Question 1

After obtaining an understanding of the entity and its environment, including its internal control, an auditor decided to perform tests of controls. This is likely because:

Accepted Answer

A)  The auditor's risk assessment is based on the effective operation of controls. 
B)  Evidence to support a reduction in control risk is not available. 
C)  An increase in the assessed level of control risk is justified for certain financial statement assertions. 
D)  There were many internal control weaknesses that could allow errors to enter the accounting system.

Question 2

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 discloses in the notes to the financial statements certain lease obligations. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles. 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 3

Which of the following is not a required procedure in an engagement to review the interim financial information of a publicly held entity?

Accepted Answer

A)  Obtaining corroborating evidence about the entity's ability to continue as a going concern. 
B)  Comparing disaggregated revenue data for the current interim period with that of comparable prior periods. 
C)  Obtaining evidence that the interim financial information reconciles with the accounting records. 
D)  Inquiring of management about their knowledge of fraud or suspected fraud.

Question 4

Which of the following risks may be assessed in nonquantitative terms?

Accepted Answer

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

Question 5

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. Blank checks are maintained in an unlocked cabinet along with the check-signing machine. Blank checks and the check-signing machine should be locked in separate locations to prevent the embezzlement of funds.

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 6

Which of the following Explanation: s most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

Accepted Answer

A)  The estimated remaining useful lives of plant assets were revised upward. 
B)  Plant assets were retired during the year. 
C)  The prior year's depreciation expense was erroneously understated. 
D)  Overhead allocations were revised at year-end.

Question 7

Which best describes the documentation completion date?

Accepted Answer

A)  Forty-five days from the report release date, based on PCAOB standards. 
B)  Sixty days from the report release date, based on PCAOB standards. 
C)  Seven years from the report release date, based on auditing standards. 
D)  Five years from the report release date, based on auditing standards.

Question 8

Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, 20X3. Park obtained sufficient audit evidence for all of Tech's financial statement items except Tech's opening inventory. Due to inadequate financial records, Park could not verify Tech's January 1, 20X3, inventory balances. Park's opinion on Tech's 20X3 financial statements most likely will be:

Accepted Answer

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

Question 9

An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies by computing the amounts that should have been received by referring to:

Accepted Answer

A)  Dividend record books produced by investment advisory services. 
B)  Stock indentures published by corporate transfer agents. 
C)  Stock ledgers maintained by independent registrars. 
D)  Annual audited financial statements issued by the investee companies.

Question 10

An accountant has been engaged to review a nonissuer's financial statements that contain several departures from GAAP. If the financial statements are not revised and modification of the standard review report is not adequate to indicate the deficiencies, the accountant should:

Accepted Answer

A)  Withdraw from the engagement and provide no further services concerning these financial statements. 
B)  Inform management that the engagement can proceed only if the accountant's report is restricted to internal use. 
C)  Determine the effects of the departures from GAAP and issue a special report on the financial statements. 
D)  Issue a modified review report provided the entity agrees that the financial statements will not be used to obtain credit.

Question 11

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:

Accepted Answer

A)  The illegal act is a violation of generally accepted accounting principles. 
B)  The client does not take the remedial action that the auditor considers necessary. 
C)  The illegal act was committed during a prior year that was not audited. 
D)  The auditor has already assessed control risk at a high level.

Question 12

Which of the following is not an attestation standard?

Accepted Answer

A)  Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report. 
B)  The report shall identify the assertion being reported on and state the character of the engagement. 
C)  The work shall be adequately planned and assistants, if any, shall be properly supervised. 
D)  A sufficient understanding of internal control shall be obtained to plan the engagement.

Question 13

Which of the following controls most likely would give the greatest assurance that securities held as investments are safeguarded?

Accepted Answer

A)  There is no access to securities between the year-end and the date of the auditor's security count. 
B)  Proceeds from the sale of investments are received by an employee who does not have access to securities. 
C)  Investment acquisitions are authorized by a member of the Board of Directors before execution. 
D)  Access to securities requires the signatures and presence of two designated officials.

Question 14

Which of the following representations does an accountant make implicitly when issuing the standard report for the compilation of a nonissuer's financial statements?

Accepted Answer

A)  The accountant is independent with respect to the entity. 
B)  The financial statements have not been audited. 
C)  A compilation consists principally of inquiries and analytical procedures. 
D)  The accountant does not express any assurance on the financial statements.

Question 15

An auditor's risk assessment is based on the assumption that controls are operating effectively. Which of the following was not a step in making this assessment?

Accepted Answer

A)  Evaluate the effectiveness of the internal controls with tests of controls. 
B)  Obtain an understanding of the entity's accounting system and control environment. 
C)  Perform tests of details of transactions to detect material misstatements in the financial statements. 
D)  Consider whether control activities can have a pervasive effect on financial statement assertions.

Question 16

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted?

Accepted Answer

A)  The entity has no formal written code of conduct. 
B)  The integrity of the entity's management is suspect. 
C)  Procedures requiring segregation of duties are subject to management override. 
D)  Management fails to modify prescribed controls for changes in conditions.

Question 17

Which of the following is not an inquiry the auditor should make to identify the risks of material misstatement due to fraud?

Accepted Answer

A)  How management communicates to employees its views on acceptable business practices. 
B)  Whether operating personnel have communicated to management regarding internal control and how it functions to prevent, deter, or detect material misstatement due to fraud. 
C)  Whether there are any particular business segments for which a risk of fraud may be more likely to exist. 
D)  Whether management is aware of any allegations of fraud.

Question 18

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the:

Accepted Answer

A)  Cash receipts journal to the sales journal. 
B)  Sales journal to the cash receipts journal. 
C)  Source documents to the accounting records. 
D)  Accounting records to the source documents.

Question 19

In an audit of an issuer, the auditor must provide an opinion on which of the following?

Accepted Answer

A)  The financial statements. II. The audit committee's oversight of financial reporting and internal control. III. The effectiveness of internal control. 
B)  I and III only. 
C)  I, II, and III. 
D)  I and II only. 
E)  I only.

Question 20

An auditor would least likely use computer software to:

Accepted Answer

A)  Construct parallel simulations. 
B)  Access client data files. 
C)  Prepare spreadsheets. 
D)  Assess EDP control risk.

Exam 1: CPA Auditing and Attestation Exam