Question 1

Before accepting an engagement to audit a new client, a CPA is required to obtain:

Accepted Answer

A)  An understanding of the prospective client's industry and business. 
B)  The prospective client's signature to the representation letter. 
C)  A preliminary understanding of the prospective client's control environment. 
D)  The prospective client's consent to make inquiries of the predecessor auditor, if any.

Question 2

An accountant's report on a review of pro forma financial information should include a:

Accepted Answer

A)  Statement that the entity's internal control was not relied on in the review. 
B)  Disclaimer of opinion on the financial statements from which the pro forma financial information is derived. 
C)  Caveat that it is uncertain whether the transaction or event reflected in the pro forma financial information will ever occur. 
D)  Reference to the financial statements from which the historical financial information is derived.

Question 3

In which case would the accountant be least likely to perform a review of interim financial information under PCAOB (auditing) standards?

Accepted Answer

A)  Quarterly reports are required to be filed with the SEC. 
B)  Selected quarterly financial data is included in an annual report. 
C)  Quarterly financial data is included in the financial statements of a nonissuer. 
D)  The accountant is performing an initial audit of financial statements that include selected quarterly data.

Question 4

Which of the following statements reflects an auditor's responsibility for detecting errors and fraud?

Accepted Answer

A)  An auditor is responsible for detecting employee errors and fraud, but not for discovering fraud involving employee collusion or management override. 
B)  An auditor should plan the audit to detect errors and fraud that are caused by departures from GAAP. 
C)  An auditor is not responsible for detecting errors and fraud unless the application of GAAS would result in such detection. 
D)  An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

Question 5

Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to:

Accepted Answer

A)  Provide positive assurance that control activities regarding segregation of duties are consistent with the entity's control objectives. 
B)  Present the results of the auditor's tests of controls. 
C)  Provide negative assurance that the auditor discovered no evidence of intentional override of internal controls. 
D)  Describe the scope of the auditor's principal substantive tests.

Question 6

An auditor was unable to obtain sufficient appropriate audit evidence concerning certain transactions due to an inadequacy in the entity's accounting records. The auditor would choose between issuing a(an):

Accepted Answer

A)  Qualified opinion and an unqualified opinion with an explanatory paragraph. 
B)  Unqualified opinion with an explanatory paragraph and an adverse opinion. 
C)  Adverse opinion and a disclaimer of opinion. 
D)  Disclaimer of opinion and a qualified opinion.

Question 7

Which of the following procedures is usually performed by the accountant in a review engagement of a nonissuer?

Accepted Answer

A)  Sending a letter of inquiry to the entity's lawyer. 
B)  Comparing the financial statements with statements for comparable prior periods. 
C)  Confirming a significant percentage of receivables by direct communication with debtors. 
D)  Communicating significant deficiencies discovered during the study of the internal control structure.

Question 8

Financial information is presented in a printed form that prescribes the wording of the independent auditor's report. The form is not acceptable to the auditor because the form calls for statements that are inconsistent with the auditor's responsibility. Under these circumstances, the auditor most likely would:

Accepted Answer

A)  Withdraw from the engagement. 
B)  Reword the form or attach a separate report. 
C)  Express a qualified opinion with an Explanation. 
D)  Restrict use of the report to the party who designed the form.

Question 9

Which of the following statements is correct regarding a review engagement of a nonissuer's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

Accepted Answer

A)  An accountant must establish an understanding with the client in an engagement letter. 
B)  An accountant must obtain an understanding of the client's internal control when performing a review. 
C)  A review provides an accountant with a basis for expressing limited assurance on the financial statements. 
D)  A review report contains an accountant's opinion of the financial statements taken as a whole.

Question 10

During an audit an internal auditor may provide direct assistance to an independent CPA in:

Accepted Answer

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

Question 11

For an entity that does financial statements generally would not refer to:

Accepted Answer

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

Question 12

In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?

Accepted Answer

A)  Completeness. 
B)  Occurrence. 
C)  Accuracy. 
D)  Rights and obligations.

Question 13

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

Accepted Answer

A)  This communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved. 
B)  If matters are communicated in writing, the report is appropriate for general use. 
C)  If matters are communicated in writing, the report is required to be distributed to both those charged with governance and management. 
D)  This communication is required to occur before the auditor's report on the financial statements is issued.

Question 14

Which of the following is not a comprehensive basis of accounting other than generally accepted accounting principles?

Accepted Answer

A)  Cash receipts and disbursements basis of accounting. 
B)  Basis of accounting used by an entity to file its income tax return. 
C)  Basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency. 
D)  Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution.

Question 15

Which of the following statements about performing tests of controls to support a lower level of control risk is not true?

Accepted Answer

A)  Observation by the auditor provides more assurance than inquiry alone. 
B)  Inquiry alone generally will support a conclusion for a lower assessed level of control risk. 
C)  Prior audits may be considered by the auditor in assessing control risk in the current audit. 
D)  An audit of financial statements is a cumulative process.

Question 16

An auditor would express an unqualified opinion with an explanatory paragraph added to the auditor's report for:

Accepted Answer

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

Question 17

In its annual report to shareholders, Lake Co. included a separate management report that contained additional information. Lake's auditor is expressing an unqualified opinion on Lake's financial statements but has not been engaged to examine and report on this additional information. What is the auditor's responsibility concerning such a report?

Accepted Answer

A)  The auditor should add an explanatory paragraph to the report on the financial statements disclaiming an opinion on the additional information. 
B)  The auditor has no obligation to read the management report or to verify the accuracy or appropriateness of its contents. 
C)  The auditor should request Lake to place the management report in its annual report where it will not be misinterpreted to be the auditor's assertion. 
D)  The auditor should read the management report and consider whether it contains a material misstatement of fact.

Question 18

To obtain audit evidence about control risk, an auditor ordinarily selects tests from a variety of techniques, including:

Accepted Answer

A)  Analysis. 
B)  Confirmation. 
C)  Reperformance. 
D)  Comparison.

Question 19

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

Accepted Answer

A)  External policies established by parties outside the entity affect its accounting practices. 
B)  Management is dominated by one individual who is also a shareholder. 
C)  Internal auditors have direct access to the board of directors and the entity's management. 
D)  Those charged with governance are active in overseeing the entity's financial reporting policies.

Question 20

Which of the following circumstances would most likely cause an auditor to suspect that material misstatements arising from fraud exist in a client's financial statements?

Accepted Answer

A)  Property and equipment are usually sold at a loss before being fully depreciated. 
B)  Significantly fewer responses to confirmation requests are received than expected. 
C)  Monthly bank reconciliations usually include several in-transit items. 
D)  Clerical errors are listed on an EDP-generated exception report.

Exam 1: CPA Auditing and Attestation Exam