AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1081:

  The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:

  A. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.

  B. Procedures to be undertaken to discover litigation, claims, and assessments.

  C. Pending legal matters to be included in the inquiry of the client's attorney.

  D. Timing of inventory observation procedures to be performed.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. In order to observe the physical inventory count, the auditor would have to coordinate

  schedules with the client. This timing is usually agreed upon before implementation of the audit strategy.

  Choice "a" is incorrect. It would not be appropriate for the client to be involved in determining the amount of

  evidence necessary to provide a basis for an opinion.

  Choice "b" is incorrect. It would not be appropriate for the client to be involved in determining the

  procedures necessary to obtain evidence about litigation, claims and assessments.

  Choice "c" is incorrect. Determination of the pending legal matters to be included in a letter to the client's

  attorney would not generally be made during the planning stage of the audit.

• Question 1082:

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

  A. The auditor need not obtain an understanding of the methods and assumptions used by the specialist.

  B. The auditor may not use the work of a specialist in matters material to the fair presentation of the financial statements.

  C. The reasonableness of the specialist's assumptions and their applications are strictly the auditor's responsibility.

  D. The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.

  Correct Answer: D

  Explanation: Choice "d" is correct. The purpose of using the work of a specialist is to provide the auditor with specialized skill or knowledge the auditor may lack. The work of a specialist who has a relationship with a client may be acceptable under certain circumstances. If the specialist has a relationship with the client, the auditor should assess the risk that the specialist's objectivity might be impaired. If the auditor believes that the relationship might impair the specialist's objectivity, the auditor should perform 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 "a" is incorrect. 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 "b" is incorrect. The auditor may use, and in fact is encouraged to use, the work of a specialist in matters material to the fair presentation of the financial statements. Choice "c" is incorrect. The appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist; the auditor should, however, 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.

• Question 1083:

  The work of internal auditors may affect the independent auditor's:

  I. Procedures performed in obtaining an understanding of internal control.

  II. Procedures performed in assessing the risk of material misstatement.

  III.

  Substantive procedures performed in gathering direct evidence.

  A.

  I and II only.

  B.

  I and III only.

  C.

  II and Ill only.

  D.

  I, II, and III.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The internal auditors' work may affect the nature, timing, and extent of the audit,

  including procedures the auditor performs when obtaining an understanding of the entity's internal control,

  when assessing risk, and when performing substantive procedures.

  Choice "a" is incorrect. It is likely that many procedures performed by internal auditors will affect the

  independent auditor's substantive testing, by providing direct evidence about material misstatements in

  assertions.

  Choice "b" is incorrect. It is likely that the work of internal auditors will aid the independent auditor in

  assessing control risk, since so much of the internal auditors' function is involved with monitoring the

  control structure.

  Choice "c" is incorrect. It is very likely that the work of internal auditors will affect the independent auditor's

  procedures for obtaining an understanding of internal control, because monitoring the control system is the

  primary responsibility of the internal auditors. Their flowcharts, narratives, and analyses of controls could

  be helpful to the independent auditor.

• Question 1084:

  Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted?

  A. The entity has no formal written code of conduct.

  B. The integrity of the entity's management is suspect.

  C. Procedures requiring segregation of duties are subject to management override.

  D. Management fails to modify prescribed controls for changes in conditions.

  Correct Answer: B

  Explanation: Choice "b" is correct. Serious concerns about the integrity of management may indicate a risk of management misrepresentation in the financial statements that is so great that an audit cannot be conducted. If the integrity of management is suspect, there would be a presumption of dishonesty. The auditor would then need to question the genuineness of all records and documents obtained from the client and would require conclusive rather than persuasive evidence to corroborate all management representations. An audit conducted on these terms would be unreasonably costly and impractical. Choice "a" is incorrect. A formal written code of conduct is generally considered a positive control, but the lack of one would not preclude an audit from being conducted. Choice "c" is incorrect. Management override of internal controls (such as segregation of duties) is an inherent limitation of any internal control and would not prevent an audit from being performed. Choice "d" is incorrect. A failure by management to modify prescribed controls for changes in conditions may increase control risk, but since the auditor can generally compensate for weak internal controls with increased substantive testing, this would not preclude an audit.

• Question 1085:

  In assessing the objectivity of internal auditors, an independent auditor should:

  A. Evaluate the quality control program in effect for the internal auditors.

  B. Examine documentary evidence of the work performed by the internal auditors.

  C. Test a sample of the transactions and balances that the internal auditors examined.

  D. Determine the organizational level to which the internal auditors report.

  Correct Answer: D

  Explanation: Choice "d" is correct. When assessing the internal auditors' objectivity, the auditor should obtain information about whether the internal auditor reports to an officer of sufficient status to ensure broad audit coverage and adequate consideration of, and action on, the findings and recommendations of the internal auditors. Choice "a" is incorrect. A quality control program would impact the competence of the internal audit staff, not their objectivity. Choice "b" is incorrect. Examining documentary evidence produced by the internal auditors would help the auditor evaluate the quality and effectiveness of the internal auditors' work, but would not help assess objectivity. Choice "c" is incorrect. Testing a sample of transactions and balances examined by the internal auditors would help the auditor evaluate the quality and effectiveness of the internal auditors' work, but would not help assess objectivity.

• Question 1086:

  Before accepting an engagement to audit a new client, a CPA is required to obtain:

  A. An understanding of the prospective client's industry and business.

  B. The prospective client's signature to the representation letter.

  C. A preliminary understanding of the prospective client's control environment.

  D. The prospective client's consent to make inquiries of the predecessor auditor, if any.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Inquiry of the predecessor auditor is a required pre-acceptance procedure.

  However, consent of the prospective client must be obtained before a CPA can make such inquiries of the

  predecessor auditor.

  Choice "a" is incorrect. Obtaining an understanding of the client's industry and business is a planning

  procedure performed after an engagement is accepted.

  Choice "b" is incorrect. A management representation letter is not obtained until the end of the audit.

  Choice "c" is incorrect. Obtaining a preliminary understanding of the client's control environment is an audit

  procedure (required by the second standard of fieldwork) that would be performed after an engagement is

  accepted.

• Question 1087:

  Which of the following matters generally is included in an auditor's engagement letter?

  A. Management's responsibility for the entity's compliance with laws and regulations.

  B. The factors to be considered in setting preliminary judgments about materiality.

  C. Management's vicarious liability for illegal acts committed by its employees.

  D. The auditor's responsibility to search for significant internal control deficiencies.

  Correct Answer: A

  Explanation: Choice "a" is correct. An understanding with the client should be established regarding management's responsibilities, which include identifying and ensuring that the entity complies with applicable laws and regulations. The understanding should be documented through a written communication, such as an engagement letter. Choice "b" is incorrect. Judgments about materiality are the auditor's responsibility and would not be included in an engagement letter. Choice "c" is incorrect. Management would not necessarily be responsible for illegal acts committed by employees. Choice "d" is incorrect. The auditor is not responsible for searching for significant internal control deficiencies.

• Question 1088:

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

  A. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques.

  B. Management's disregard of its responsibility to maintain an adequate internal control environment.

  C. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions.

  D. Management's refusal to permit the CPA to perform substantive tests before the year-end.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The control environment is the foundation for all other components of internal control.

  Management's disregard of its responsibility to maintain an adequate internal control environment

  therefore compromises its ability to provide reasonable assurance regarding reliable financial reporting.

  The auditor may conclude that the risk of misrepresentation in the financial statements is great enough that

  an audit should not be conducted.

  Choice "a" is incorrect. The CPA does not need to understand the internal auditor's techniques in order to

  accept a new audit engagement.

  Choice "c" is incorrect. Related party transactions (by definition) are not considered to be arm's-length

  transactions, and evaluation of such transactions does not affect the CPA's decision regarding acceptance

  of new clients.

  Choice "d" is incorrect. Substantive tests are generally performed after year-end, since prior to that time

  the financial statements have not been finalized.

• Question 1089:

  Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

  A. The details of most recorded transactions are not available after a specified period of time.

  B. Internal control activities requiring the segregation of duties are subject to management override.

  C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.

  D. Management has a reputation for consulting with several accounting firms about significant accounting issues.

  Correct Answer: C

  Explanation: Choice "c" is correct. A CPA cannot render an opinion on financial statements unless he or she has obtained sufficient appropriate audit evidence supporting that opinion. If such evidence were unlikely to be available, the CPA would most likely reject the potential audit engagement. Choice "a" is incorrect. The auditor takes the availability of information into account when planning the audit, and would need to perform testing throughout the period, but this would not be cause for rejecting a potential audit engagement. Choice "b" is incorrect. The risk of management override is considered during planning and would not be cause for rejecting a potential audit engagement. Choice "d" is incorrect. Management may consult with several accounting firms, and this would not be cause for rejecting a potential audit engagement.

• Question 1090:

  An accountant's standard report on a compilation of a projection should not include a statement that:

  A. There will usually be differences between the forecasted and actual results.

  B. The hypothetical assumptions used in the projection are reasonable in the circumstances.

  C. The accountant has no responsibility to update the report for future events and circumstances.

  D. The compilation of a projection is limited in scope.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. An accountant's standard report on a compilation of a projection does not include a

  statement that the hypothetical assumptions used in the projection are reasonable in the circumstances.

  Choice "a" is incorrect. An accountant's standard report on a compilation of a projection does state that there will usually be differences between the forecasted and actual results. Choice "c" is incorrect. An accountant's standard report on a compilation of a projection does state that the accountant has no responsibility to update the report for future events and circumstances. Choice "d" is incorrect. An accountant's standard report on a compilation of a projection does state that the compilation of a projection is limited in scope ("A compilation is limited to presenting in the form of a projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection.")