Question 1

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)  Fictitious credit sales have been recorded during the year. 
B)  Employees have stolen inventory just before the year-end. 
C)  The client recently tightened its credit-granting policies. 
D)  An employee has been lapping receivables in both years.

Question 2

The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to:

Accepted Answer

A)  Give guidance to the staff regarding both technical and personnel aspects of the audit. 
B)  Discuss staff suggestions concerning the establishment and maintenance of time budgets. 
C)  Establish the need for using the work of specialists and internal auditors. 
D)  Provide an opportunity to document staff disagreements regarding technical issues.

Question 3

Jewel, CPA, audited Infinite Co.'s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel's auditor's report, which expressed a qualified opinion. In drafting the current year's auditor's report, Crain, CPA, the successor auditor, should:

Accepted Answer

A)  Not name Jewel as the predecessor auditor. II. Indicate the type of report issued by Jewel. III. Indicate the substantive reasons for Jewel's qualification. 
B)  I only. 
C)  I and II only. 
D)  II and III only. 
E)  I, II, and III.

Question 4

When an accountant is engaged to compile a nonissuer's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are:

Accepted Answer

A)  Not designed for those who are uninformed about the omitted disclosures. 
B)  Prepared in conformity with a comprehensive basis of accounting other than GAAP. 
C)  Not compiled in accordance with Statements on Standards for Accounting and Review Services. 
D)  Special-purpose financial statements that are not comparable to those of prior periods.

Question 5

Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?

Accepted Answer

A)  The complexity of the information processing system. 
B)  Human judgment in the decision making process. 
C)  The ineffectiveness of the board of directors. 
D)  The lack of management incentives to improve the control environment.

Question 6

In planning the audit, the auditor obtains a sufficient understanding of the existing internal control. Which one of the following is not among the auditor's primary objectives for obtaining such knowledge?

Accepted Answer

A)  Identify types of material misstatements. 
B)  Consider the factors that affect the risk of material misstatement. 
C)  Make constructive suggestions to the client for improvement. 
D)  Design effective substantive tests.

Question 7

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for:

Accepted Answer

A)  Segregation of duties of employees in the accounts payable department. 
B)  Independent verification of invoices for disbursements recorded as equipment acquisitions. 
C)  Investigation of variances within a formal budgeting system. 
D)  Authorization by the board of directors of significant equipment acquisitions.

Question 8

The use of the ratio estimation sampling technique is most effective when:

Accepted Answer

A)  The calculated audit amounts are approximately proportional to the client's book amounts. 
B)  A relatively small number of differences exist in the population. 
C)  Estimating populations whose records consist of quantities, but not book values. 
D)  Large overstatement differences and large understatement differences exist in the population.

Question 9

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?

Accepted Answer

A)  The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques. 
B)  Management's disregard of its responsibility to maintain an adequate internal control environment. 
C)  The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions. 
D)  Management's refusal to permit the CPA to perform substantive tests before the year-end.

Question 10

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?

Accepted Answer

A)  Accounts receivable. 
B)  Credit. 
C)  Accounts payable. 
D)  Treasurer.

Question 11

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?

Accepted Answer

A)  Turnover of senior accounting personnel is low. 
B)  Insiders recently purchased additional shares of the entity's stock. 
C)  Management places substantial emphasis on meeting earnings projections. 
D)  The rate of change in the entity's industry is slow.

Question 12

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would trace:

Accepted Answer

A)  Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. 
B)  Items listed in receiving reports and vendors' invoices to the inventory listing. 
C)  Inventory tags noted during the auditor's observation to items in the inventory listing. 
D)  Items in the inventory listing to inventory tags and the auditor's recorded count sheets.

Question 13

Which of the following cash transfers results in a misstatement of cash at December 31, 20X1?

Accepted Answer

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

Question 14

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?

Accepted Answer

A)  An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities. 
B)  The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date. 
C)  The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger. 
D)  A designated member of the board of directors controls the securities in a bank safe-deposit box.

Question 15

Which of the following procedures represents a weakness in internal controls for payroll?

Accepted Answer

A)  The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department. 
B)  The accounting department wires transfers funds to the payroll bank account. The transfer is based on totals from the payroll department summary. 
C)  The payroll department prepares checks using a signature plate. The treasurer supervises the process before payroll checks are distributed. 
D)  The payroll department prepares checks. The chief financial officer signs the payroll checks.

Question 16

When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the:

Accepted Answer

A)  Amount of dividends paid to related parties. 
B)  Expected proceeds from stock subscriptions receivable. 
C)  Number of shares issued and outstanding. 
D)  Proper authorization of stock rights and warrants.

Question 17

When unaudited financial statements of a nonissuer are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and:

Accepted Answer

A)  The report on the unaudited financial statements should be reissued. II. The report on the audited financial statements should include a separate paragraph describing the responsibility assumed for the unaudited financial statements. 
B)  I only. 
C)  II only. 
D)  Both I and II. 
E)  Either I or II.

Question 18

An accountant has been asked to issue a review report on the balance sheet of a nonissuer without reporting on the related statements of income, retained earnings, and cash flows. The accountant may issue the requested review report only if:

Accepted Answer

A)  The balance sheet is not to be used to obtain credit or distributed to the entity's creditors. 
B)  The balance sheet is part of a comprehensive personal financial plan developed to assist the entity. 
C)  There have been no material changes during the year in the entity's accounting principles. 
D)  The scope of the accountant's inquiry and analytical procedures has not been restricted.

Question 19

In assessing the objectivity of internal auditors, an independent auditor should:

Accepted Answer

A)  Evaluate the quality control program in effect for the internal auditors. 
B)  Examine documentary evidence of the work performed by the internal auditors. 
C)  Test a sample of the transactions and balances that the internal auditors examined. 
D)  Determine the organizational level to which the internal auditors report.

Question 20

Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a:

Accepted Answer

A)  Qualified opinion. 
B)  Standard three paragraph report with reference to footnote disclosure. 
C)  Disclaimer of opinion. 
D)  Special report.

Exam 1: CPA Auditing and Attestation Exam