AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1071:

  In auditing the financial statements of ABC Corp., Land discovered information leading Land to believe that

  ABC's prior year's financial statements, which were audited by Tell, require substantial revisions.

  Under these circumstances, Land should:

  A. Notify ABC's audit committee and stockholders that the prior year's financial statements cannot be relied on.

  B. Request ABC to reissue the prior year's financial statements with the appropriate revisions.

  C. Notify Tell about the information and make inquiries about the integrity of ABC's management.

  D. Request ABC to arrange a meeting among the three parties to resolve the matter.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. If, during the audit, the successor auditor becomes aware of information indicating

  that the financial statements reported on by the predecessor auditor may require revision, he or she should request the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter. Choice "a" is incorrect. It is not the successor auditor's responsibility to inform readers that the financial statements, which were audited by another firm, cannot be relied upon. Choice "b" is incorrect. The prior year's financial statements should not be reissued until the two auditing firms and the client have an opportunity to discuss the matter. There is a reasonable likelihood that the successor firm is unaware of other information that supports the current condition of the prior year financial statements. Choice "c" is incorrect. The successor firm should not notify the predecessor directly but should request that the client do so.

• Question 1072:

  An auditor should design the written audit plan so that:

  A. All material transactions will be selected for substantive testing.

  B. Substantive tests prior to the balance sheet date will be minimized.

  C. The audit procedures selected will achieve specific audit objectives.

  D. Each account balance will be tested under either tests of controls or tests of transactions.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. An audit plan aids in instructing assistants in the work to be done. It should set forth

  in reasonable detail the audit procedures that the auditor believes are necessary to accomplish the

  objectives of the audit.

  Choice "a" is incorrect. Auditors make extensive use of sampling to perform audit tests. Tests of all

  material transactions would not be economically feasible.

  Choice "b" is incorrect. Assuming that incremental risk can be controlled, substantive tests can be

  performed prior to year-end.

  Choice "d" is incorrect. An account balance does not necessarily have to have tests of controls or tests of

  transactions applied to it.

• Question 1073:

  Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

  A. The anticipated sample size of the planned substantive tests.

  B. The entity's annualized interim financial statements.

  C. The results of the internal control questionnaire.

  D. The contents of the management representation letter.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The auditor's preliminary judgment about materiality is generally based on either

  annualized interim financial statements or annual financial statements from a prior period.

  Choice "a" is incorrect. The anticipated sample size for substantive tests is irrelevant in making a

  preliminary judgment about materiality.

  Choice "c" is incorrect. The results of the internal control questionnaire would be relevant for making a

  preliminary assessment of control risk; however, these results are irrelevant for determining a preliminary

  level of materiality.

  Choice "d" is incorrect. The management representation letter is obtained at the end of the audit and would

  not be available when preliminary assessments of materiality are made during planning.

• Question 1074:

  Which of the following risks may be assessed in nonquantitative terms?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Both the risk of material misstatement (including control risk and inherent risk) and

  detection risk may be assessed in quantitative terms such as percentages or in nonquantitative terms that

  range, for example, from a minimum to a maximum.

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

• Question 1075:

  Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?

  A. An illegal payment to a foreign official that was not recorded.

  B. A piece of obsolete office equipment that was not retired.

  C. A petty cash fund disbursement that was not properly authorized.

  D. An uncollectible account receivable that was not written off.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. An illegal payment of an otherwise immaterial amount could be material if there is a

  reasonable possibility that it could lead to a material contingent liability or a material loss of revenue.

  Choice "b" is incorrect. Failure to retire a piece of obsolete office equipment is not likely to have

  ramifications beyond the immaterial misstatement that would result directly from it.

  Choice "c" is incorrect. Failure to properly authorize a petty cash fund disbursement is not likely to have

  ramifications beyond the immaterial misstatement that would result directly from it.

  Choice "d" is incorrect. Failure to write off a relatively small uncollectible account receivable is not likely to

  have ramifications beyond the immaterial misstatement that would result directly from it.

• Question 1076:

  Analytical procedures used in planning an audit should focus on:

  A. Reducing the scope of tests of controls and substantive tests.

  B. Providing assurance that potential material misstatements will be identified.

  C. Enhancing the auditor's understanding of the client's business.

  D. Assessing the adequacy of the available audit evidence.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Analytical procedures used in planning the audit should focus on enhancing the

  auditor's understanding of the client's business and the transactions and events that have occurred since

  the last audit date.

  Choice "a" is incorrect. Analytical procedures used in planning do not reduce tests of controls or

  substantive tests.

  Choice "b" is incorrect. Analytical procedures used in planning are not designed to identify material

  misstatements.

  Choice "d" is incorrect. Audit evidence has not yet been gathered during the planning process, so its

  adequacy cannot be assessed.

• Question 1077:

  The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants:

  A. That fraud is not to be reported to those charged with governance.

  B. How the results of various auditing procedures performed by the assistants should be evaluated.

  C. What benefits may be attained by the assistants' adherence to established time budgets.

  D. Why certain documents are being transferred from the current file to the permanent file.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Assistants should be informed of their responsibilities and the objectives of the

  procedures that they are to perform. Part of the assistant's responsibility is to properly evaluate audit

  results, and the in-charge auditor would likely discuss this with them.

  Choice "a" is incorrect. Fraud that causes a material misstatement or involves senior management should

  be reported to those charged with governance.

  Choice "c" is incorrect. Preparation and maintenance of the time budget is related to planning rather than

  supervision.

  Choice "d" is incorrect. The reasons for transferring documents from the permanent file to the current file

  need not be explained to the staff assistants.

• Question 1078:

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

  A. Inquiring of the client's legal counsel concerning pending litigation.

  B. Comparing the financial statements to anticipated results.

  C. Examining computer generated exception reports to verify the effectiveness of internal controls.

  D. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. A requirement during planning is to perform analytical procedures, which involve

  comparisons of recorded amounts to expectations.

  Choice "a" is incorrect. Inquiry of the client's legal counsel is typically performed near the end of fieldwork.

  Choice "c" is incorrect. Tests of controls are performed after audit planning is complete.

  Choice "d" is incorrect. The search for unrecorded liabilities is generally performed at or after year-end.

• Question 1079:

  Which of the following statements would least likely appear in an auditor's engagement letter?

  A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses.

  B. During the course of our audit we may observe opportunities for economy in, or improved controls over, your operations.

  C. Our engagement is subject to the risk that material errors or fraud, including defalcations, if they exist, will not be detected.

  D. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The auditor does not consult with the client about audit procedures that will be

  performed.

  Choice "a" is incorrect. Since the engagement letter serves as a contract between the auditor and client,

  fee arrangements are typically disclosed in the letter.

  Choice "b" is incorrect. A discussion regarding possible auditor suggestions is appropriate for inclusion in

  an engagement letter.

  Choice "c" is incorrect. The fact that audit risk exists and that an audit only provides reasonable assurance

  of the detection of errors and fraud is typically disclosed in an engagement letter.

• Question 1080:

  A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:

  A. Specialized accounting principles of the client's industry.

  B. The competency of the client's internal audit staff.

  C. The uncertainty inherent in applying sampling procedures.

  D. Disagreements with management as to auditing procedures.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Inquiries should include specific questions regarding, among other things, facts that

  might bear on the integrity of management; disagreements with management as to accounting principles,

  auditing procedures, or other similarly significant matters; communications with those charged with

  governance regarding fraud, illegal acts, and matters relating to internal control; and the predecessor's

  understanding as to the reasons for the change of auditors.

  Choice "a" is incorrect. Specialized industry accounting principles might be discussed; however, the

  successor would be more likely to inquire about items specific to the client.

  Choice "b" is incorrect. The competency of the client's internal audit staff might be discussed; however,

  inquiries of the predecessor auditor regarding the staff are not required.

  Choice "c" is incorrect. The uncertainty in applying sampling procedures is not something that is typically

  discussed with the predecessor auditor.