Question 1

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

Accepted Answer

A)  Inquiry. 
B)  Analytical procedures. 
C)  Calculation. 
D)  Confirmation.

Question 2

"In connection with an audit of our financial statements, management has prepared, and furnished to our auditors a description and evaluation of certain contingencies." The foregoing passage most likely is from a(an):

Accepted Answer

A)  Audit inquiry letter to legal counsel. 
B)  Management representation letter. 
C)  Audit committee's communication to the auditor. 
D)  Financial statement footnote disclosure.

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. Our audit is designed to provide reasonable assurance of detecting misstatements that, in our judgment, could have a material effect on the financial statements taken as a whole. Consequently, our audit will not necessarily detect all misstatements that exist due to error, fraudulent financial reporting, or misappropriation of assets.

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

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 is a defendant in a lawsuit alleging infringement of certain patent rights. However, the ultimate outcome of the litigation cannot be reasonably estimated by management. The auditor believes there is a reasonable possibility of a significantly material loss, but the lawsuit is adequately disclosed in the notes to the financial statements. 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 5

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

Accepted Answer

A)  Significant related party transactions are pervasive. 
B)  Usual trade credit from suppliers is denied. 
C)  Arrearages in preferred stock dividends are paid. 
D)  Restrictions on the disposal of principal assets are present.

Question 6

Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?

Accepted Answer

A)  The sampling distribution should approximate the normal distribution. 
B)  Overstated units have a lower probability of sample selection than units that are understated. 
C)  The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. 
D)  The sampling interval is calculated by dividing the number of physical units in the population by the sample size.

Question 7

In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the:

Accepted Answer

A)  Timing of audit procedures. 
B)  Cost-benefit of gathering evidence. 
C)  Selected audit techniques. 
D)  Financial statement assertions.

Question 8

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

Accepted Answer

A)  Large amounts of liquid assets that are easily convertible into cash. 
B)  Low growth and profitability as compared to other entities in the same industry. 
C)  Financial management's participation in the initial selection of accounting principles. 
D)  An overly complex organizational structure involving unusual lines of authority.

Question 9

In auditing accounts receivable, the negative form of confirmation request most likely would be used when:

Accepted Answer

A)  Recipients are likely to return positive confirmation requests without verifying the accuracy of the information. 
B)  The combined assessed level of inherent and control risk relative to accounts receivable is low. 
C)  A small number of accounts receivable are involved but a relatively large number of errors are expected. 
D)  The auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.

Question 10

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when:

Accepted Answer

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

Question 11

Investment and property schedules are presented for purposes of additional analysis in an auditor submitted document. The schedules are not required parts of the basic financial statements, but accompany the basic financial statements. When reporting on such additional information, the measurement of materiality is the:

Accepted Answer

A)  Same as that used in forming an opinion on the basic financial statements taken as a whole. 
B)  Lesser of the individual schedule of investments or schedule of property taken by itself. 
C)  Greater of the individual schedule of investments or schedule of property taken by itself. 
D)  Combined total of both the individual schedules of investments and property taken as a whole.

Question 12

Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls?

Accepted Answer

A)  The amount of time budgeted to complete the engagement. 
B)  How frequently the control is performed. 
C)  The expected deviation rate from the control. 
D)  The extent to which other tests provide evidence about the same assertion.

Question 13

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 14

Which of the following statements extracted from a client's lawyer's letters concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

Accepted Answer

A)  "I believe that the possible liability to the company is nominal in amount." 
B)  "I believe that the action can be settled for less than the damages claimed." 
C)  "I believe that the plaintiff's case against the company is without merit." 
D)  "I believe that the company will be able to defend this action successfully."

Question 15

The understanding with a client of an auditor's contractual obligation ordinarily is set forth in the:

Accepted Answer

A)  Management letter. 
B)  Scope paragraph of the auditor's report. 
C)  Engagement letter. 
D)  Introductory paragraph of the auditor's report.

Question 16

Each page of a nonissuer's financial statements reviewed by an accountant should include the following reference:

Accepted Answer

A)  See Accompanying Accountant's Footnotes. 
B)  Reviewed, No Material Modifications Required. 
C)  See Accountant's Review Report. 
D)  Reviewed, No Accountant's Assurance Expressed.

Question 17

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:

Accepted Answer

A)  Evidence to be gathered to provide a sufficient basis for the auditor's opinion. 
B)  Procedures to be undertaken to discover litigation, claims, and assessments. 
C)  Pending legal matters to be included in the inquiry of the client's attorney. 
D)  Timing of inventory observation procedures to be performed.

Question 18

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice:

Accepted Answer

A)  Eliminates the use of certain statistical sampling methods that would otherwise be available. 
B)  Presumes that the auditor will reperform the tests as of the balance sheet date. 
C)  Should be especially considered when there are rapidly changing economic conditions. 
D)  Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

Question 19

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:

Accepted Answer

A)  Special report. 
B)  Management representation letter. 
C)  Letter for an underwriter. 
D)  Report on internal controls.

Question 20

Smith, CPA, has been asked to issue a review report on the balance sheet of Cone Company, a nonissuer, and not on the other related financial statements. Smith may do so only if:

Accepted Answer

A)  Smith compiles and reports on the related statements of income, retained earnings, and cash flows. 
B)  Smith is not aware of any material modifications needed for the balance sheet to conform with GAAP. 
C)  The scope of Smith's inquiry and analytical procedures is not restricted. 
D)  Cone is a new client and Smith accepts the engagement after the end of Cone's fiscal year.

Exam 1: CPA Auditing and Attestation Exam