AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1031:

  Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess:

  A. Control risk at a low level.

  B. Inherent risk at a high level.

  C. The difficulty in controlling the incremental audit risk.

  D. Materiality for the accounts tested as insignificant.

  Correct Answer: C

  Explanation: Choice "c" is correct. Before performing substantive tests at an interim date, the auditor must assess the difficulty in controlling the incremental audit risk from the interim date (on which the substantive procedures are performed) to the year-end date (on which an opinion is rendered). Choice "a" is incorrect. The auditor would not have to assess control risk at a low level in order to perform substantive tests at interim. It may simply be more efficient to perform a substantive audit. As long as the balances tested at interim are reasonably predictable with respect to amount, relative significance and composition, the account may be tested at interim. Choice "b" is incorrect. Generally, inherent risk should be low in order to test substantively at interim. Choice "d" is incorrect. If the materiality level for those accounts to be tested is insignificant, then the auditor probably would not perform any substantive testing, since it is unlikely that a material error exists in an insignificant balance.

• Question 1032:

  Which of the following is not true with respect to the control activities of an entity?

  A. Control activities are the policies and procedures that help ensure that management directives are carried out.

  B. Control activities are the policies and procedures that help ensure that the financial statements are fairly presented in conformity with generally accepted accounting principles.

  C. An understanding of control activities may be obtained while the auditor is obtaining an understanding of the other components of internal control.

  D. An understanding of control activities does not require an understanding of control activities related to each account balance included in the financial statements.

  Correct Answer: B

  Explanation: Choice "b" is correct. Control activities are the policies and procedures that help ensure that management directives are carried out. These policies and procedures may relate to any of the three objectives

  (financial reporting, operations, and compliance), not strictly to the financial reporting objective.

  Choice "a" is incorrect. Control activities are defined as the policies and procedures that help ensure that

  management directives are carried out.

  Choice "c" is incorrect. As an auditor obtains an understanding about the other components of internal

  control, he or she is also likely to obtain some knowledge about control activities.

  Choice "d" is incorrect. Ordinarily, audit planning does not require an understanding of control activities

  related to each account balance, transaction class, and disclosure component.

• Question 1033:

  Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:

  A. Assess control risk at a low level for the assertions embodied in the accounts selected for interim testing.

  B. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole.

  C. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

  D. Obtain written representations from management that all financial records and related data will be made available.

  Correct Answer: C

  Explanation: Choice "c" is correct. Before performing substantive tests at an interim date, an auditor should consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable with respect to amount, relative significance and composition. Choice "a" is incorrect. It is not necessary for control risk to be assessed at a low level for the assertions relating to the accounts that will be substantively tested at an interim date. It may simply be more efficient to perform a substantive audit. As long as the balances tested at interim are reasonably predictable with respect to amount, relative significance and composition, the account may be tested at interim. Choice "b" is incorrect. Material account balances, such as accounts receivable and inventory, are commonly tested at an interim date. Choice "d" is incorrect. The written representation letter will not be obtained until after year-end.

• Question 1034:

  Which of the following statements is true regarding the risk assessment component of internal control?

  A. An auditor evaluates an entity's risk assessment because it is a component of overall audit risk in a financial statement audit.

  B. An auditor's evaluation of an entity's risk assessment may not be applicable to the audit of every entity.

  C. An auditor evaluates an entity's risk assessment to understand how management addresses risks relevant to financial reporting.

  D. An auditor need not consider an entity's risk assessment because he or she is primarily concerned with audit risk in a financial statement audit.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. The auditor needs to understand how management addresses risks relevant to

  financial reporting in order to properly plan the audit.

  Choice "a" is incorrect. An entity's risk assessment differs from an auditor's assessment of audit risk.

  The entity is concerned with managing risks that affect entity objectives (financial reporting, operations,

  and compliance) whereas the auditor is concerned with the risk that material misstatements could occur in

  the financial statements.

  Choice "b" is incorrect. The five components of internal control are applicable to the audit of every entity.

  Choice "d" is incorrect. The auditor needs to understand how management addresses risks relevant to

  financial reporting in order to properly plan the audit.

• Question 1035:

  An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the:

  A. Client receives financial assistance from a federal government agency.

  B. Audit evidence that is necessary to prove that the illegal acts were committed does not exist.

  C. Employees' actions affect the auditor's ability to rely on management's representations.

  D. Notes to the financial statements fail to disclose the employees' actions.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. When an auditor cannot rely on management's representations, he or she should

  withdraw from the engagement.

  Choice "a" is incorrect. As long as the client takes appropriate remedial action, the auditor would not need

  to withdraw from the engagement simply because the client receives federal financial assistance.

  However, the auditor would be subject to a variety of reporting requirements related to this discovery.

  Choice "b" is incorrect. If there is no evidence that an illegal act was committed, management may be

  unable to take remedial action against the related employees. As long as the illegal act is immaterial and

  the auditor is satisfied that management's response is appropriate in the circumstances, there would be no

  reason for the auditor to withdraw.

  Choice "d" is incorrect. The auditor should evaluate the adequacy of disclosure in the financial statements

  with respect to the potential effects of an illegal act. If the auditor concludes that disclosure is inadequate,

  he or she should express a qualified or adverse opinion, but would not necessarily need to withdraw from

  the engagement (unless the client refused to accept the modified report).

• Question 1036:

  Which of the following is not a control environment factor?

  A. Participation of those charged with governance.

  B. Hiring and advancement policies.

  C. Management's approach toward business risks.

  D. Proper segregation of duties.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Policies and procedures involving segregation of duties are control activities, not

  control environment factors.

  Choice "a" is incorrect. Participation of those charged with governance is a control environment factor.

  Choice "b" is incorrect. Hiring and advancement policies are part of human resource policies and practices,

  which are control environment factors.

  Choice "c" is incorrect. Management's approach toward business risks is part of its philosophy and

  operating style, which is a control environment factor.

• Question 1037:

  Which of the following information discovered during an audit most likely would raise a question concerning possible illegal acts?

  A. Related party transactions, although properly disclosed, were pervasive during the year.

  B. The entity prepared several large checks payable to cash during the year.

  C. Material internal control weaknesses previously reported to management were not corrected.

  D. The entity was a campaign contributor to several local political candidates during the year.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Information that may raise a question concerning possible illegal acts include

  unusually large payments made to:

  •

  Cash

  •

  Bearer

  •

  Purchase cashiers checks

  •

  Transfer funds to numbered accounts

  Choice "a" is incorrect. Related party transactions may provide an indication of fraud, particularly if not

  made in the ordinary course of business, but they are generally not indicative of illegal acts.

  Choice "c" is incorrect. Failure to correct material internal control weaknesses may represent a conscious

  decision by management to accept that degree of risk because of cost or other considerations.

  Choice "d" is incorrect. Contributions to local political candidates are legal and generally would not raise a

• Question 1038:

  The auditor should obtain sufficient knowledge of the client's information and communication system relevant to financial reporting to understand all of the following, except:

  A. Classes of transactions in the entity's operations that are significant to the financial statements, and how those transactions are processed, from initiation to inclusion in the financial statements.

  B. The financial reporting process, including development of significant accounting estimates and inclusion of appropriate disclosures.

  C. The means the entity uses to communicate roles, responsibilities, and significant matters relating to financial reporting.

  D. Control activities related to each account balance, transaction class, and disclosure component in the financial statements or to every assertion relevant to them.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Ordinarily, audit planning does not require an understanding of the control activities

  related to each account balance, transaction class, and disclosure component in the FS or to every

  assertion relevant to them.

  Choice "a" is incorrect. The auditor is required to understand significant classes of transactions and how

  they are processed.

  Choice "b" is incorrect. The auditor is required to understand the financial reporting process.

  Choice "c" is incorrect. The auditor is required to understand the methods used by the entity to

  communicate matters relevant to financial reporting.

• Question 1039:

  A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements in a Statement of Financial Accounting Standards. Which of the following information sources would the CPA most likely consult for this information?

  A. AICPA Accounting Trends and Techniques.

  B. FASB Technical Bulletins.

  C. AICPA Audit and Accounting Manual.

  D. FASB Statements of Financial Accounting Concepts.

  Correct Answer: A

  Explanation: Choice "a" is correct. The AICPA's Accounting Trends and Techniques is an annual survey of accounting practices followed in 600 stockholders' annual reports. Choice "b" is incorrect. FASB Technical Bulletins are considered to be a source of established accounting principles that expand upon or further clarify GAAP. They do not provide information regarding how various companies comply with GAAP. Choice "c" is incorrect. AICPA Audit and Accounting Guides are interpretive publications that provide additional guidance regarding the application of auditing standards. They do not provide information regarding how various companies comply with GAAP. Choice "d" is incorrect. FASB Statements of Financial Accounting Concepts establish the objectives and concepts for use by the FASB in developing accounting and reporting standards. They do not provide information regarding how various companies comply with GAAP.

• Question 1040:

  When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the:

  A. Level of detection risk.

  B. Extent of tests of details.

  C. Level of inherent risk.

  D. Extent of tests of controls.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. An increase in the assessed level of control risk means that the assessed risk of

  material misstatement has also increased, and this requires a corresponding decrease in detection risk to

  maintain the same (presumably low) level of overall audit risk. Increasing the extent of tests of details will

  result in a reduction in detection risk.

  Choice "a" is incorrect. Increasing detection risk would result in a corresponding increase in overall audit

  risk, which is the opposite of the desired response.

  Choice "c" is incorrect. The auditor cannot change the level of inherent risk, which is based on the nature

  of the related assertion.

  Choice "d" is incorrect. If the auditor has already determined that certain control activities are ineffective,

  increasing the extent of those tests is not likely to be helpful. The auditor needs to find a way to

  compensate for the increased level of risk in order to keep overall audit risk to a low level.