AICPA CPA Review 2009 Auditing Questions with Answers PDF

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Following are multiple choice questions recently released by the AICPA. Thesequestions were released by the AICPA with letter answers only. Our editorial board hasprovided the accompanying explanation.Please note that the AICPA generally releases questions that it does NOT intend to useagain. These ...

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2009 AICPA Newly Released Questions – Auditing

Following are multiple choice questions recently released by the AICPA. These questions were released by the AICPA with letter answers only. Our editorial board has provided the accompanying explanation. Please note that the AICPA generally releases questions that it does NOT intend to use again. These questions and content may or may not be representative of questions you may see on any upcoming exams.

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2009 AICPA Newly Released Questions – Auditing

1. In obtaining written representations from management, materiality limits ordinarily would apply to representations related to: a. b. c. d.

Amounts concerning related party transactions. Irregularities involving members of management. The availability of financial records. The completeness of minutes of directors' meetings.

Solution: Choice "a" is correct. Representations may be limited to items that management and the auditor agree are material, such as amounts concerning related party transactions. Materiality considerations do not apply to items not directly related to financial statement amounts (e.g., all minutes and all financial records should be made available to the auditor). Choice "b" is incorrect. Irregularities involving management are considered significant regardless of dollar amount. Choices "c" and "d" are incorrect. Materiality considerations do not apply to items not directly related to financial statement amounts (e.g., all minutes and all financial records should be made available to the auditor).

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2009 AICPA Newly Released Questions – Auditing

2. As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate. The most likely explanation for this situation is that: a. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate. b. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate. c. The deviation rates of both the auditor's sample and the population exceed the tolerable rate. d. The deviation rates of both the auditor's sample and the population are less than the tolerable rate. Solution: Choice "b" is correct. If the deviation rate in the auditor's sample is higher than the tolerable rate, the auditor will assess control risk as unacceptably high. If it turns out that the deviation rate in the population is less than the tolerable rate, the auditor will have made an improper decision by assessing control risk higher than appropriate. Choice "a" is incorrect. If the deviation rate in the auditor's sample is less than the tolerable rate, the auditor will assess control risk as acceptably low. If it turns out that the deviation rate in the population exceeds the tolerable rate, the auditor will have made an improper decision by assessing control risk lower than appropriate. Choice "c" is incorrect. When both the deviation rate in the auditor's sample and the deviation rate in the population exceed the tolerable rate, there will be no sampling error and the auditor will assess risk properly. Choice "d" is incorrect. When both the deviation rate in the auditor's sample and the deviation rate in the population are less than the tolerable rate, there will be no sampling error and the auditor will assess risk properly.

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2009 AICPA Newly Released Questions – Auditing

3. An accountant has been engaged to compile the financial statements of a nonpublic entity. The financial statements contain many departures from GAAP because of inadequacies in the accounting records. The accountant believes that modification of the compilation report is not adequate to indicate the deficiencies. Under these circumstances, the accountant should: a. Inform management that the engagement can proceed only if distribution of the accountant's report is restricted to internal use. b. Withdraw from the engagement and provide no further service concerning these financial statements. c. Quantify the effects of the departures from GAAP and describe the departures from GAAP in a special report. d. Obtain written representations from management that the financial statements will not be used to obtain credit from financial institutions. Solution: Choice "b" is correct. If the accountant believes that modification of the compilation report would not be adequate to indicate the deficiencies in the financial statements, he or she should withdraw from the engagement and provide no further services. Choice "a" is incorrect. If the accountant believes that modification of the compilation report would not be adequate to indicate the deficiencies in the financial statements, restricting the report to internal use is not a sufficient response. The auditor should withdraw from the engagement. Choice "c" is incorrect. A compilation report cannot be "qualified," and special reports are specifically defined and are distinct from compilation reports. Choice "d" is incorrect. Obtaining written representations from management that the financial statements will not be used to obtain credit from financial institutions is important when compiling personal financial statements, but it is not an appropriate response to financial statements that contain many departures from GAAP.

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2009 AICPA Newly Released Questions – Auditing

4. Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate? a. The auditor is unable to obtain the audited financial statements of a consolidated investee. b. Management does not provide reasonable justification for a change in accounting principles. c. The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities. d. Management refuses to allow the auditor to have access to the company's canceled checks and bank statements. Solution: Choice "b" is correct. If management does not provide reasonable justification for a change in accounting principles, the auditor would issue a qualified or adverse opinion, depending on materiality. Choice "a" is incorrect. If the auditor is unable to obtain the audited financial statements of a consolidated investee, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality. Choice "c" is incorrect. If the company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality. Choice "d" is incorrect. If management refuses to allow the auditor to have access to the company's canceled checks and bank statements, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality.

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2009 AICPA Newly Released Questions – Auditing

5. According to the third standard of fieldwork, which of the following terms identifies a requirement for audit evidence? a. b. c. d.

Appropriate. Adequate. Reasonable. Disconfirming.

Solution: Choice "a" is correct. According to the third standard of fieldwork, the auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion. Choice "b" is incorrect. The third standard of fieldwork does not use the word adequate in describing the requirements for audit evidence. Choice "c" is incorrect. Although the third standard of fieldwork does use the word reasonable, this is used to describe the basis for the opinion, and not to describe a specific requirement for audit evidence. Choice "d" is incorrect. The third standard of fieldwork does not use the word disconfirming in describing the requirements for audit evidence.

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2009 AICPA Newly Released Questions – Auditing

6. When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information? a. b. c. d.

Unaudited information from internal quarterly reports. Various account assertions in the planning memorandum. Comments in the prior-year's management letter. The control risk assessment relating to specific financial assertions.

Solution: Choice "a" is correct. Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor. During the planning stage, analytical procedures generally use financial data, such as unaudited information from internal quarterly reports. Choice "b" is incorrect. Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor. Various account assertions in a planning memorandum would not necessarily be helpful in developing expectations. Choice "c" is incorrect. Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor. Comments from the prior year's management letter would not necessarily provide a basis for developing expectations. Choice "d" is incorrect. Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor. The control risk assessment would not be useful in developing expectations.

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2009 AICPA Newly Released Questions – Auditing

7. An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the: a. b. c. d.

Availability of documentary evidence that should be verified. Extent of accounting estimates used in preparing the financial statements. Precision and reliability of the data used to develop expectations. Number of transactions recorded just before and just after the year end.

Solution: Choice "c" is correct. The decision as to whether or not to use analytical procedures as substantive tests is based in part on the availability, reliability, and precision of the data used to develop expectations. Choice "a" is incorrect. Verification of documentary evidence is a test of details, not an analytical procedure. Choice "b" is incorrect. The extent of accounting estimates used in preparing the financial statements is not a factor that affects the auditor's decision with respect to the use of analytical procedures as a substantive test. If there is a plausible and predictable relationship, estimated amounts should still fall within expected ranges. Choice "d" is incorrect. Transaction volume is not a factor that affects the auditor's decision with respect to the use of analytical procedures as a substantive test.

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2009 AICPA Newly Released Questions – Auditing

8. In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following? a. The internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee. b. The risk that the internal control system will not detect a material misstatement of a financial statement assertion. c. The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion. d. The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls. Solution: Choice "d" is correct. Inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls. Choice "a" is incorrect. Evaluation of inherent risk is based on the nature of the assertion, and is unrelated to the objectivity of the internal audit department. Choice "b" is incorrect. Control risk (not inherent risk) is the risk that a material misstatement will not be detected (or prevented) on a timely basis by the entity's internal control. Choice "c" is incorrect. Detection risk (not inherent risk) is the risk that the audit procedures implemented will not detect a misstatement that exists in a relevant assertion.

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2009 AICPA Newly Released Questions – Auditing

9. Which of the following statements most likely would be included in an engagement letter from an auditor to a client? a. The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement. b. The CPA firm is responsible for ensuring that the client complies with applicable laws. c. The CPA firm will involve information technology specialists in the performance of the audit. d. The CPA firm will adjust the financial statements to correct misstatements before issuing a report. Solution: Choice "c" is correct. The auditor's understanding with the client often includes discussion of any specialists who will be involved in the engagement. Choice "a" is incorrect. An audit should be planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement. Absolute assurance is not provided. Choice "b" is incorrect. The client is responsible for ensuring compliance with applicable laws, not the auditor. Choice "d" is incorrect. The auditor may suggest correcting or adjusting entries, but it is the client who is responsible for actually making any adjustments to the financial statements.

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2009 AICPA Newly Released Questions – Auditing

10. A CPA is engaged to examine an entity's financial forecast. The CPA believes that several significant assumptions do not provide a reasonable basis for the forecast. Under these circumstances, the CPA should issue a(an): a. b. c. d.

Adverse opinion. Pro forma opinion. Qualified opinion. Unqualified opinion with an explanatory paragraph.

Solution: Choice "a" is correct. If one or more of the significant assumptions do not provide a reasonable basis for the financial statements, an adverse opinion would be issued. Choice "b" is incorrect. A pro forma financial statement is one that shows historical financial statements as they would have been if a hypothetical event had occurred. The term "pro forma opinion" is not used. Choice "c" is incorrect. A qualified opinion might be issued if AICPA presentation guidelines were not followed, but when the basis for the financial statements is not reasonable, only an adverse opinion is acceptable. Choice "d" is incorrect. If one or more of the significant assumptions do not provide a reasonable basis for the financial statements, an adverse opinion would be issued. An unqualified opinion with an explanatory paragraph would not be sufficient.

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2009 AICPA Newly Released Questions – Auditing

11. Which of the following represents an inherent limitation of internal controls? a. b. c. d.

Bank reconciliations are not performed on a timely basis. The CEO can request a check with no purchase order. Customer credit checks are not performed. Shipping documents are not matched to sales invoices.

Solution: Choice "b" is correct. An inherent limitation of internal control exists when, although good controls are instituted, management can override those controls. When the CEO requests a check with no purchase order, this is an example of management override. Choice "a" is incorrect. An inherent limitation of internal control is a limitation that prevents seemingly good controls from working. Failure to institute proper controls, such as not requiring timely bank reconciliations, is not an inherent limitation of internal control. Choice "c" is incorrect. An inherent limitation of internal control is a limitation that prevents seemingly good controls from working. Failure to institute proper controls, such as not requiring customer credit checks, is not an inherent limitation of internal control. Choice "d" is incorrect. An inherent limitation of internal control is a limitation that prevents seemingly good controls from working. Failure to institute proper controls, such as not requiring matching of shipping documents and sales invoices, is not an inherent limitation of internal control.

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2009 AICPA Newly Released Questions – Auditing

12. An auditor's tests of controls for completeness for the revenue cycle usually include determining whether: a. b. c. d.

Each receivable is collected subsequent to the year end. An invoice is prepared for each shipping document. Each invoice is supported by a customer purchase order. Each credit memo is properly approved.

Solution: Choice "b" is correct. The auditor often traces a sample of shipping documents to sales invoices to test completeness of sales. Choice "a" is incorrect. Subsequent collections are used to verify the existence and valuation of year-end receivables. Choice "c" is incorrect. Vouching sales orders to supporting documentation provides evidence of the existence of sales, not completeness. Choice "d" is incorrect. Verifying proper approval of credit memos provides evidence regarding the accuracy of receivables, not the completeness of sales.

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2009 AICPA Newly Released Questions – Auditing

13. Which of the following prospective financial statements is(are) appropriate for general use? a. b. c. d.

Financial forecast Yes Yes No No

Financial projection Yes No Yes No

Solution: Choice "b" is correct. A financial forecast is appropriate for general use, but a financial projection is not. Choice "a" is incorrect. A financial projection is not appropriate for general use. Choice "c" is incorrect. A financial forecast is appropriate for general use, but a financial projection is not. Choice "d" is incorrect. A financial forecast is appropriate for general use.

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2009 AICPA Newly Released Questions – Auditing

14. Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments? a. b. c. d.

Inspect checks included with the client's cutoff bank statement. Obtain a letter of representations from the client's underwriter of securities. Apply ratio analysis on the current-year's liability accounts. Read the file of correspondence from taxing authorities.

Solution: Choice "d" is correct. In identifying litigation, claims, and assessments, the auditor should review correspondence from taxing authorities, which may indicate an existing tax liability. Choice "a" is incorrect. Inspecting checks included with the client's cutoff bank statement is not likely to assist an auditor in indentifying litigation, claims, and assessments. Checks included with the cutoff statement would simply provide some indication of monies paid near the year-end date. Choice "b" is incorrect. The client's underwriter of securities is not likely to provide information regarding litigation, claims, and assessments. Choice "c" is incorrect. Ratio analysis of liability accounts will not provide evidence of pending or threatened litigation, claims, and assessments.

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2009 AICPA Newly Released Questions – Auditing

15. Which of the following is the primary objective of probability proportional to sample size? a. b. c. d.

To identify overstatement errors. To increase the proportion of smaller-value items in the sample. To identify items where controls were not properly applied. To identify zero and negative balances.

Solution: Choice "a" is correct. PPS sampling is a method designed to estimate overstatement errors. Zero balances, negative balances, and understated balances require special design considerations. Choice "b" is incorrect. PPS sampling emphasizes larger items, which are more likely to be selected for the sample. Choice "c" is incorrect. PPS sampling is a technique used to estimate a dollar amount of error in a population. It does not identify items whe...