Question 1

In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If the amounts in question could materially affect current operating results, the auditor would:

Accepted Answer

A)  Be unable to express an opinion on the current year's results of operations and cash flows. 
B)  Express a qualified opinion on the financial statements because of a client-imposed scope limitation. 
C)  Withdraw from the engagement and refuse to be associated with the financial statements. 
D)  Specifically state that the financial statements are not comparable to the prior year due to an uncertainty.

Question 2

An annual shareholders' report includes audited financial statements and contains supplementary information required by GAAP. Is it permissible for the auditor to report on such information?

Accepted Answer

A)  No, because such reporting may lead to the belief that the auditor is responsible for the information. 
B)  No, because the auditor has no responsibility to read the other information in a document containing audited financial statements. 
C)  Yes, provided the report provides negative assurance only. 
D)  Yes, provided the auditor performs sufficient audit procedures to determine whether the information is fairly stated, in all material respects, in relation to the financial statements.

Question 3

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. Nothing came to our attention that caused us to believe that at October 31, 20XX, there was any change in the capital stock, increase in long-term debt, or decrease in consolidated net current assets or stockholders' equity as compared with the amounts shown in the September 30, 20XX unaudited condensed consolidated balance sheet.

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 4

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

Accepted Answer

A)  The current year's accounts receivable with the prior year's accounts receivable. 
B)  The current year's payroll expense with the prior year's payroll expense. 
C)  The budgeted current year's sales with the prior year's sales. 
D)  The budgeted current year's warranty expense with the current year's contingent liabilities.

Question 5

A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor's:

Accepted Answer

A)  Understanding of the reasons for the change in auditors. 
B)  Methodology used in applying sampling techniques. 
C)  Opinion on subsequent events that have occurred since the balance sheet date. 
D)  Perception of the competency and reliance on the client's internal audit function.

Question 6

An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether:

Accepted Answer

A)  The cash receipts journal was held open for a few days after the year-end. 
B)  The last checks recorded before the year-end were actually mailed by the year-end. 
C)  Cash balances were overstated because of kiting. 
D)  Any unusual payments to or receipts from related parties occurred.

Question 7

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?

Accepted Answer

A)  Senior financial management participates in the selection of accounting principles and the determination of significant estimates. 
B)  Supporting accounting records and files that should be readily available are not produced promptly when requested. 
C)  Related party transactions take place in the ordinary course of business with an entity that is audited by another CPA firm. 
D)  Senior management has an excessive interest in upgrading the entity's information technology capabilities.

Question 8

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:

Accepted Answer

A)  Unpaid voucher. 
B)  Debit memo. 
C)  Vendor invoice. 
D)  Credit memo.

Question 9

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 no comparison of the scope of a review to an audit in the second (scope) paragraph.

Accepted Answer

A)  Correct 
B)  Incorrect

Question 10

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Accepted Answer

A)  Determine that changes in employee pay rates after year-end were properly authorized. 
B)  Recompute depreciation charges for plant assets sold after year-end. 
C)  Inquire about payroll checks that were recorded before year-end but cashed after year-end. 
D)  Investigate changes in long-term debt occurring after year-end.

Question 11

Kell engaged March, CPA, to submit to Kell a written personal financial plan containing unaudited personal financial statements. March anticipates omitting certain disclosures required by GAAP because the engagement's sole purpose is to assist Kell in developing a personal financial plan. For March to be exempt from complying with the requirements of SSARS 1, Compilation and Review of Financial Statements, Kell is required to agree that the:

Accepted Answer

A)  Financial statements will not be presented in comparative form with those of the prior period. 
B)  Omitted disclosures required by GAAP are not material. 
C)  Financial statements will not be disclosed to a non-CPA financial planner. 
D)  Financial statements will not be used to obtain credit.

Question 12

Which of the following best describes an auditor's responsibility with respect to communicating internal control deficiencies of issuers?

Accepted Answer

A)  The auditor is required to communicate all deficiencies in internal control to management, deficiencies that constitute a significant deficiency to the audit committee, and deficiencies that constitute a material weakness to the full board of directors. 
B)  The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee. 
C)  The auditor is not required to communicate control deficiencies to management or the audit committee unless they constitute a significant deficiency or a material weakness. 
D)  The auditor is not required to communicate control deficiencies or significant deficiencies to management or the audit committee, but must communicate material weaknesses to both management and the audit committee.

Question 13

Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency?

Accepted Answer

A)  The likelihood that a control will fail to prevent or detect a misstatement. II. The magnitude of the misstatement that could result from the deficiency. 
B)  I only. 
C)  II only. 
D)  Both I and II. 
E)  Neither I nor II.

Question 14

A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services when:

Accepted Answer

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

Question 15

When auditing related party transactions, an auditor places primary emphasis on:

Accepted Answer

A)  Ascertaining the rights and obligations of the related parties. 
B)  Confirming the existence of the related parties. 
C)  Verifying the valuation of the related party transactions. 
D)  Evaluating the disclosure of the related party transactions.

Question 16

Reference in a principal auditor's report to the fact that part of the audit was performed by another auditor most likely would be an indication of the:

Accepted Answer

A)  Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements. 
B)  Lack of materiality of the portion of the financial statements audited by the other auditor. 
C)  Principal auditor's recognition of the other auditor's competence, reputation, and professional certification. 
D)  Different opinions the auditors are expressing on the components of the financial statements that each audited.

Question 17

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. Several employees have disabled the anti-virus detection software on their PCs because the software slows the processing of data and occasionally rings false alarms. The company should obtain anti-virus software that runs continuously at all system entry points and that cannot be disabled by unauthorized personnel.

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 18

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of internal control?

Accepted Answer

A)  Confirmation with outside parties. 
B)  Inquiry of client personnel. 
C)  Recomputation of account balance amounts. 
D)  Observation of client personnel.

Question 19

A retail entity uses electronic data interchange (EDI) in executing and recording most of its purchase transactions. The entity's auditor recognizes that the documentation of the transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would:

Accepted Answer

A)  Increase the sample of EDI transactions to be selected for cutoff tests. 
B)  Perform tests several times during the year, rather than only at year-end. 
C)  Plan to make a 100% count of the entity's inventory at or near the year-end. 
D)  Decrease the assessed level of control risk for the existence or occurrence assertions.

Question 20

Jones, CPA, is auditing the financial statements of XYZ Retailing, Inc. What assurance does Jones provide that direct effect illegal acts that are material to XYZ's financial statements, and illegal acts that have a material, but indirect effect on the financial statements will be detected?

Accepted Answer