Auditing Questions Aicpa 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 boardhas provided the accompanying explanations.Please note that the AICPA generally releases questions that it does NOT intend touse again. These...

Description

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 explanations. 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.

2007 AICPA Newly Released Questions – Auditing

1. CPA-05465 Which of the following categories is included in generally accepted auditing standards? a. Standards of review. b. Standards of planning. c. Standards of fieldwork. d. Standards of evidence.

ANSWER: Choice "c" is correct. Generally accepted auditing standards include three categories: general standards, standards of fieldwork, and standards of reporting. Choices "a", "b", and "d" are incorrect, based on the above explanation.

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2007 AICPA Newly Released Questions – Auditing

2. CPA-05466 A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would: a. Compare a sample of paid vendors' invoices to the receiving records at year-end. b. Plan for a large measure of tolerable misstatement in substantive tests. c. Perform tests several times during the year, rather than only at year-end. d. Increase the sample of transactions to be selected for cutoff tests.

ANSWER: Choice "c" is correct. When an entity transmits, processes, maintains, or accesses significant information electronically, some accounting data and source documents may be available only in electronic form, or only at a certain point in time. The auditor would generally perform tests of controls several times during the year to compensate for this limitation. Choice "a" is incorrect. Comparing a sample of paid vendors' invoices to receiving records provides evidence that the company received the goods for which it paid, but only if records are available in sufficient detail to make such a comparison. If detailed records are retained for only a short period of time, such comparisons would need to be performed throughout the year, not just at year-end. Choice "b" is incorrect. The auditor's judgment as to an appropriate level of tolerable misstatement is based on considerations of materiality and audit risk. Increasing this level implies that the auditor is willing to accept a larger error, which would not be an appropriate response to the limitation described. Choice "d" is incorrect. Increasing the sample size related to cutoff testing will not provide evidence about transactions occurring throughout the period under audit, since cutoff testing relates to year-end.

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2007 AICPA Newly Released Questions – Auditing

3. CPA-05467 (Adapted) After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances the auditor most likely would a. b. c. d.

Issue a disclaimer of opinion about the internal controls as part of the auditor's report. Increase the assessment of control risk and increase the extent of substantive tests. Issue a qualified opinion of this finding as part of the auditor's report. Withdraw from the audit because the internal controls are ineffective.

ANSWER: Choice "b" is correct. The auditor uses tests of controls to evaluate control risk. In situations where there are a number of significant deficiencies in the operation of the client's internal controls, the auditor would increase the assessment of control risk (and the risk of material misstatement) and revise substantive testing accordingly (for example, by increasing the extent of substantive tests). Choice "a" is incorrect. An auditor is required to communicate significant deficiencies to management and those charged with governance, and a disclaimer of opinion on the effectiveness of controls would be included in this communication. However, such disclaimer would not be part of the auditor's report on the financial statements. Choice "c" is incorrect. Since the auditor's report provides an opinion on the financial statements (and not on internal control), significant deficiencies in internal control do not result in a qualified opinion. Choice "d" is incorrect. The auditor need not withdraw from an audit simply because internal controls are ineffective, but rather would increase the assessment of control risk and revise substantive testing accordingly.

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2007 AICPA Newly Released Questions – Auditing

4. CPA-05468 Which of the following procedures would be most effective in reducing attestation risk? a. Discussion with responsible individuals. b. Examination of evidence. c. Inquiries of senior management. d. Analytical procedures.

ANSWER: Choice "b" is correct. Evidence obtained directly by the accountant (e.g., through physical examination) provides more persuasive evidence than evidence obtained through inquiry, discussion, or analytical procedures, and therefore reduces attestation risk. Choices "a", "c", and "d" are incorrect, based on the above explanation.

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2007 AICPA Newly Released Questions – Auditing

5. CPA-05469 Which of the following is an inherent limitation in internal control? a. Incompatible duties. b. Lack of segregation of duties. c. Faulty human judgment. d. Lack of an audit committee.

ANSWER: Choice "c" is correct. Inherent limitations in internal control are limitations that exist despite implementation of appropriate controls. For example, faulty human judgment may result in errors in the design or use of internal controls. Choice "a" is incorrect. Assigning incompatible duties to a particular individual indicates a missing control, rather than an inherent limitation in internal control. Choice "b" is incorrect. Lack of segregation of duties indicates a missing control, rather than an inherent limitation in internal control. Choice "d" is incorrect. Lack of an audit committee indicates a missing control, rather than an inherent limitation in internal control.

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2007 AICPA Newly Released Questions – Auditing

6. CPA-05470 Which of the following statements is correct regarding a review engagement of a nonpublic company's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)? a. An accountant must establish an understanding with the client in an engagement letter. b. An accountant must obtain an understanding of the client's internal control when performing a review. c. A review provides an accountant with a basis for expressing limited assurance on the financial statements. d. A review report contains an accountant's opinion of the financial statements taken as a whole.

ANSWER: Choice "c" is correct. A review report is issued when inquiry and analytical procedures provide a reasonable basis for the expression of limited assurance on the financial statements. Choice "a" is incorrect. While the accountant is required to establish an understanding with the client, preferably in writing, an engagement letter is not required. Choice "b" is incorrect. When performing a review under SSARS, the accountant is not required to obtain an understanding of the client's internal control. Choice "d" is incorrect. A review results in the expression of limited assurance that no material modifications are necessary for the financial statements to be in conformity with generally accepted accounting principles. The limited nature of the work performed during a review does not provide sufficient evidence for an opinion on the financial statements taken as a whole.

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2007 AICPA Newly Released Questions – Auditing

7. CPA-05471 Which of the following procedures does a CPA normally perform first in a review engagement in accordance with Statements on Standards for Accounting and Review Services (SSARS)? a. b. c. d.

Inquiry regarding the client's principles and practices and the method of applying them. Inquiry concerning the effectiveness of the client's system of internal control. Inquiry to identify transactions between related parties and management. Inquiry of the client's professional advisors, including bankers, insurance agents, and consultants.

ANSWER: Choice "a" is correct. In performing a review engagement in accordance with SSARS, the accountant should inquire of management regarding the accounting principles and practices used, and the method of applying them. Choice "b" is incorrect. When performing a review under SSARS, the accountant is not required to make inquiries concerning the client's system of internal control. Choice "c" is incorrect. The accountant may inquire about the existence of related party transactions, but would likely make a more basic inquiry, about the client's accounting principles and practices, first. Choice "d" is incorrect. In performing a review engagement in accordance with SSARS, the accountant generally directs his/her inquiries to members of management, not to external parties.

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2007 AICPA Newly Released Questions – Auditing

8. CPA-05472 (Adapted) Which of the following cash transfers results in a misstatement of cash at December 31, 20X1? Bank Transfer Schedule Transfers a. b. c. d.

Disbursement date per books per bank 12 /31/X1 01/05/X2 01/04/X2 01/11/X2 12/31/X1 01/04/X2 01/04/X2 01/05/X2

Receipt date per books per bank 12/31/X1 01/04/X2 01/04/X2 01/04/X2 12/31/X1 12/31/X1 12/31/X1 01/04/X2

ANSWER: Choice "d" is correct. Since the disbursement was not recorded until January 20X2 while the receipt was recorded in December 20X1, cash will be overstated at December 31, 20X1. Choices "a" and "c" are incorrect. Both the disbursement and the receipt are recorded in 20X1, so there will be no misstatement of cash at December 31, 20X1. Choice "b" is incorrect. Both the disbursement and the receipt are recorded in 20X2, so there will be no misstatement of cash at December 31, 20X1.

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2007 AICPA Newly Released Questions – Auditing

9. CPA-05473 Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement? a. The primary objective of a review engagement is to test the completeness of the financial statements prepared, but a compilation tests for reasonableness. b. The primary objective of a review engagement is to provide positive assurance that the financial statements are fairly presented, but a compilation provides no such assurance. c. In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance. d. In a review engagement, accountants provide reasonable or positive assurance that the financial statements are fairly presented, but a compilation provides limited assurance.

ANSWER: Choice "c" is correct. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, whereas a compilation provides no assurance. Choice "a" is incorrect. A review does not test for completeness, nor does a compilation test for reasonableness. A review provides limited assurance about the financial statements based on inquiry and analytical review procedures, while a compilation provides no assurance and includes no testing for reasonableness. Choice "b" is incorrect. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and it is based on inquiry and analytical review procedures. Positive assurance (such as an audit opinion) is only provided when more extensive procedures have been performed. Choice "d" is incorrect. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and it is based on inquiry and analytical review procedures. Positive or reasonable assurance (such as an audit opinion) is only provided when more extensive procedures have been performed. A compilation provides no assurance at all.

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2007 AICPA Newly Released Questions – Auditing

10. CPA-05474 (Adapted) Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client's management. Which of the following matters do the auditor and management agree upon at this time? a. b. c. d.

The appropriateness of the entity's plans for dealing with adverse economic conditions. The determination of the fraud risk factors that exist within the client's operations. The control weaknesses to be included in the communication with those charged with governance. The coordination of the assistance of the client's personnel in data preparation.

ANSWER: Choice "d" is correct. Prior to commencing fieldwork, an auditor would establish an understanding with the client as to the services to be performed and the overall audit strategy. This understanding may include arrangements involving the conduct of the engagement, such as timing, client assistance, and the availability of documents. Choice "a" is incorrect. The auditor does not evaluate the appropriateness of the entity's plans for dealing with adverse economic conditions prior to commencing fieldwork. The auditor might consider this as part of evaluating the client's ability to continue as a going concern, but this would not occur prior to commencing fieldwork. Choice "b" is incorrect. Determination of existing fraud risk factors is generally made during the fieldwork stage of the audit, as information and evidence is obtained. Also, fraud risk factors are assessed by the auditor, and would not necessarily be agreed upon with management. Choice "c" is incorrect. Identification and evaluation of control weaknesses generally occurs during the fieldwork stage of the audit, as information and evidence is obtained. Only those weaknesses that rise to the level of being significant deficiencies (or material weaknesses) are required to be communicated to those charged with governance.

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2007 AICPA Newly Released Questions – Auditing

11. CPA-05475 (Adapted) An auditor's engagement letter most likely would include a statement that: a. Lists potential significant deficiencies discovered during the prior year's audit. b. Explains the analytical procedures that the auditor expects to apply. c. Describes the auditor's responsibility to evaluate going concern issues. d. Limits the auditor's responsibility to detect errors and fraud.

ANSWER: Choice "d" is correct. An auditor's engagement letter typically includes discussion of limitations of the engagement, such as the fact that the auditor will obtain only reasonable assurance, and therefore a material misstatement may remain undetected. Choice "a" is incorrect. An auditor's engagement letter typically covers the objectives of the engagement, management's responsibilities, the auditor's responsibilities, limitations of the engagement, and other matters involving the conduct of the audit. Potential significant deficiencies discovered during the prior year's audit would not typically be included in the engagement letter. Choice "b" is incorrect. While the auditor's engagement letter might include a discussion of the overall audit strategy, it typically would not include specific audit procedures. Choice "c" is incorrect. While the auditor's engagement letter might include a discussion of the auditor's responsibilities, this is usually discussed in fairly general terms. An engagement letter would not describe the auditor's responsibility with respect to specific issues (such as going concern issues).

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2007 AICPA Newly Released Questions – Auditing

12. CPA-05476 Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement? a. b. c. d.

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

ANSWER: Choice "d" is correct. If a prospective client is unwilling to permit inquiry of its legal counsel, the CPA must consider the implications of this refusal. Such refusal may indicate a lack of cooperativeness on the part of management, or an attempt to be less than forthright with respect to litigation, claims, and assessments. Furthermore, a client's refusal to permit inquiry of its legal counsel ordinarily would result in a disclaimer of opinion. It would be unlikely that a CPA would accept a new engagement under these circumstances. Choice "a" is incorrect. An understanding of the client's operations and industry should be obtained during the planning stage of the audit. It does not necessarily need to be obtained before acceptance of the engagement. Choice "b" is incorrect. The fact that the entity has had recurring operating losses may increase the auditor's assessment of risk on the engagement, but it would not preclude acceptance of the engagement. Choice "c" is incorrect. Although the predecessor's audit documentation provides some audit evidence with respect to opening balances, consistency of accounting principles, and other matters of continuing significance, alternative means of obtaining such evidence generally do exist.

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2007 AICPA Newly Released Questions – Auditing

13. CPA-05477 An enterprise engaged a CPA to audit its financial statements in accordance with Government Auditing Standards (the Yellow Book) because of the provisions of government grant funding agreements. Under these circumstances, the CPA is required to report on the enterprise's internal controls either in the report on the financial statements or in: a. b. c. d.

The report on the performance audit. The notes to the financial statements. A letter to the government funding agency. A separate report.

ANSWER: Choice "d" is correct. The report on the audit of the financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and should either present the results of those tests or refer to a separate report containing that information. Choice "a" is incorrect. The CPA was engaged to audit financial statements in accordance with the Yellow Book, not to perform a performance audit. Choice "b" is incorrect. The notes to the financial statements are a management representation and would not be used by the CPA to comply with requirements to either report or opine in conformity with Yellow Book requirements. Choice "c" is incorrect. Governmental Auditing Standards require that the auditor describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting and present the results of those tests as part of their report or in a separate report, not simply in a letter to the funding agency.

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2007 AICPA Newly Released Questions – Auditing

14. CPA-05478 An auditor determines that the entity is presenting certain supplementary financial disclosures of pension information that are required by the GASB. Under these circumstances, the auditor should: a. Add an explanatory paragraph to the auditor's report that refers to the required supplementary information. b. State that the audit is not be...