AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1021:

  ABC Co. processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of ABC's internal controls placed in operation as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit. Cook's report should:

  A. Contain a disclaimer of opinion on the operating effectiveness of ABC's controls.

  B. State whether ABC's controls were suitably designed to achieve the retailer's objectives.

  C. Identify ABC's controls relevant to specific financial statement assertions.

  D. Disclose Cook's assessed level of control risk for ABC.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. There are two types of reports on the processing of transactions by service

  organizations: "reports on controls placed in operation" and "reports on controls placed in operation and

  tests of operating effectiveness." The former do not include tests of operating effectiveness and, therefore,

  are not intended to provide the user auditor with a basis for reducing the assessment of control risk.

  Accordingly, such reports should include a disclaimer of opinion regarding the operating effectiveness of

  the controls.

  Choice "b" is incorrect. The report should contain an indication that the controls were suitably designed to

  achieve specified control objectives, but it does not provide any assurance regarding the achievement of

  the user organization's (in this case, the retailer's) objectives.

  Choice "c" is incorrect. The service auditor (Cook) is not required to identify the service organization's (i.e.,

  ABC's) controls relevant to specific financial statement assertions because this is not a financial statement

  audit.

  Choice "d" is incorrect. The service auditor (Cook) is not required to disclose the assessed level of control

  risk for the service organization (ABC).

• Question 1022:

  Dunn, CPA, is auditing the financial statements of ABC Co. ABC uses Quick Service Center (QSC) to process its payroll. Price, CPA, is expressing an opinion on a description of the controls placed in operation at QSC regarding the processing of its customers' payroll transactions. Dunn expects to consider the effects of Price's report on the ABC engagement. Price's report should contain a (an):

  A. Description of the scope and nature of Price's procedures.

  B. Statement that Dunn may assess control risk based on Price's report.

  C. Assertion that Price assumes no responsibility to determine whether QSC's controls are suitably designed.

  D. Opinion on the operating effectiveness of QSC's internal controls.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Price, CPA (the "service auditor") should include in his or her report a description of

  the scope and nature of the procedures performed.

  Choices "b" and "d" are incorrect. A report on controls placed in operation does not provide an opinion on

  operating effectiveness, and therefore may not be used to assess control risk.

  Choice "c" is incorrect. A report on controls placed in operation includes a statement that, "our examination

  included procedures to obtain reasonable assurance about whether the controls were suitably designed."

• Question 1023:

  In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:

  A. Influence the design of internal control.

  B. Affect the auditor's preliminary judgment about materiality levels.

  C. Assist in evaluating the planned audit objectives.

  D. Determine the auditor's acceptable level of audit risk.

  Correct Answer: A

  Explanation: Choice "a" is correct. The auditor would consider the methods used to process accounting information in planning an audit of a new client, because such methods influence the design of internal control. The auditor is required to obtain an understanding of the design of internal control in order to plan the audit and determine the nature, timing, and extent of tests to be performed. Choice "b" is incorrect. The auditor's judgment about materiality levels is based upon the auditor's perception of the needs of a reasonable person who will rely on the financial statements, not on the methods used to process accounting information. Choice "c" is incorrect. The planned audit objectives are based upon the auditor's desire to render an opinion on the fairness of the financial statements. This end goal is not influenced by the methods used by the client to process accounting information. Choice "d" is incorrect. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated. The auditor's only acceptable level of audit risk is low, and this is not affected by the client's methods used to process accounting information.

• Question 1024:

  The monitoring component of internal control excludes:

  A. Assessing information derived from external parties.

  B. Assessing the quality of internal control performance over time.

  C. Improving controls that are not operating effectively.

  D. Eliminating controls that are not operating effectively.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Monitoring is the process of assessing the quality of internal control performance

  over time and taking necessary corrective actions. Eliminating a control that is not operating effectively

  would not be an appropriate corrective action.

  Choice "a" is incorrect. Information derived from external parties (such as customer complaints and

  regulator comments) may be useful in identifying problems with the internal control structure.

  Choices "b" and "c" are incorrect. Assessing the quality of internal control performance over time and

  improving controls that are not operating effectively are part of the monitoring process.

• Question 1025:

  An auditor should obtain knowledge of a client's information and communication system in order to understand each of the following, except:

  A. How transactions are initiated, processed, and reported.

  B. The process used to prepare financial statements.

  C. The means used by an entity to communicate financial reporting roles to its staff.

  D. The means used by an entity to ensure that management directives are carried out.

  Correct Answer: D

  Explanation: Choice "d" is correct. Control activities (not the information and communication system) are the policies and procedures that help ensure that management directives are carried out. Choices "a", "b", and "c" are incorrect. The auditor obtains an understanding of an entity's information and communication system to understand how transactions are initiated, processed, and reported, the financial reporting process, and the means used by an entity to communicate financial reporting roles and responsibilities.

• Question 1026:

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

  A. Management letter.

  B. Scope paragraph of the auditor's report.

  C. Engagement letter.

  D. Introductory paragraph of the auditor's report.

  Correct Answer: C

  Explanation: Choice "c" is correct. An engagement letter, which is a presumptively mandatory requirement, sets forth the scope and nature of an auditor's contractual obligation to a client. Choice "a" is incorrect. A management letter (also known as a letter of recommendations, or a constructive services letter) is usually delivered by the auditor at the end of the audit. It identifies areas of weakness and provides recommended solutions. Choices "b" and "d" are incorrect. The scope and introductory paragraphs of the auditor's report do provide some information regarding the work performed by the auditor, but they do not express the auditor's understanding with the client as completely as does an engagement letter.

• Question 1027:

  Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor's audit documentation relating to:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: A

  Explanation: Choice "a" is correct. Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor's audit documentation relating to matters of continuing accounting and auditing significance, including both contingencies and balance sheet accounts. Contingencies have continuing significance as they may continue to affect the current year financial statements (either by remaining as contingencies or by being resolved); balance sheet accounts from the prior year-end have continuing significance since they are the opening balances for the current year. Choices "b", "c", and "d" are incorrect, per above explanation.

• Question 1028:

  Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding:

  A. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.

  B. The predecessor's evaluation of matters of continuing accounting significance.

  C. The degree of cooperation the predecessor received concerning the inquiry of the client's lawyer.

  D. The predecessor's assessments of inherent risk and judgments about materiality.

  Correct Answer: A

  Explanation: Choice "a" is correct. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding disagreements the predecessor had with the client concerning auditing procedures and accounting principles. Choice "b" is incorrect. The successor auditor may make specific inquiries of the predecessor auditor regarding the predecessor's evaluation of matters of continuing accounting significance, but this would occur after accepting the engagement. Choice "c" is incorrect. The successor auditor may make specific inquiries of the predecessor auditor regarding the degree of cooperation the predecessor received concerning the inquiry of the client's lawyer, but this would occur after accepting the engagement. Choice "d" is incorrect. The successor auditor would generally come to his or her own conclusions regarding assessments of inherent risk and judgments about materiality without consulting the predecessor auditor.

• Question 1029:

  When assessing an internal auditor's objectivity, an independent auditor should: A. Evaluate the adequacy of the internal auditor's audit plans.

  B. Inquire about the internal auditor's educational background and professional certification.

  C. Consider the organizational level to which the internal auditor reports.

  D. Review the internal auditor's audit documentation.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. When assessing an internal auditor's objectivity, an independent auditor should

  consider the organizational level to which the internal auditor reports.

  Choice "a" is incorrect. Evaluating the adequacy of the internal auditor's audit plans would be performed

  when assessing an internal auditor's competence.

  Choice "b" is incorrect. Inquiring about the internal auditor's educational background and professional

  certification would be performed when assessing an internal auditor's competence.

  Choice "d" is incorrect. Reviewing the internal auditor's audit documentation (to determine the quality of the

  reports and recommendations) would be performed when assessing an internal auditor's competence.

• Question 1030:

  Which of the following statements best describes how a detailed audit plan of a CPA who is engaged to audit the financial statements of a large publicly held company compares with the audit client's comprehensive internal audit program?

  A. The comprehensive internal audit plan is substantially identical to the audit plan used by the CPA because both cover substantially identical areas.

  B. The comprehensive internal audit plan is less detailed and covers fewer areas than would normally be covered by the CPA.

  C. The comprehensive internal audit plan is more detailed and covers areas that would normally not be covered by the CPA.

  D. The comprehensive internal audit plan is more detailed although it covers fewer areas than would normally be covered by the CPA.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. "Internal auditors" are part of the system of internal control. Their audits would cover

  more areas in greater depth than those of the "independent auditors," whose concerns are limited to areas

  materially affecting the "financial statements taken as a whole."

  Choices "a", "b", and "d" are incorrect, as described above.