Question 1

Comfort letters ordinarily are:

Accepted Answer

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

Question 2

Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when reporting on Tech's audited financial statements for the year ended June 30, 19X4. That doubt has been removed in 19X5. What is Mead's reporting responsibility if Tech is presenting its financial statements for the year ended June 30, 19X5, on a comparative basis with those of 19X4?

Accepted Answer

A)  The explanatory paragraph included in the 19X4 auditor's report should not be repeated. 
B)  The explanatory paragraph included in the 19X4 auditor's report should be repeated in its entirety. 
C)  A different explanatory paragraph describing Mead's reasons for the removal of doubt should be included. 
D)  A different explanatory paragraph describing Tech's plans for financial recovery should be included.

Question 3

In using the work of a specialist, an auditor referred to the specialist's findings in the auditor's report. This would be an appropriate reporting practice if the:

Accepted Answer

A)  Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. 
B)  Auditor, as a result of the specialist's findings, adds an explanatory paragraph emphasizing a matter regarding the financial statements. 
C)  Auditor understands the form and content of the specialist's findings in relation to the representations in the financial statements. 
D)  Auditor, as a result of the specialist's findings, decides to indicate a division of responsibility with the specialist.

Question 4

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 An entity changes its depreciation method for production equipment from the straight-line to a units-of production method based on hours of utilization. The auditor concurs with the change although it has a material effect on the comparability of the entity's financial statements. 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.

Question 5

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

Accepted Answer

A)  Reconcile receiving reports with related cash payments made just prior to year-end. 
B)  Contrast the ratio of accounts payable to purchases with the prior year's ratio. 
C)  Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders. 
D)  Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

Question 6

When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and:

Accepted Answer

A)  Observing the distribution of paychecks. 
B)  Footing and crossfooting the payroll register. 
C)  Inspecting payroll tax returns. 
D)  Recalculating payroll accruals.

Question 7

An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as:

Accepted Answer

A)  Deductions not authorized by employees. 
B)  Overtime not approved by supervisors. 
C)  Time tickets with invalid job numbers. 
D)  Payroll checks with unauthorized signatures.

Question 8

Samples to test internal control are intended to provide a basis for an auditor to conclude whether:

Accepted Answer

A)  The control activities are operating effectively. 
B)  The financial statements are materially misstated. 
C)  The risk of incorrect acceptance is too high 
D)  Materiality for planning purposes is at a sufficiently low level.

Question 9

Miller, CPA, is engaged to compile the financial statements of Web Co., a nonissuer, in conformity with the income tax basis of accounting. If Web's financial statements do not disclose the basis of accounting used, Miller should:

Accepted Answer

A)  Disclose the basis of accounting in the accountant's compilation report. 
B)  Clearly label each page "Distribution Restricted-Material Modifications Required." 
C)  Issue a special report describing the effect of the incomplete presentation. 
D)  Withdraw from the engagement and provide no further services to Web.

Question 10

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. During the year under audit, we were advised that management consulted with Better & Best, CPAs. The purpose of this consultation was to obtain another CPA firm's opinion concerning the company's recognition of certain revenue that we believe should be deferred to future periods. Better & Best's opinion was consistent with our opinion, so management did not recognize the revenue in the current year.

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 11

When engaged to express an opinion on a nonissuer's internal control, an accountant should:

Accepted Answer

A)  Obtain management's written assertions regarding whether the company has maintained effective internal control. 
B)  Qualify any opinion concerning management's assertion that the cost of correcting any weaknesses exceeds the benefits. 
C)  Keep informed of events subsequent to the date of the report that might have affected the accountant's opinion. 
D)  Disclaim an opinion on whether the system taken as a whole is sufficient to prevent or detect material errors or irregularities.

Question 12

Which of the following statements is correct concerning statistical sampling in tests of controls?

Accepted Answer

A)  Deviations from control procedures at a given rate usually result in misstatements at a higher rate. 
B)  As the population size doubles, the sample size should also double. 
C)  The qualitative aspects of deviations are not considered by the auditor. 
D)  There is an inverse relationship between the sample size and the tolerable rate.

Question 13

Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements?

Accepted Answer

A)  Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. 
B)  Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. 
C)  Determine whether inadequate provisions for the safeguarding of assets have been corrected. 
D)  Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud.

Question 14

Does an auditor make the following representations explicitly or implicitly when issuing the standard auditor's report on comparative financial statements?

Accepted Answer

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

Question 15

Which of the following are true regarding communication requirements an auditor must follow when providing tax services to an audit client who is an issuer under the Sarbanes-Oxley Act of 2002?

Accepted Answer

A)  The auditor must communicate to the audit committee, in writing, regarding the proposed tax services and related fees. II. The auditor must communicate to the audit committee, in writing, when the proposed tax services involve contingent fee arrangements. III. The auditor must discuss with the audit committee the potential effects of the proposed tax services on the firm's independence. 
B)  I and II only. 
C)  I, II, and III. 
D)  I and III only. 
E)  II and III only.

Question 16

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to:

Accepted Answer

A)  Verify that payroll taxes are deducted from employees' gross pay. 
B)  Determine whether internal control activities are operating effectively. 
C)  Uncover fictitious employees who are receiving payroll checks. 
D)  Identify potential liabilities for unpaid payroll taxes.

Question 17

It is not appropriate to refer a reader of an auditor's report to a financial statement footnote for details concerning:

Accepted Answer

A)  Subsequent events. 
B)  The pro forma effects of a business combination. 
C)  Sale of a discontinued operation. 
D)  The results of confirmation of receivables.

Question 18

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:

Accepted Answer

A)  Journalize cash receipts and disbursements and prepare the financial statements. 
B)  Monitor internal controls and evaluate whether the controls are operating as intended. 
C)  Adopt new accounting pronouncements and authorize the recording of transactions. 
D)  Record and conceal fraudulent transactions in the normal course of assigned tasks.

Question 19

When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should:

Accepted Answer

A)  Explain why this basis of accounting is more useful for the readers of this entity's financial statements than GAAP. 
B)  Refer to the note in the financial statements that describes management's responsibility for the financial statements. 
C)  State that the basis of presentation is a comprehensive basis of accounting (OCBO
A)  other than GAAP. 
D)  Include a separate explanatory paragraph that discusses the justification for, and the CPA's concurrence with, the departure from GAAP.

Question 20

Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?

Accepted Answer

A)  The complexity of the information system relevant to financial reporting. 
B)  The existence of related party transactions. 
C)  The adequacy of the accounting records. 
D)  The operating effectiveness of controls.

Exam 1: CPA Auditing and Attestation Exam