AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1161:

  Which of the following procedures should an auditor generally perform regarding subsequent events?

  A. Compare the latest available interim financial statements with the financial statements being audited.

  B. Send second requests to the client's customers who failed to respond to initial accounts receivable confirmation requests.

  C. Communicate material weaknesses in the internal control structure to those charged with governance.

  D. Review the cut-off bank statements for several months after the year-end.

  Correct Answer: A

  Explanation: Choice "a" is correct. When performing procedures regarding subsequent events, the auditor generally will compare the latest available interim financial statements with the financial statements being audited to determine if any significant subsequent event occurred that would need to be reflected in the statements being audited. Choice "b" is incorrect. Sending second requests to the client's customers who failed to respond to initial A/ R confirmation requests is a substantive procedure that provides evidence about receivables existing at year end, not about subsequent events. Choice "c" is incorrect. Internal control weaknesses should be communicated to those charged with governance, but this communication provides no evidence about subsequent events. Choice "d" is incorrect. Bank cut-off statements generally are reviewed for only a week to ten days subsequent to year-end. Reviewing them for a longer period such as "several months" would provide little additional audit evidence regarding the YE FS and thus would not be a cost beneficial procedure.

• Question 1162:

  For an entity that does not receive governmental financial assistance, an auditor's standard report on financial statements generally would not refer to:

  A. Significant estimates made by management.

  B. An assessment of the entity's accounting principles.

  C. Management's responsibility for the financial statements.

  D. The entity's internal control.

  Correct Answer: D

  Explanation: Choice "d" is correct. The auditor's standard report generally does not make reference to the entity's internal control. Note that for an entity that does receive governmental financial assistance, a written report on internal control is required. Also, note that an auditor may (but is not required to) expand his or her audit report to clarify that a GAAS audit does not require the level of testing and reporting on internal control that is required for issuers. Choices "a" and "b" are incorrect. The scope paragraph states that, "an audit also includes assessing the accounting principles used and significant estimates made by management."

  Choice "c" is incorrect. The introductory paragraph states that the "financial statements are the responsibility of the company's management."

• Question 1163:

  Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

  A. Cash flows from operating activities are negative.

  B. Research and development projects are postponed.

  C. Significant related party transactions are pervasive.

  D. Stock dividends replace annual cash dividends.

  Correct Answer: A

  Explanation: Choice "a" is correct. Negative cash flows from operating activities most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Choices "b" and "d" are incorrect. Plans to reduce or delay cash expenditures are mitigating factors conserving cash (e.g., postponing RandD projects and replacing cash dividends with stock dividends). This would not ordinarily cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Choice "c" is incorrect. The existence of significant related party transactions should be disclosed but would not ordinarily cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.

• Question 1164:

  According to the profession's ethical standards, which of the following events may justify a departure from a Statement of Financial Accounting Standards?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Explanation: Choice "c" is correct. Yes - Yes. Rule 203 of the code of professional conduct of the AICPA states that if the financial statements or data contain a GAAP departure, the departure may be justified if the CPA can demonstrate that due to unusual circumstances, such as new legislation or the evolution of a new form of business transaction, the FS would otherwise be misleading. Under these circumstances, the auditor's report should describe the departure, its approximate effects, if practicable, and the reasons why compliance with the generally accepted principle would result in a misleading statement. Choices "a", "b", and "d" are incorrect, per the above explanation.

• Question 1165:

  Which of the following best describes what is meant by the term generally accepted auditing standards?

  A. Rules acknowledged by the accounting profession because of their universal application.

  B. Pronouncements issued by the Auditing Standards Board.

  C. Measures of the quality of the auditor's performance.

  D. Procedures to be used to gather evidence to support financial statements.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Generally accepted auditing standards ("GAAS") are measures of the quality of the

  auditor's performance.

  Choice "a" is incorrect. GAAS are not "rules," nor are they universally applicable. GAAS are measures of

  the quality of an auditor's performance.

  Choice "b" is incorrect. The Auditing Standards Board (ASB) issues many types of pronouncements,

  including (but not limited to) "Statements on Auditing Standards" (SASs). While SASs are considered to be

  interpretations of GAAS, not all ASB pronouncements relate to audits. Therefore, just because something

  is issued by the ASB does not make it GAAS.

  Choice "d" is incorrect. Auditing standards differ from auditing procedures in that procedures relate to acts

  to be performed, whereas standards deal with the quality of the performance of those acts.

• Question 1166:

  Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of ABC, Inc. Smith, CPA, audits one of ABC's subsidiaries. In which situation(s) should Pell make reference to Smith's audit?

  I. Pell reviews Smith's audit documentation and assumes responsibility for Smith's work, but expresses a qualified opinion on ABC's financial statements.

  II.

  Pell is unable to review Smith's audit documentation; however, Pell's inquiries indicate that Smith has an excellent reputation for professional competence and integrity.

  A.

  I only

  B.

  II only

  C.

  Both I and II

  D. Neither I nor II

  Correct Answer: B

  Explanation:

  Choice "b" is correct. II only. If Pell is unable to review Smith's audit documentation, but inquiries indicate

  that Smith has an excellent reputation for professional competence and integrity, Pell should divide

  responsibility by making reference to Smith's audit.

  Choices "a", "c", and "d" are incorrect. Since the principal auditor in situation I reviews Smith's audit

  documentation and assumes responsibility for Smith's work, no mention of Smith should be made.

• Question 1167:

  An auditor reads the letter of transmittal accompanying a county's comprehensive annual financial report and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take?

  A. Request that the client revise the letter of transmittal.

  B. Include an explanatory paragraph in the auditor's report.

  C. Consider withdrawing from the engagement.

  D. Request a client representation letter acknowledging the inconsistency.

  Correct Answer: A

  Explanation: Choice "a" is correct. When information accompanies audited financial statements in a client-prepared document, the auditor is required to read the information. If such information is materially inconsistent with the financial statements and the financial statements do not require revision, the auditor should request that the information (in this case the letter of transmittal) be revised. Choice "b" is incorrect. The auditor would only revise the report to include discussion of the material inconsistency if the client were unwilling to revise the transmittal letter appropriately. Choice "c" is incorrect. The auditor would only consider withdrawing from the engagement if the client were unwilling to revise the transmittal letter appropriately. Choice "d" is incorrect. The auditor would not request a client representation letter acknowledging the inconsistency, as correction (and not simply acknowledgment) of the error is desired.

• Question 1168:

  An auditor determines that the entity is presenting certain supplementary financial disclosures of pension information that are required by the GASB. Under these circumstances, the auditor should:

  A. Add an explanatory paragraph to the auditor's report that refers to the required supplementary information.

  B. State that the audit is not being performed in accordance with generally accepted auditing standards.

  C. Document in the working papers that the required supplementary information is presented, but should not apply any procedures to the information.

  D. Compare the required supplementary information for consistency with the audited financial statements.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The auditor should perform certain limited procedures on supplementary information

  accompanying the financial statements, including evaluating whether the information is consistent with the

  audited financial statements.

  Choice "a" is incorrect. Generally, the auditor's report on the financial statements would not include a

  reference to required supplementary information unless there were a problem with it (e.g., it was omitted,

  inappropriately prepared, or the auditor was unable to satisfactorily complete required procedures).

  Choice "b" is incorrect. An audit can and should be performed in accordance with generally accepted

  auditing standards even when required supplementary information is presented.

  Choice "c" is incorrect. The auditor should perform certain limited procedures on supplementary

  information accompanying the financial statements.

• Question 1169:

  An auditor is reporting on condensed financial statements for an annual period that are derived from the audited financial statements of a publicly-held entity. The auditor's opinion should indicate whether the information in the condensed financial statements is fairly stated in all material respects:

  A. In conformity with accounting principles generally accepted in the United States of America.

  B. In relation to the complete financial statements.

  C. In conformity with another comprehensive basis of accounting.

  D. In relation to supplementary filings under federal security statutes.

  Correct Answer: B

  Explanation: Choice "b" is correct. The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived. Choice "a" is incorrect. Condensed financial statements do not include all of the disclosures required by GAAP, and therefore would not typically be presented in conformity with GAAP. Choice "c" is incorrect. Condensed financial statements are presented in less detail than complete financial statements, but the fact pattern gives no indication that any comprehensive basis of accounting other than GAAP has been used. Choice "d" is incorrect. The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived, not in relation to supplementary filings under federal security statutes.

• Question 1170:

  In its annual report to shareholders, ABC Co. included a separate management report that contained additional information. ABC's auditor is expressing an unqualified opinion on ABC's financial statements but has not been engaged to examine and report on this additional information. What is the auditor's responsibility concerning such a report?

  A. The auditor should add an explanatory paragraph to the report on the financial statements disclaiming an opinion on the additional information.

  B. The auditor has no obligation to read the management report or to verify the accuracy or appropriateness of its contents.

  C. The auditor should request Lake to place the management report in its annual report where it will not be misinterpreted to be the auditor's assertion.

  D. The auditor should read the management report and consider whether it contains a material misstatement of fact.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The auditor should read other information accompanying the basic financial

  statements and consider whether it contains a material inconsistency or material misstatement of fact.

  Choice "a" is incorrect. The auditor generally does not add a disclaimer paragraph in this situation.

  Choice "b" is incorrect. The auditor should read other information accompanying the basic financial

  statements and consider whether it contains a material inconsistency or material misstatement of fact.

  Choice "c" is incorrect. Even if the management report were included in the annual report, the auditor still

  has the same responsibility regarding both the management report and the annual report: the auditor

  should read the information and consider whether it contains a material inconsistency or material

  misstatement of fact.