Question 1

Which of the following matters most likely would be included in a management representation letter?

Accepted Answer

A)  An assessment of the risk factors concerning the misappropriation of assets. 
B)  An evaluation of the litigation that has been filed against the entity. 
C)  A confirmation that the entity has complied with contractual agreements. 
D)  A statement that all material internal control weaknesses have been corrected.

Question 2

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances the auditor most likely would:

Accepted Answer

A)  Issue a disclaimer of opinion about the internal controls as part of the auditor's report. 
B)  Increase the assessment of control risk and increase the extent of substantive tests. 
C)  Issue a qualified opinion of this finding as part of the auditor's report. 
D)  Withdraw from the audit because the internal controls are ineffective.

Question 3

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 Negative assurance should be expressed on the current year's reviewed financial statements in the second (scope) paragraph.

Accepted Answer

A)  Correct 
B)  Incorrect

Question 4

Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards?

Accepted Answer

A)  The attestation standards provide a framework for the attest function beyond historical financial statements. 
B)  The requirement that the practitioner be independent in mental attitude is omitted from the attestation standards. 
C)  The attestation standards do not permit an attest engagement to be part of a business acquisition study or a feasibility study. 
D)  None of the standards of fieldwork in generally accepted auditing standards are included in the attestation standards.

Question 5

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

Accepted Answer

A)  A flowchart or narrative of the information system relevant to financial reporting describing the recording and classification of transactions for financial reporting. 
B)  An audit plan setting forth in detail the procedures necessary to accomplish the engagement's objectives. 
C)  A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel. 
D)  An internal control questionnaire identifying controls that assure specific objectives will be achieved.

Question 6

An auditor's primary consideration regarding an entity's internal control is whether the controls:

Accepted Answer

A)  Affect the financial statement assertions. 
B)  Prevent management override. 
C)  Relate to the control environment. 
D)  Reflect management's philosophy and operating style.

Question 7

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 8

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the:

Accepted Answer

A)  Prelist of individual checks. 
B)  Monthly bank reconciliation. 
C)  Daily deposit slip. 
D)  Remittance advices.

Question 9

The first general standard requires that an audit of financial statements is to be performed by a person or persons having:

Accepted Answer

A)  Seasoned judgment in varying degrees of supervision and review. 
B)  Adequate technical training and proficiency. 
C)  Knowledge of the standards of fieldwork and reporting. 
D)  Independence with respect to the financial statements and supplementary disclosures.

Question 10

Comfort letters ordinarily are addressed to:

Accepted Answer

A)  The Securities and Exchange Commission. 
B)  Underwriters of securities. 
C)  Creditor financial institutions. 
D)  The client's audit committee.

Question 11

Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?

Accepted Answer

A)  Direct access to securities in the safety deposit box is limited to only one corporate officer. 
B)  Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger. 
C)  The purchase and sale of investments are executed on the specific authorization of the board of directors. 
D)  The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.

Question 12

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Accepted Answer

A)  Inquiring of the client's legal counsel concerning pending litigation. 
B)  Comparing the financial statements to anticipated results. 
C)  Examining computer generated exception reports to verify the effectiveness of internal controls. 
D)  Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

Question 13

Which of the following matters is an auditor required to communicate to those charged with governance?

Accepted Answer

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

Question 14

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:

Accepted Answer

A)  This is a duplication of cutoff tests. 
B)  Accounts payable balances at the balance sheet date may not be paid before the audit is completed. 
C)  Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. 
D)  There is likely to be other reliable external evidence available to support the balances.

Question 15

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 16

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to:

Accepted Answer

A)  Provide the data necessary to prepare a proof of cash. 
B)  Request a cutoff bank statement and related checks be sent to the auditor. 
C)  Detect kiting activities that may otherwise not be discovered. 
D)  Seek information about contingent liabilities and security agreements.

Question 17

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:

Accepted Answer

A)  Examine the shipping documents that provide evidence for the existence assertion. 
B)  Verify the sources and contents of the faxes in telephone calls to the senders. 
C)  Consider the faxes to be nonresponses and evaluate them as unadjusted differences. 
D)  Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted.

Question 18

At December 30, 20X3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, 20X3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Accepted Answer

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

Question 19

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. Was the difference of opinion on the accrued pension liabilities that existed between the engagement personnel and the actuarial specialist resolved in accordance with firm policy and appropriately documented?

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 20

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:

Accepted Answer

A)  There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement. 
B)  There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements. 
C)  The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement. 
D)  The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.

Exam 1: CPA Auditing and Attestation Exam

Which of the following matters most likely would be included in a management representation letter?

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances the auditor most likely would:

Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards?

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

An auditor's primary consideration regarding an entity's internal control is whether the controls:

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

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the:

The first general standard requires that an audit of financial statements is to be performed by a person or persons having:

Comfort letters ordinarily are addressed to:

Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Which of the following matters is an auditor required to communicate to those charged with governance?

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:

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:

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to:

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:

At December 30, 20X3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, 20X3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?