Question 1

An accountant had begun to audit the financial statements of a nonissuer. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity's request to change the engagement to a compilation?

Accepted Answer

A)  The entity's management does not provide the accountant with a signed representation letter. 
B)  The accountant is prohibited from corresponding with the entity's legal counsel. 
C)  The entity's principal creditors no longer require the entity to furnish audited financial statements. 
D)  The accountant is prevented from examining the minutes of the board of directors' meetings.

Question 2

If a budgetary reporting system provides adequate reports, but the reports are not analyzed and acted upon:

Accepted Answer

A)  The control has been implemented and is operating effectively. 
B)  The control has been implemented but is not operating effectively. 
C)  The control has not been implemented and is not operating effectively. 
D)  The control has not been implemented but is operating effectively.

Question 3

An auditor's engagement letter most likely would include:

Accepted Answer

A)  Management's acknowledgment of its responsibility for maintaining effective internal control. 
B)  The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting. 
C)  A reminder that management is responsible for illegal acts committed by employees. 
D)  A request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and assessments.

Question 4

The following data pertain to Cowl, Inc., for the year ended December 31, 20X4:  What was Cowl's rate of return on assets for 20X4?

Accepted Answer

A)  5% 
B)  6% 
C)  20% 
D)  24%

Question 5

Which statement is true regarding the three fraud risk factors (incentives/pressures, opportunity, and rationalization/attitude)?

Accepted Answer

A)  The auditor should determine whether and to what extent fraud risk factors are present as part of the final overall review stage of the audit. 
B)  The fraud risk factors should be discussed by engagement personnel during planning. 
C)  The existence of all three fraud risk factors indicates that fraud has occurred. 
D)  Lack of observation of all three fraud risk factors indicates that fraud has not occurred.

Question 6

Which of the following statements is correct concerning an auditor's use of the work of a specialist?

Accepted Answer

A)  The auditor need not obtain an understanding of the methods and assumptions used by the specialist. 
B)  The auditor may not use the work of a specialist in matters material to the fair presentation of the financial statements. 
C)  The reasonableness of the specialist's assumptions and their applications are strictly the auditor's responsibility. 
D)  The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.

Question 7

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that:

Accepted Answer

A)  The scope of the inquiry and analytical procedures performed by the accountant has not been restricted. 
B)  All information included in the financial statements is the representation of the management of the entity. 
C)  A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 
D)  A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements.

Question 8

Audit documentation should be prepared in enough detail so that:

Accepted Answer

A)  An experienced auditor who has worked with the client in the past can understand the procedures performed and the evidence obtained. 
B)  A reader of the financial statements who has no previous connection with the audit can understand the procedures performed and the evidence obtained. 
C)  A reader of the financial statements who has a background in financial analysis can understand the procedures performed and the evidence obtained. 
D)  An experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained.

Question 9

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:

Accepted Answer

A)  Increase current dividend distributions. 
B)  Reduce existing lines of credit. 
C)  Increase ownership equity. 
D)  Purchase assets formerly leased.

Question 10

The date of the management representation letter should coincide with the date of the:

Accepted Answer

A)  Balance sheet. 
B)  Latest interim financial information. 
C)  Auditor's report. 
D)  Latest related party transaction.

Question 11

Which of the following best describes the auditor's reporting responsibility concerning information accompanying the basic financial statements in an auditor-submitted document?

Accepted Answer

A)  The auditor has no reporting responsibility concerning information accompanying the basic financial statements. 
B)  The auditor should report on the information accompanying the basic financial statements only if the auditor participated in its preparation. 
C)  The auditor should report on the information accompanying the basic financial statements only if the auditor did not participate in its preparation. 
D)  The auditor should report on all the information included in the document.

Question 12

As the acceptable level of detection risk increases, an auditor may change the:

Accepted Answer

A)  Assessed level of control risk from low to high. 
B)  Assurance provided by tests of controls by using a larger sample size than planned. 
C)  Timing of substantive tests from year-end to an interim date. 
D)  Nature of substantive tests from a less effective to a more effective procedure.

Question 13

Which of the following procedures is more likely to be performed in a review engagement of a nonissuer than in a compilation engagement?

Accepted Answer

A)  Gaining an understanding of the entity's business transactions. 
B)  Making a preliminary assessment of control risk. 
C)  Obtaining a representation letter from the chief executive officer. 
D)  Assisting the entity in adjusting the accounting records.

Question 14

In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to:

Accepted Answer

A)  Determine whether the control activities have been implemented. 
B)  Perform procedures to understand the design of internal control. 
C)  Document the understanding of the entity's internal control components. 
D)  Search for significant deficiencies in the operation of internal control.

Question 15

A successor auditor is required to attempt communication with the predecessor auditor prior to:

Accepted Answer

A)  Performing test of controls. 
B)  Testing beginning balances for the current year. 
C)  Making a proposal for the audit engagement. 
D)  Accepting the engagement.

Question 16

An auditor would most likely verify the interest earned on bond investments by:

Accepted Answer

A)  Vouching the receipt and deposit of interest checks. 
B)  Confirming the bond interest rate with the issuer of the bonds. 
C)  Recomputing the interest earned on the basis of face amount, interest rate, and period held. 
D)  Testing the internal controls over cash receipts.

Question 17

Which of the following is true regarding the standard audit report for an issuer?

Accepted Answer

A)  Reference should be made in the scope paragraph to both PCAOB standards and generally accepted auditing standards. 
B)  PCAOB standards should not be mentioned at all, although their use is implied in the standard auditor's report. 
C)  Reference should be made in the scope paragraph to PCAOB standards, and in the opinion paragraph to generally accepted accounting principles. 
D)  Reference may be made in the scope paragraph to either PCAOB standards or generally accepted auditing standards.

Question 18

Which of the following statements about internal control is correct?

Accepted Answer

A)  Properly maintained internal control reasonably ensures that collusion among employees cannot occur. 
B)  The establishment and maintenance of internal control is an important responsibility of the internal auditor. 
C)  Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on a significant account balance. 
D)  The cost-benefit relationship is a primary criterion that should be considered in designing internal control.

Question 19

Which of the following matters is an auditor not required to communicate to those charged with governance?

Accepted Answer

A)  Significant adjustments arising from the audit that were recorded by management. 
B)  The basis for the auditor's conclusions about the reasonableness of management's sensitive accounting estimates. 
C)  The level of responsibility assumed by the auditor under generally accepted auditing standards. 
D)  The degree of reliance the auditor placed on the management representation letter.

Question 20

Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?

Accepted Answer

A)  The CPA does not understand the entity's operations and industry. 
B)  Management acknowledges that the entity has had recurring operating losses. 
C)  The CPA is unable to review the predecessor auditor's working papers. 
D)  Management is unwilling to permit inquiry of its legal counsel.

Exam 1: CPA Auditing and Attestation Exam