Question 1

An accountant who had begun an audit of the financial statements of a nonissuer was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant's review report should include reference to the:

Accepted Answer

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

Question 2

A CPA is permitted to accept a separate engagement (not in conjunction with an audit of financial statements) to audit an entity's:

Accepted Answer

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

Question 3

Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows: Lore would use which of the following to determine the average days sales in inventory?

Accepted Answer

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

Question 4

The annual financial statements of a publicly held company have been audited, and its interim financial statements have been reviewed. Which of the following is true about the application of professional standards to this review?

Accepted Answer

A)  PCAOB standards apply. 
B)  Statements on Standards for Accounting and Review Services apply. 
C)  Both PCAOB standards and SSARS apply. 
D)  None of the above.

Question 5

Which of the following conditions is necessary for a practitioner to accept an attest engagement to examine and report on a nonissuer's internal control over financial reporting?

Accepted Answer

A)  The practitioner anticipates relying on the entity's internal control in a financial statement audit. 
B)  Management presents its written assertion about the effectiveness of internal control. 
C)  The practitioner is a continuing auditor who previously has audited the entity's financial statements. 
D)  Management agrees not to present the practitioner's report in a general-use document to stockholders.

Question 6

A CPA's standard report on audited financial statements would be inappropriate if it referred to:

Accepted Answer

A)  Management's responsibility for the financial statements. 
B)  An assessment of the entity's accounting principles. 
C)  Significant estimates made by management. 
D)  The CPA's assessment of sampling risk factors.

Question 7

Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should:

Accepted Answer

A)  Consider the likelihood of assessing the risk of incorrect rejection too low. 
B)  Project sampling risk at the maximum for tests covering the remaining period. 
C)  Ascertain that accounts receivable are immaterial to the financial statements. 
D)  Assess the difficulty in controlling the incremental audit risk.

Question 8

What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls?

Accepted Answer

A)  Assess control risk at a low level. 
B)  Perform both tests of controls and substantive tests on inventory. 
C)  Perform only substantive tests on inventory. 
D)  Perform only tests of controls on inventory.

Question 9

Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?

Accepted Answer

A)  The auditor should design and apply tests of controls to discover significant deficiencies in internal control that could result in material misstatements. 
B)  The auditor need not search for significant deficiencies in internal control unless management requests an attestation that "no significant deficiencies in internal control were noted in the audit." 
C)  The auditor should search for significant deficiencies in internal control if the auditor expects that controls are operating effectively (i.e., if the auditor plans to rely on controls). 
D)  The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.

Question 10

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:

Accepted Answer

A)  Observe physical counts of the inventory items. 
B)  Trace the total on the inventory listing to the general ledger inventory account. 
C)  Obtain a confirmation from the client indicating inventory ownership. 
D)  Analytically compare the current-year inventory balance to the prior-year balance.

Question 11

In an audit of contingent liabilities, which of the following procedures would be least effective?

Accepted Answer

A)  Reviewing a bank confirmation letter. 
B)  Examining customer confirmation replies. 
C)  Examining invoices for professional services 
D)  Reading the minutes of the board of directors.

Question 12

Which of the following internal controls most likely would prevent direct labor hours from being charged to manufacturing overhead?

Accepted Answer

A)  Periodic independent counts of work-in-process for comparison to recorded amounts. 
B)  Comparison of daily journal entries with approved production orders. 
C)  Use of time tickets to record actual labor worked on production orders. 
D)  Reconciliation of work-in-process inventory with periodic cost budgets.

Question 13

Regardless of the assessed level of control risk, an auditor would perform some:

Accepted Answer

A)  Tests of controls to determine the effectiveness of internal control. 
B)  Analytical procedures to verify the design of internal control. 
C)  Substantive tests to restrict detection risk for significant transaction classes. 
D)  Dual purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

Question 14

An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to:

Accepted Answer

A)  Stock ledgers maintained by independent registrars. 
B)  Dividend records on file with the SEC. 
C)  Records produced by investment services. 
D)  Minutes of the investee's board of directors.

Question 15

This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below. Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure. Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft. Accountant's Review Report We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co. A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose. The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date. Jordan and Stone, CPAs March 1, 20X3 Supervisor's Review Notes There should be a reference to "conformity with generally accepted accounting principles" in the third paragraph.

Accepted Answer

A)  Correct 
B)  Incorrect

Question 16

An auditor's inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should:

Accepted Answer

A)  Perform analytical procedures to determine if the derivatives are properly valued. 
B)  Examine the contracts for possible risk exposure and the need to recognize losses. 
C)  Confirm the marketability of the derivatives with a commodity specialist. 
D)  Document the derivatives in the auditor's communication with those charged with governance.

Question 17

Compiled financial statements should be accompanied by an accountant's report stating that:

Accepted Answer

A)  A compilation includes assessing the accounting principles used and significant management estimates, as well as evaluating the overall financial statement presentation. 
B)  The accountant compiled the financial statements in accordance with Statements on Standards for Accounting and Review Services. 
C)  A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion. 
D)  The accountant is not aware of any material modifications that should be made to the financial statements to conform with GAAP.

Question 18

To which of the following matters would materiality limits not apply in obtaining written management representations?

Accepted Answer

A)  The availability of minutes of stockholders' and directors' meetings. 
B)  Losses from purchase commitments at prices in excess of market value. 
C)  The disclosure of compensating balance arrangements involving related parties. 
D)  Reductions of obsolete inventory to net realizable value.

Question 19

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the:

Accepted Answer

A)  Auditor's system of quality control has been maintained at a high level. 
B)  Results are consistent with the conclusions to be presented in the auditor's report. 
C)  Audit procedures performed are approved in the professional standards. 
D)  Audit has been performed by persons having adequate technical training and proficiency as auditors.

Question 20

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:

Accepted Answer

A)  Tests of controls may fail to identify procedures relevant to assertions. 
B)  Material misstatements may exist in the financial statements. 
C)  Specified controls requiring segregation of duties may be circumvented by collusion. 
D)  Entity policies may be overridden by senior management.

Exam 1: CPA Auditing and Attestation Exam

An accountant who had begun an audit of the financial statements of a nonissuer was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant's review report should include reference to the:

A CPA is permitted to accept a separate engagement (not in conjunction with an audit of financial statements) to audit an entity's:

Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows: Lore would use which of the following to determine the average days sales in inventory?

The annual financial statements of a publicly held company have been audited, and its interim financial statements have been reviewed. Which of the following is true about the application of professional standards to this review?

Which of the following conditions is necessary for a practitioner to accept an attest engagement to examine and report on a nonissuer's internal control over financial reporting?

A CPA's standard report on audited financial statements would be inappropriate if it referred to:

Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should:

What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls?

Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:

In an audit of contingent liabilities, which of the following procedures would be least effective?

Which of the following internal controls most likely would prevent direct labor hours from being charged to manufacturing overhead?

Regardless of the assessed level of control risk, an auditor would perform some:

An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to:

An auditor's inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should:

Compiled financial statements should be accompanied by an accountant's report stating that:

To which of the following matters would materiality limits not apply in obtaining written management representations?

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the:

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that: