Question 1

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?

Accepted Answer

A)  Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests. 
B)  I only 
C)  II only. 
D)  Both I and II. 
E)  Neither I nor II.

Question 2

Which of the following should be included as a written representation from management?

Accepted Answer

A)  The belief that misstatements identified by the auditor and not corrected are immaterial. 
B)  The belief that misstatements identified by the auditor and corrected are material. 
C)  The belief that the auditor is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles. 
D)  The belief that the financial statements are completely accurate in all respects.

Question 3

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting?

Accepted Answer

A)  There is a lack of interest by management in maintaining an earnings trend. 
B)  Computer hardware is usually sold at a loss before being fully depreciated. 
C)  Management had frequent disputes with the auditor on accounting matters. 
D)  Monthly bank reconciliations usually include several large checks outstanding.

Question 4

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 considers the decline in value of equity securities classified as available-for-sale to be temporary.

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 5

An auditor most likely would introduce test data into a computerized payroll system to test internal controls related to the:

Accepted Answer

A)  Existence of unclaimed payroll checks held by supervisors. 
B)  Early cashing of payroll checks by employees. 
C)  Discovery of invalid employee I.D. numbers. 
D)  Proper approval of overtime by supervisors.

Question 6

Under which of the following circumstances would an auditor's expression of an unqualified opinion be inappropriate?

Accepted Answer

A)  The auditor is unable to obtain the audited financial statements of a significant subsidiary. 
B)  The financial statements are prepared on the entity's income tax basis. 
C)  There are significant deficiencies in the design and operation of the entity's internal control. 
D)  Analytical procedures indicate that many year-end account balances are not comparable with the prior year's balances.

Question 7

In parallel simulation, actual client data are reprocessed using an auditor software program. An advantage of using parallel simulation, instead of performing tests of controls without a computer, is that:

Accepted Answer

A)  The test includes all types of transaction errors and exceptions that may be encountered. 
B)  The client's computer personnel do not know when the data are being tested. 
C)  There is no risk of creating potentially material errors in the client's data. 
D)  The size of the sample can be greatly expanded at relatively little additional cost.

Question 8

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:

Accepted Answer

A)  Confirmation and observation. 
B)  Observation and inquiry. 
C)  Analytical procedures and confirmation. 
D)  Inquiry and analytical procedures.

Question 9

As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:

Accepted Answer

A)  Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control activity. 
B)  The auditor believes that the control activity relates to the client's assertions when, in fact, it does not. 
C)  The auditor believes that the control activity will reduce the extent of substantive testing when, in fact, it will not. 
D)  Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.

Question 10

In auditing long-term bonds payable, an auditor most likely would:

Accepted Answer

A)  Perform analytical procedures on the bond premium and discount accounts. 
B)  Examine documentation of assets purchased with bond proceeds for liens. 
C)  Compare interest expense with the bond payable amount for reasonableness. 
D)  Confirm the existence of individual bondholders at year-end.

Question 11

Comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should:

Accepted Answer

A)  Indicate the substantive reasons for the qualification in the predecessor auditor's opinion. 
B)  Request the client to reissue the predecessor's report on the prior year's statements. 
C)  Issue an updated comparative audit report indicating the division of responsibility. 
D)  Express an opinion only on the current year's statements and make no reference to the prior year's statements.

Question 12

May an accountant accept an engagement to compile or review the financial statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry accounting principles, but plans to obtain the required level of knowledge before compiling or reviewing the financial statements?

Accepted Answer

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

Question 13

Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files?

Accepted Answer

A)  It is usually more difficult to detect transposition errors. 
B)  Transactions are usually authorized before they are executed and recorded. 
C)  It is usually easier for unauthorized persons to access and alter the files. 
D)  Random error associated with processing similar transactions in different ways is usually greater.

Question 14

Which of the following characteristics distinguishes computer processing from manual processing?

Accepted Answer

A)  Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing. 
B)  Errors or irregularities in computer processing will be detected soon after their occurrences. 
C)  The potential for systematic error is ordinarily greater in manual processing than in computerized processing. 
D)  Most computer systems are designed so that transaction trails useful for audit purposes do not exist.

Question 15

When an auditor tests a computerized accounting system, which of the following is true of the test data approach?

Accepted Answer

A)  Several transactions of each type must be tested. 
B)  Test data are processed by the client's computer programs under the auditor's control. 
C)  Test data must consist of all possible valid and invalid conditions. 
D)  The program tested is different from the program used throughout the year by the client.

Question 16

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 has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.

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 17

To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the:

Accepted Answer

A)  Expected deviation rate. 
B)  Upper deviation rate. 
C)  Risk of incorrect acceptance. 
D)  Risk of incorrect rejection.

Question 18

Jones Retailing, a nonissuer, has asked Winters, CPA, to compile financial statements that omit substantially all disclosures required by generally accepted accounting principles. Winters may compile such financial statements provided the:

Accepted Answer

A)  Reason for omitting the disclosures is explained in the engagement letter and acknowledged in the management representation letter. 
B)  Financial statements are prepared on a comprehensive basis of accounting other than generally accepted accounting principles. 
C)  Use of the financial statements is restricted to internal use only. 
D)  Omission is not undertaken to mislead the users of the financial statements and is properly disclosed in the accountant's report.

Question 19

An accountant's compilation report on a financial forecast should include a statement that the:

Accepted Answer

A)  Compilation does not include evaluation of the support of the assumptions underlying the forecast. 
B)  Hypothetical assumptions used in the forecast are reasonable. 
C)  Range of assumptions selected is one in which one end of the range is less likely to occur than the other. 
D)  Prospective statements are limited to presenting, in the form of a forecast, information that is the accountant's representation.

Question 20

Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?

Accepted Answer

A)  A written audit plan setting forth the procedures necessary to accomplish the audit's objectives. 
B)  An indication that the accounting records agree or reconcile with the financial statements. 
C)  A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork. 
D)  The basis for the auditor's decision not to perform tests of controls concurrently with obtaining an understanding of internal control.

Exam 1: CPA Auditing and Attestation Exam