AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1061:

  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 should consider the methods the entity uses to process accounting information in planning the audit because such methods influence the design of internal control. The extent to which computer processing is used in significant accounting applications, as well as the complexity of the processing, may also influence the nature, timing, and extent of audit procedures. Choice "b" is incorrect. Materiality is a matter of professional judgment and is influenced by the auditor's perceptions of the needs of a reasonable person. It would not be affected by the methods used to process accounting information. Choice "c" is incorrect. The auditor develops specific audit objectives based on financial statement assertions. The methods used to process accounting information would not be relevant to the development of objectives. Choice "d" is incorrect. Audit risk is the risk that the auditor may unknowingly fail to modify the opinion on financial statements that are materially misstated. The acceptable level of audit risk is a matter of auditor judgment, but it would not be affected by the methods used to process accounting information.

• Question 1062:

  To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would:

  A. Perform tests of details of transactions and balances.

  B. Review prior-year audit documentation and the permanent file for the client.

  C. Read specialized industry journals.

  D. Reevaluate the client's internal control environment.

  Correct Answer: B

  Explanation: Choice "b" is correct. Knowledge of an entity's business is ordinarily obtained through experience with the entity or its industry and inquiry of personnel of the entity. Audit documentation from prior years may contain useful information about the nature of the business, its organizational structure, its operating characteristics, and transactions that may require special consideration. Choice "a" is incorrect. Tests of details of transactions and balances are not performed during the planning

  stage of an audit.

  Choice "c" is incorrect. Reading industry journals would provide information about the industry in which the

  entity operates, but reviewing prior-year audit documentation and the permanent file would provide a more

  thorough understanding of the specific client's business.

  Choice "d" is incorrect. The client's internal control is not reevaluated during the planning stage of an audit.

• Question 1063:

  The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to:

  A. Give guidance to the staff regarding both technical and personnel aspects of the audit.

  B. Discuss staff suggestions concerning the establishment and maintenance of time budgets.

  C. Establish the need for using the work of specialists and internal auditors.

  D. Provide an opportunity to document staff disagreements regarding technical issues.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Pre-audit planning meetings are typically held to plan technical and personnel

  aspects of the audit. Assistants should be informed of their responsibilities and the objectives of the

  procedures that they are to perform.

  Choice "b" is incorrect. While staff suggestions regarding time budgets may be discussed, this is not

  typically the primary reason for the meeting.

  Choice "c" is incorrect. Establishing the need for specialists and internal auditors may be discussed, but

  this is not the primary reason for the meeting.

  Choice "d" is incorrect. Disagreements about technical issues arise and are resolved after testing begins,

  not during the pre-audit conference.

• Question 1064:

  Hill, CPA, has been retained to audit the financial statements of ABC Co. ABC's predecessor auditor was

  Post, CPA, who has been notified by ABC that Post's services have been terminated.

  Under these circumstances, which party should initiate the communications between Hill and Post?

  A. Hill, the successor auditor.

  B. Post, the predecessor auditor.

  C. ABC's controller or CFO.

  D. The chairman of Monday's board of directors.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The initiative to communicate with the predecessor auditor rests with the successor

  auditor. Note, however, that the successor auditor must first receive permission from the client.

  Choice "b" is incorrect. The predecessor auditor should respond promptly and fully to reasonable inquiries.

  However, the predecessor is not responsible for initiating communications.

  Choice "c" is incorrect. The prospective client should authorize the predecessor to respond fully to the

  successor's inquiries. However, the client is not responsible for initiating communications.

  Choice "d" is incorrect. The prospective client should authorize the predecessor to respond fully to the

  successor's inquiries. However, the client is not responsible for initiating communications.

• Question 1065:

  Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?

  A. The complexity of the information system relevant to financial reporting.

  B. The existence of related party transactions.

  C. The adequacy of the accounting records.

  D. The operating effectiveness of controls.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Inadequate financial records may preclude the auditor from obtaining sufficient

  appropriate audit evidence.

  Choice "a" is incorrect. The complexity of the client's information system generally would not influence an

  auditor's determination of auditability, although it might indicate the need for an information technology

  expert.

  Choice "b" is incorrect. The existence of related party transactions generally would not influence the

  auditor's determination of auditability.

  Choice "d" is incorrect. The operating effectiveness of internal controls is determined long after the

  decision about auditability is made.

• Question 1066:

  Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?

  A. Obtaining a written representation letter from the client's management.

  B. Examining documents to detect illegal acts having a material effect on the financial statements.

  C. Considering whether the client's accounting estimates are reasonable in the circumstances.

  D. Determining the extent of involvement of the client's internal auditors.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The auditor considers several factors in planning the nature, timing and extent of

  auditing procedures. One of these factors is the extent of involvement of the client's internal auditors.

  Choice "a" is incorrect. Representation letters are obtained by the auditor at the end of the audit. The

  representation letter should not be dated earlier than the date of the auditor's report.

  Choice "b" is incorrect. The auditor does not perform tests to detect illegal acts during the planning

  process.

  Choice "c" is incorrect. The auditor does obtain and evaluate evidence to support significant accounting

  estimates, but this occurs subsequent to initial planning.

• Question 1067:

  In using the work of a specialist, an auditor of a nonissuer may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor:

  A. Becomes aware of conditions causing substantial doubt about the entity's ability to continue as a going concern.

  B. Desires to disclose the specialist's findings, which imply that a more thorough audit was performed.

  C. Is able to corroborate another specialist's earlier findings that were consistent with management's representations.

  D. Discovers significant deficiencies in the design of the entity's internal control that management does not correct.

  Correct Answer: A

  Explanation: Choice "a" is correct. The auditor may, as a result of the report or findings of the specialist, decide to add explanatory language to the auditor's standard report or depart from an unqualified opinion. Reference to and identification of the specialist may be made in the auditor's report if the auditor believes such reference will facilitate an understanding of the reason for the explanatory paragraph or the departure from the unqualified opinion.

  Choice "b" is incorrect. The auditor should not refer to the work or findings of the specialist unless the specialist's work results in a change to the auditor's report. Choice "c" is incorrect. The auditor should not refer to the work or findings of the specialist unless the specialist's work results in a change to the auditor's report. Choice "d" is incorrect. The identification of significant deficiencies in the design of the client's internal control would not result in a change to the auditor's report. The auditor should not refer to the work or findings of the specialist unless the specialist's work results in a change to the auditor's report.

• Question 1068:

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

  A. The work of a specialist who is related to the client may be acceptable under certain circumstances.

  B. If an auditor believes that the determinations made by a specialist are unreasonable, only a qualified opinion may be issued.

  C. If there is a material difference between a specialist's findings and the assertions in the financial statements, only an adverse opinion may be issued.

  D. An auditor may not use a specialist in the determination of physical characteristics relating to inventories.

  Correct Answer: A

  Explanation: Choice "a" is correct. The work of a specialist who has a relationship with a client may be acceptable under certain circumstances. If the specialist is related to the client, the auditor should consider performing additional procedures with respect to the specialist's assumptions, methods, or findings to determine that the findings are not unreasonable, or should engage another specialist for that purpose. Choice "b" is incorrect. If the auditor believes the findings are unreasonable, the auditor should apply additional procedures, which may include obtaining the opinion of another specialist. This does not imply that there is a problem with the financial statements, and therefore would not necessarily result in a qualified opinion. Choice "c" is incorrect. If there is a material difference between a specialist's findings and the assertions in the financial statements, and if the specialist's findings are deemed reasonable, either a qualified or an adverse opinion may be issued. (Note that it is also possible that the specialist's findings turn out to be erroneous, in which case an unqualified opinion might be issued.) Choice "d" is incorrect. A specialist may be used to determine the physical characteristics relating to inventory (e.g., quantity on hand or condition).

• Question 1069:

  During an audit an internal auditor may provide direct assistance to an independent CPA in:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Internal auditors may assist the auditor in obtaining an understanding of internal

  control and in performing tests of controls and substantive tests.

  Choices "a", "b", and "c" are incorrect, based on the above explanation.

• Question 1070:

  An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the:

  A. Existence of contingencies.

  B. Valuation of intangible assets.

  C. Existence of fixed asset additions.

  D. Valuation of related party transactions.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. In making judgments about the extent of the effect of the internal auditor's work on

  the auditor's procedures, the auditor considers the materiality of financial statement amounts, the risk of

  material misstatement of the assertions related to these financial statement amounts, and the degree of

  subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions. As the

  degree of subjectivity increases, the need for the auditor to perform tests of the assertions increases.

  Testing the existence of fixed asset additions involves very little subjectivity, and thus work performed by

  the internal auditor may reduce the auditor's testing in this area.

  Choice "a" is incorrect. Testing the existence of contingencies involves much subjectivity, and should,

  therefore, be performed by the auditor.

  Choice "b" is incorrect. Testing the valuation of intangible assets involves much subjectivity, and should,

  therefore, be performed by the auditor.

  Choice "d" is incorrect. Testing the valuation of related party transactions involves much subjectivity, and

  should, therefore, be performed by the auditor.