
A)  The auditor must communicate both significant deficiencies and material weaknesses. 
B)  The auditor must communicate material weaknesses, but need not disclose significant deficiencies. 
C)  The auditor must communicate significant deficiencies, but need not separately identify material weaknesses. 
D)  Neither significant deficiencies nor material weaknesses are required to be communicated.

Question 12

An auditor has identified a risk of material misstatement due to fraud related to the inventory function. Which is least likely to be an appropriate response?

Accepted Answer

A)  Observing inventory counts on an unannounced basis. 
B)  Requesting that management more closely monitor the inventory function. 
C)  Assigning more experienced personnel to the engagement. 
D)  Requesting that inventory be counted on a date close to the end of the reporting period. 
A)  Observing inventory counts on an unannounced basis. 
B)  Requesting that management more closely monitor the inventory function. 
C)  Assigning more experienced personnel to the engagement. 
D)  Requesting that inventory be counted on a date close to the end of the reporting period.

Question 13

Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:

Accepted Answer

A)  Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. 
B)  Request that management disclose the newly discovered information by issuing revised financial statements. 
C)  Issue revised pro forma financial statements taking into consideration the newly discovered information. 
D)  Give public notice that the auditor is no longer associated with financial statements. 
A)  Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. 
B)  Request that management disclose the newly discovered information by issuing revised financial statements. 
C)  Issue revised pro forma financial statements taking into consideration the newly discovered information. 
D)  Give public notice that the auditor is no longer associated with financial statements.

Question 14

In a comparison of 20X2 to 20X1, Neir Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

Accepted Answer

A)  Cost of goods sold decreased. 
B)  Accounts receivable turnover increased. 
C)  Total asset turnover increased. 
D)  Gross profit percentage decreased. 
A)  Cost of goods sold decreased. 
B)  Accounts receivable turnover increased. 
C)  Total asset turnover increased. 
D)  Gross profit percentage decreased.

Question 15

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to:

Accepted Answer

A)  Identify unusually large purchases that should be investigated further. 
B)  Verify that cash disbursements were for goods actually received. 
C)  Determine that purchases were properly recorded. 
D)  Test whether payments were for goods actually ordered. 
A)  Identify unusually large purchases that should be investigated further. 
B)  Verify that cash disbursements were for goods actually received. 
C)  Determine that purchases were properly recorded. 
D)  Test whether payments were for goods actually ordered.

Question 16

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. Our use of professional judgment and the assessment of audit risk and materiality for the purpose of our audit mean that matters may have existed that would have been assessed differently by you. We make no representation as to the sufficiency or appropriateness of the information in our audit documentation for your purposes.

Accepted Answer

A)  Practitioner's report on management's assertion about an entity's compliance with specified requirements. 
B)  Auditor's communications on significant deficiencies in internal control. 
C)  Audit inquiry letter to legal counsel. 
D)  Lawyer's response to audit inquiry letter. 
E)  Communication from those charged with governance to the auditor.
F) Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control
G) Report on the application of accounting principles.
H) Auditor's engagement letter.
I) Letter for underwriters.
J) Accounts receivable confirmation request.
K) Request for bank cutoff statement.
L) Explanatory paragraph of an auditor's report on financial statements.
M) Partner's engagement review notes.
N) Management representation letter.
O) Successor auditor's communication with predecessor auditor.
P) Predecessor auditor's communication with successor auditor. 
A)  Practitioner's report on management's assertion about an entity's compliance with specified requirements. 
B)  Auditor's communications on significant deficiencies in internal control. 
C)  Audit inquiry letter to legal counsel. 
D)  Lawyer's response to audit inquiry letter. 
E)  Communication from those charged with governance to the auditor.
F) Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control
G) Report on the application of accounting principles.
H) Auditor's engagement letter.
I) Letter for underwriters.
J) Accounts receivable confirmation request.
K) Request for bank cutoff statement.
L) Explanatory paragraph of an auditor's report on financial statements.
M) Partner's engagement review notes.
N) Management representation letter.
O) Successor auditor's communication with predecessor auditor.
P) Predecessor auditor's communication with successor auditor.

Question 17

Which of the following types of audit evidence generally is the most reliable?

Accepted Answer

A)  Inquiries made of management. 
B)  Confirmation of account information. 
C)  Analytical procedures. 
D)  Review of prior-year audit procedures. 
A)  Inquiries made of management. 
B)  Confirmation of account information. 
C)  Analytical procedures. 
D)  Review of prior-year audit procedures.

Question 18

Which of the following factors most likely would cause an auditor to question the integrity of management?

Accepted Answer

A)  Management has an aggressive attitude toward financial reporting and meeting profit goals. 
B)  Audit tests detect material fraud that was known to management, but not disclosed to the auditor. 
C)  Managerial decisions are dominated by one person who is also a stockholder. 
D)  Weaknesses in internal control reported to the audit committee are not corrected by management. 
A)  Management has an aggressive attitude toward financial reporting and meeting profit goals. 
B)  Audit tests detect material fraud that was known to management, but not disclosed to the auditor. 
C)  Managerial decisions are dominated by one person who is also a stockholder. 
D)  Weaknesses in internal control reported to the audit committee are not corrected by management.

Question 19

An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for:

Accepted Answer

A)  Cash flow increases and decreases. 
B)  Audit objectives and assertions. 
C)  Reclassifications and adjustments. 
D)  Reconciliations and tickmarks. 
A)  Cash flow increases and decreases. 
B)  Audit objectives and assertions. 
C)  Reclassifications and adjustments. 
D)  Reconciliations and tickmarks.

Question 20

For a nonissuer, a control deficiency would be considered a material weakness when the likelihood and magnitude of potential financial statement misstatements are:

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

Exam 1: CPA Auditing and Attestation Exam

Which of the following statements is true regarding an accountant's consideration of fraud/illegal acts in compilation and review engagements?

An auditor reviews a client's accounting policies and procedures when considering which of the following planning matters?

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should:

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of:

An auditor may issue a qualified opinion under which of the following circumstances?

The likelihood of assessing control risk too high is the risk that the sample selected to test controls:

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an attest engagement to examine the effectiveness of a nonissuer's internal control?

An auditor has identified a risk of material misstatement due to fraud related to the inventory function. Which is least likely to be an appropriate response?

Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:

In a comparison of 20X2 to 20X1, Neir Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to:

Which of the following types of audit evidence generally is the most reliable?

Which of the following factors most likely would cause an auditor to question the integrity of management?

An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for:

For a nonissuer, a control deficiency would be considered a material weakness when the likelihood and magnitude of potential financial statement misstatements are:

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