Question 1

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the:

Accepted Answer

A)  Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records. 
B)  Securities are registered in the name of the trust company, rather than the entity itself. 
C)  Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities. 
D)  Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.

Question 2

Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

Accepted Answer

A)  An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern. 
B)  A contingency is resolved that had been disclosed in the audited financial statements. 
C)  New information is discovered concerning undisclosed lease transactions of the audited period. 
D)  A subsidiary is sold that accounts for 25% of the entity's consolidated net income.

Question 3

Which of the following are considered control environment factors?

Accepted Answer

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

Question 4

Which of the following matters generally is included in an auditor's engagement letter?

Accepted Answer

A)  Management's responsibility for the entity's compliance with laws and regulations. 
B)  The factors to be considered in setting preliminary judgments about materiality. 
C)  Management's vicarious liability for illegal acts committed by its employees. 
D)  The auditor's responsibility to search for significant internal control deficiencies.

Question 5

Rachel, CPA, is conducting an audit of Eaton Enterprises, a nonissuer. Rachel has conducted her audit in accordance with generally accepted auditing standards, and she wishes to emphasize in her report that such standards do not require the same level of testing and reporting on internal control as is required for audits of issuers under the Sarbanes-Oxley Act. Which report modification would be most appropriate in this situation?

Accepted Answer

A)  Only the scope paragraph should be modified. 
B)  An explanatory paragraph should be added following the opinion paragraph. 
C)  An explanatory paragraph should be added preceding the opinion paragraph, and the opinion paragraph should state, "Except for the matter discussed in the preceding paragraph..." 
D)  No report modification should be made in this scenario.

Question 6

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Accepted Answer

A)  Performing cutoff tests of sales transactions with customers with long-standing receivable balances. 
B)  Evaluating the entity's procedures for identifying and recording related party transactions. 
C)  Inspecting title documents to verify whether any real property is pledged as collateral. 
D)  Inquiring of the entity's legal counsel about litigation, claims, and assessments.

Question 7

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 connection with an audit of our financial statements, management has prepared, and furnished to our auditors, a description and evaluation of certain contingencies.

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.

Question 8

Before reissuing the prior year's auditor's report on the financial statements of a former client, the predecessor auditor should obtain letters of representation from the:

Accepted Answer

A)  Former client's management and the board of directors. 
B)  Former client's attorney and management. 
C)  Former client's board of directors and the successor auditor. 
D)  Successor auditor and the former client's management.

Question 9

Gearty & Duffy, certified public accountants, have been engaged to perform a single audit of Sleepy Knoll Township, a local government receiving substantial federal financial assistance for community development and housing assistance. A single audit represents:

Accepted Answer

A)  An audit of annual activity of only federal financial assistance programs over the course of the town's fiscal year. 
B)  An inception to date audit of only federal financial assistance programs over the course of the grant year specified by the grant award. 
C)  An audit of the township's financial statements and of compliance with federal regulations relating to federal financial assistance as prescribed by the Single Audit Act and OMB Circular A-133. 
D)  An audit of the township's financial statements and the fair presentation of the revenues derived from federal financial assistance.

Question 10

Which of the following procedures is usually the first step in reviewing the financial statements of a nonissuer?

Accepted Answer

A)  Make preliminary judgments about risk and materiality to determine the scope and nature of the procedures to be performed. 
B)  Obtain a general understanding of the entity's organization, its operating characteristics, and its products or services. 
C)  Assess the risk of material misstatement arising from fraudulent financial reporting and the misappropriation of assets. 
D)  Perform a preliminary assessment of the operating efficiency of the entity's internal control activities.

Question 11

The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for:

Accepted Answer

A)  Determining whether the prospective financial information is based on reasonable assumptions. 
B)  Expressing a limited opinion that the financial information is presented in conformity with generally accepted accounting principles. 
C)  Deciding whether to perform substantive audit procedures prior to the balance sheet date. 
D)  Reporting whether material modifications should be made for such information to conform with generally accepted accounting principles.

Question 12

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary. Between which of the following opinions should the entity's auditor choose?

Accepted Answer

A)  Adverse and unqualified with an explanatory paragraph added. 
B)  Disclaimer and unqualified with an explanatory paragraph added. 
C)  Qualified and adverse. 
D)  Qualified and disclaimer.

Question 13

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. The company believes that all material expenditures that have been deferred to future periods will be recoverable.

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.

Question 14

A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to which of the following prescribed standards:

Accepted Answer

A)  Professional ethics. 
B)  Supervision and review. 
C)  Accounting and review services. 
D)  Quality control.

Question 15

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an audit of a nonissuer?

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.

Question 16

An accountant's standard report issued after compiling the financial statements of a nonissuer should state that:

Accepted Answer

A)  I am not aware of any material modifications that should be made to the accompanying financial statements. 
B)  A compilation consists principally of inquiries of company personnel and analytical procedures. 
C)  A compilation is limited to presenting in the form of financial statements information that is the representation of management. 
D)  A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.

Question 17

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

Accepted Answer

A)  Obsolete inventory has not yet been reduced to fair market value. 
B)  There was an improper cutoff of sales at the end of the year. 
C)  An unusually large receivable was written off near the end of the year. 
D)  The aging of accounts receivable was improperly performed in both years.

Question 18

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:

Accepted Answer

A)  Objective judgment. 
B)  Independent integrity. 
C)  Professional skepticism. 
D)  Impartial conservatism.

Question 19

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

Accepted Answer

A)  Opinion of any subsequent events occurring since the predecessor's audit report was issued. 
B)  Understanding as to the reasons for the change of auditors. 
C)  Awareness of the consistency in the application of GAAP between periods. 
D)  Evaluation of all matters of continuing accounting significance.

Question 20

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