AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1051:

  An auditor obtains knowledge about a new client's business and its industry to:

  A. Make constructive suggestions concerning improvements to the client's internal control.

  B. Develop an attitude of professional skepticism concerning management's financial statement assertions.

  C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.

  D. Understand the events and transactions that may have an effect on the client's financial statements.

  Correct Answer: D

  Explanation: Choice "d" is correct. The auditor should obtain knowledge of the client's business and its industry in order to determine the effect of transactions, events, and practices on the client's financial statements. Choice "a" is incorrect. Constructive suggestions concerning improvements in the new client's internal control are generally made after the study and evaluation of the client's internal control, performed subsequent to planning. Knowledge about the new client's business and its industry is generally obtained during planning. Choice "b" is incorrect. The auditor should have an attitude of professional skepticism in conducting the engagement, but this attitude is not necessarily related to the auditor's knowledge of the new client's business and its industry. Choice "c" is incorrect. The auditor should evaluate whether the aggregation of known misstatements materially affects the financial statements, but this is done near the audit's conclusion. Knowledge about the new client's business and its industry is generally obtained during planning.

• Question 1052:

  The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the:

  A. Auditor's system of quality control has been maintained at a high level.

  B. Results are consistent with the conclusions to be presented in the auditor's report.

  C. Audit procedures performed are approved in the professional standards.

  D. Audit has been performed by persons having adequate technical training and proficiency as auditors.

  Correct Answer: B

  Explanation: Choice "b" is correct. Review of assistants' work is necessary to determine whether it was performed in a satisfactory manner and to determine whether the work supports the conclusions presented in the auditor's report. Choice "a" is incorrect. The responsibility of a firm to establish review procedures (a system of quality control) is distinct from the auditor's responsibility to adequately plan and supervise the work on a particular engagement. Quality control standards relate to the conduct of the firm's audit practice as a whole; GAAS relates to the conduct of individual audits. Choice "c" is incorrect. Specific audit procedures are performed based on the auditor's judgment and would not necessarily be approved in the professional standards. Choice "d" is incorrect. Review of an assistant's work would not necessarily be indicative of that assistant's technical training and proficiency. The review process is to determine whether the audit is being performed in a satisfactory manner.

• Question 1053:

  Which of the following factors most likely would cause an auditor not to accept a new audit engagement?

  A. An inadequate understanding of the entity's internal control.

  B. The close proximity to the end of the entity's fiscal year.

  C. Concluding that the entity's management probably lacks integrity.

  D. An inability to perform preliminary analytical procedures before accepting the engagement.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. A conclusion that management lacks integrity would probably cause the auditor not to

  accept a new engagement.

  Choice "a" is incorrect. Inadequate understanding of the client's internal control would not prevent the

  auditor from accepting the engagement, since that understanding could be obtained later.

  Choice "b" is incorrect. Proximity to year-end would not prevent an auditor from accepting a new audit

  engagement.

  Choice "d" is incorrect. While analytical procedures are required during planning, this generally occurs

  subsequent to accepting the engagement.

• Question 1054:

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

  A. Opinion of any subsequent events occurring since the predecessor's audit report was issued.

  B. Understanding as to the reasons for the change of auditors.

  C. Awareness of the consistency in the application of GAAP between periods.

  D. Evaluation of all matters of continuing accounting significance.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Before accepting an engagement, the auditor should make specific inquiries of the

  predecessor auditor in order to assist the auditor in deciding whether or not to accept the engagement.

  Inquiry should include the predecessor's understanding of the reasons for the change in auditors.

  Choice "a" is incorrect. The predecessor generally does not provide an opinion on events occurring

  subsequent to the issuance of the audit report.

  Choice "c" is incorrect. The successor (and not the predecessor) evaluates the consistency in the

  application of GAAP. This evaluation occurs after acceptance.

  Choice "d" is incorrect. The predecessor generally allows the successor to review audit documentation

  related to matters of continuing accounting significance, but this occurs subsequent to acceptance.

• Question 1055:

  In assessing the competence and objectivity of an entity's internal auditor, an independent auditor least likely would consider information obtained from:

  A. Discussions with management personnel.

  B. External quality reviews of the internal auditor's activities.

  C. Previous experience with the internal auditor.

  D. The results of analytical procedures.

  Correct Answer: D

  Explanation: Choice "d" is correct. Analytical procedures may be used to enhance the auditor's understanding of the client's business or to evaluate financial statement assertions, but generally would not be helpful in assessing the competence and objectivity of an entity's internal auditor. Choice "a" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from discussions with management personnel. Choice "b" is incorrect. In assessing competence and objectivity, the auditor usually considers information

  obtained from external quality reviews of internal audit activities.

  Choice "c" is incorrect. In assessing competence and objectivity, the auditor usually considers information

  obtained from previous experience with the internal audit function.

• Question 1056:

  Which of the following statements is correct about the auditor's use of the work of a specialist?

  A. The specialist should not have an understanding of the auditor's corroborative use of the specialist's findings.

  B. The auditor is required to perform substantive procedures to verify the specialist's assumptions and findings.

  C. The client should not have an understanding of the nature of the work to be performed by the specialist.

  D. The auditor should obtain an understanding of the methods and assumptions used by the specialist.

  Correct Answer: D

  Explanation: Choice "d" is correct. Although the appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist, the auditor should obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements. Choice "a" is incorrect. An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed. Choice "b" is incorrect. The auditor may consider performing substantive procedures to verify the specialist's findings if the specialist is related to the client, but is not required to do so. Choice "c" is incorrect. An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed.

• Question 1057:

  When assessing the internal auditors' competence, the independent CPA should obtain information about the:

  A. Organizational level to which the internal auditors report.

  B. Educational background and professional certification of the internal auditors.

  C. Policies prohibiting the internal auditors from auditing areas where relatives are employed.

  D. Internal auditors' access to records and information that is considered sensitive.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. When assessing the internal auditors' competence, the auditor should obtain

  information about such factors as educational level, experience, professional certification, continuing

  education, supervision, review, and evaluation of performance.

  Choice "a" is incorrect. The organizational level to which the internal auditors report is related to their

  objectivity.

  Choice "c" is incorrect. Policies prohibiting internal auditors from auditing areas where relatives are

  employed are related to objectivity.

  Choice "d" is incorrect. Access to sensitive records and information is related to the overall objectives of

  the internal audit function, not to internal auditor competence.

• Question 1058:

  Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?

  A. A written audit plan setting forth the procedures necessary to accomplish the audit's objectives.

  B. An indication that the accounting records agree or reconcile with the financial statements.

  C. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork.

  D. The basis for the auditor's decision not to perform tests of controls concurrently with obtaining an understanding of internal control.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The auditor is not required to evaluate operating effectiveness as part of obtaining an

  understanding of internal control, and therefore need not document the basis for this decision.

  Choice "a" is incorrect. The auditor is required to prepare a written audit plan.

  Choice "b" is incorrect. Audit documentation should be sufficient to show that the accounting records agree

  or reconcile with the financial statements.

  Choice "c" is incorrect. Establishing an understanding with the client is required by GAAS, and an

  engagement letter is a presumptively mandatory requirement.

• Question 1059:

  Which of the following statements is not correct about materiality?

  A. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.

  B. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

  C. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.

  D. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.

  Correct Answer: B

  Explanation: Choice "b" is correct. Materiality levels include an overall level for each statement; however, because the statements are interrelated, and for reasons of efficiency, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements. Choice "a" is incorrect. The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for the fair presentation of financial statements in conformity with GAAP, while other matters are not important. Choice "c" is incorrect. Materiality judgments are made in light of the surrounding circumstances and necessarily involve both quantitative and qualitative considerations. Choice "d" is incorrect. The auditor's consideration of materiality is influenced by his or her perception of the needs of a reasonable person relying on the financial statements.

• Question 1060:

  The existence of audit risk is recognized by the statement in the auditor's standard report that the:

  A. Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

  B. Financial statements are presented fairly, in all material respects, in conformity with GAAP.

  C. Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

  D. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The existence of audit risk is recognized by the statement in the standard report that

  the auditor obtained reasonable assurance about whether the financial statements are free of material

  misstatement. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion

  on financial statements that are materially misstated.

  Choice "a" is incorrect. This statement defines the distinction between the responsibility of the auditor and

  that of management.

  Choice "b" is incorrect. The purpose of this section is to note that fair presentation is not necessarily

  impacted by immaterial errors.

  Choice "c" is incorrect. This statement explains the nature of an audit.