Question 1

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

Accepted Answer

A)  "I believe that the plaintiff will have problems establishing any liability." 
B)  "I believe that this action has only a remote chance in establishing any liability." 
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 2

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement due to fraud?

Accepted Answer

A)  Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion. 
B)  An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material misstatement due to fraud. 
C)  The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements. 
D)  The auditor didn't consider factors influencing audit risk for account balances that have effects pervasive to financial statements taken whole.

Question 3

Which of the following statements about internal control is correct?

Accepted Answer

A)  There is no relationship between an entity's objectives and the components of internal control. 
B)  Internal control is relevant to the entire entity, or to any of its operating units or business functions. 
C)  All of the entity's objectives and related internal controls are relevant to an audit of the entity's financial 
D)  An understanding of internal control relevant to each of the entity's operating units and business functions is necessary.

Question 4

In an audit of financial statements, an auditor's primary consideration regarding internal control is whether the control:

Accepted Answer

A)  Reflects management's philosophy and operating style. 
B)  Affects management's financial statement assertions. 
C)  Provides adequate safeguards over access to assets. 
D)  Enhances management's decision-making processes.

Question 5

Would the following factors ordinarily be considered in planning an audit engagement's personnel requirements?

Accepted Answer

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

Question 6

North Co., a privately-held entity, asked its tax accountant, King, a CPA in public practice, to prepare North's interim financial statements on King's microcomputer when King prepared North's quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of:

Accepted Answer

A)  Statements on Standards for Accounting and Review Services. 
B)  Statements on Standards for Unaudited Financial Services. 
C)  Statements on Standards for Consulting Services. 
D)  Statements on Standards for Attestation Engagements.

Question 7

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include a(an):

Accepted Answer

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

Question 8

When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to:

Accepted Answer

A)  Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements. 
B)  Consider the adequacy of disclosure about the client's possible inability to continue as a going concern. 
C)  Report to the client's audit committee that management's accounting estimates may need to be adjusted. 
D)  Reissue the prior year's auditor's report and add an explanatory paragraph that specifically refers to "substantial doubt" and "going concern."

Question 9

Green, CPA, concludes that there is substantial doubt about JKL Co.'s ability to continue as a going concern. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report should:

Accepted Answer

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

Question 10

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Accepted Answer

A)  Fictitious transactions may be recorded that cause an understatement of revenues and overstatement of receivables. 
B)  Claims received from customers for goods returned may be intentionally recorded in other customers' accounts. 
C)  Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. 
D)  The failure to prepare shipping documents may cause an overstatement of inventory balances.

Question 11

An auditor who wishes to capture an entity's data as transactions are processed and continuously test the entity's computerized information system most likely would use which of the following techniques?

Accepted Answer

A)  Snapshot application. 
B)  Embedded audit module. 
C)  Integrated data check. 
D)  Test data generator.

Question 12

An accountant who reviews the financial statements of a nonissuer should issue a report stating that a review:

Accepted Answer

A)  Is substantially less in scope than an audit. 
B)  Provides negative assurance that the internal control structure is functioning as designed. 
C)  Provides only limited assurance that the financial statements are fairly presented. 
D)  Is substantially more in scope than a compilation.

Question 13

Baker, CPA, was engaged to review the financial statements of Hall Company, a nonissuer. Evidence came to Baker's attention that indicated substantial doubt as to Hall's ability to continue as a going concern. The principal conditions and events that caused the substantial doubt have been fully disclosed in the notes to Hall's financial statements. Which of the following statements best describes Baker's reporting responsibility concerning this matter?

Accepted Answer

A)  Baker is not required to modify the accountant's review report. 
B)  Baker is not permitted to modify the accountant's review report. 
C)  Baker should issue an accountant's compilation report instead of a review report. 
D)  Baker should express a qualified opinion in the accountant's review report.

Question 14

An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the:

Accepted Answer

A)  Safeguards used to limit access to computer facilities. 
B)  Process used to prepare significant accounting estimates. 
C)  Procedures used to assure proper authorization of transactions. 
D)  Policies used to detect the concealment of irregularities.

Question 15

An auditor may report on condensed financial statements that are derived from complete financial statements if the:

Accepted Answer

A)  Condensed financial statements are distributed to stockholders along with the complete financial statements. 
B)  Auditor describes the additional procedures performed on the condensed financial statements. 
C)  Auditor indicates whether the information in the condensed financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived. 
D)  Condensed financial statements are presented in comparative form with the prior year's condensed financial statements.

Question 16

An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

Accepted Answer

A)  To enable the auditor to accurately identify significant deficiencies in internal control. 
B)  To assist the auditor in accurately interpreting information obtained during an audit. 
C)  To allow the auditor to more accurately perform tests of controls. 
D)  To decide whether it will be necessary to perform analytical procedures.

Question 17

In establishing the existence and ownership of a long-term investment in the form of publicly-traded stock, an auditor should inspect the securities or:

Accepted Answer

A)  Correspond with the investee company to verify the number of shares owned. 
B)  Inspect the audited financial statements of the investee company. 
C)  Confirm the number of shares owned that are held by an independent custodian. 
D)  Determine that the investment is carried at the lower of cost or market.

Question 18

An accountant has been asked to issue a review report on the balance sheet of a nonissuer but not to report on the other basic financial statements. The accountant may not do so:

Accepted Answer

A)  Because compliance with this request would result in a violation of the ethical standards of the profession. 
B)  Because compliance with this request would result in an incomplete review. 
C)  If the review of the balance sheet discloses material departures from GAAP. 
D)  If the scope of the inquiry and analytical procedures has been restricted.

Question 19

Compiled financial statements should be accompanied by a report stating that:

Accepted Answer

A)  A compilation is substantially less in scope than a review or an audit in accordance with generally accepted auditing standards. 
B)  The accountant does not express an opinion but expresses only limited assurance on the compiled financial statements. 
C)  A compilation is limited to presenting in the form of financial statements information that is the representation of management. 
D)  The accountant has compiled the financial statements in accordance with standards established by the Auditing Standards Board.

Question 20

An independent accountant's report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the:

Accepted Answer

A)  Accountant's review report is not a part of the registration statement within the meaning of the Securities Act of 1933. 
B)  Accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report. 
C)  Accountant's review was performed in accordance with standards established by the Securities and Exchange Commission. 
D)  Accountant obtained corroborating evidence to determine whether material modifications are needed for such information to conform with GAAP.

Exam 1: CPA Auditing and Attestation Exam

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

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement due to fraud?

Which of the following statements about internal control is correct?

In an audit of financial statements, an auditor's primary consideration regarding internal control is whether the control:

Would the following factors ordinarily be considered in planning an audit engagement's personnel requirements?

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include a(an) :

When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to:

Green, CPA, concludes that there is substantial doubt about JKL Co.'s ability to continue as a going concern. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report should:

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

An auditor who wishes to capture an entity's data as transactions are processed and continuously test the entity's computerized information system most likely would use which of the following techniques?

An accountant who reviews the financial statements of a nonissuer should issue a report stating that a review:

An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the:

An auditor may report on condensed financial statements that are derived from complete financial statements if the:

An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

In establishing the existence and ownership of a long-term investment in the form of publicly-traded stock, an auditor should inspect the securities or:

An accountant has been asked to issue a review report on the balance sheet of a nonissuer but not to report on the other basic financial statements. The accountant may not do so:

Compiled financial statements should be accompanied by a report stating that:

An independent accountant's report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the: