AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 761:

  With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's management and those charged with governance because they represent:

  A. Manipulation or falsification of accounting records or documents from which financial statements are prepared.

  B. Disclosures of information that significantly contradict the auditor's going concern assumption.

  C. Material irregularities or illegal acts perpetrated by high-level management.

  D. Deficiencies in the design or operation of internal control that could reasonably be expected to cause a non-inconsequential misstatement in the financial statements.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Significant deficiencies in the design or operation of internal control should be

  communicated to management and those charged with governance because there is more than a remote

  likelihood that they will result in a financial statement misstatement that is more than inconsequential.

  Choice "a" is incorrect. Manipulation or falsification of accounting records may not represent an internal

  control deficiency (e.g., if such fraud occurs through collusion).

  Choice "b" is incorrect. Information indicative of a going concern problem is not an internal control

  deficiency.

  Choice "c" is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if

  such acts occur through collusion).

• Question 762:

  In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the:

  I. Likely rate of deviations.

  II.

  Allowable risk of assessing control risk too high.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Either I or II.

  Correct Answer: A

  Explanation: Choice "a" is correct. In determining the number of sample items to select in a test of controls, the auditor would also consider the likely rate of deviations. The higher the expected rate, the greater the number of items selected. Choices "b", "c", and "d" are incorrect. The process of establishing the number of sample items to select in a test of controls would include the consideration of the allowable risk of assessing control risk too low, not too high.

• Question 763:

  An auditor may decide to decrease the acceptable level of risk when:

  A. Increased reliability from the sample is desired.

  B. Many differences (audit value minus recorded value) are expected.

  C. Initial sample results do not support the planned level of control risk.

  D. The cost and effort of selecting additional sample items is low.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Decreasing the acceptable level of risk will result in a larger sample size, which the

  auditor might not want to do unless the cost and effort of selecting additional sample items is low.

  Choice "a" is incorrect. Decreasing the acceptable level of risk doesn't increase the reliability of a given

  sample. It does, however, result in selection of a larger sample, which in turn makes it less likely that the

  auditor will make an incorrect decision.

  Choice "b" is incorrect. The auditor's acceptable level of risk is not affected by the extent to which

  differences are expected.

  Choice "c" is incorrect. Control risk is not relevant in assessing the acceptable level of risk, which is a

  factor of substantive testing.

• Question 764:

  Which of the following matters most likely would be included in a management representation letter?

  A. An assessment of the risk factors concerning the misappropriation of assets.

  B. An evaluation of the litigation that has been filed against the entity.

  C. A confirmation that the entity has complied with contractual agreements.

  D. A statement that all material internal control weaknesses have been corrected.

  Correct Answer: C

  Explanation: Choice "c" is correct. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that the company has complied with all aspects of contractual agreements that may materially affect the financial statements. Choice "a" is incorrect. As part of planning the audit, the auditor must assess the risk that misappropriation of assets may occur, and may cause a material misstatement in the financial statements. While management may also assess this risk for its own purposes, the auditor would not be able to rely on management's assessment, and therefore would not typically request a representation regarding this matter. Choice "b" is incorrect. The auditor will typically request that the client's attorney evaluate pending litigation, as the attorney is more knowledgeable in such areas than is management. Choice "d" is incorrect. The management representation letter typically includes information regarding the financial statements, the completeness of information, recognition, measurement, and disclosure, and subsequent events. Representations regarding internal control are not typically included in a management representation letter.

• Question 765:

  Which of the following matters is an auditor not required to communicate to those charged with governance?

  A. Significant adjustments arising from the audit that were recorded by management.

  B. The basis for the auditor's conclusions about the reasonableness of management's sensitive accounting estimates.

  C. The level of responsibility assumed by the auditor under generally accepted auditing standards.

  D. The degree of reliance the auditor placed on the management representation letter.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The auditor is not required to communicate to those charged with governance the

  degree of reliance placed on the management representation letter.

  Choice "a" is incorrect. Unless all those charged with governance are also involved with managing the

  entity, the auditor should inform those charged with governance about adjustments arising from the audit,

  regardless of whether or not management recorded them.

  Choice "b" is incorrect. The auditor should communicate qualitative aspects of the process used by

  management in formulating sensitive accounting estimates, which would likely include discussion of the

  basis for the auditor's conclusions regarding the reasonableness of those estimates.

  Choice "c" is incorrect. The auditor should communicate the level of responsibility that he/she is assuming

  under GAAS.

• Question 766:

  Which of the following matters is an auditor required to communicate to those charged with governance?

  A. The basis for his or her assessment of control risk.

  B. The process used by management in formulating sensitive accounting estimates.

  C. The auditor's preliminary judgments about materiality levels.

  D. The justification for performing substantive procedures at interim dates.

  Correct Answer: B

  Explanation: Choice "b" is correct. The auditor should ensure that those charged with governance are informed about the process used by management in formulating particularly sensitive accounting estimates and about the basis for the auditor's conclusions regarding the reasonableness of the estimates. Choices "a", "c", and "d" are incorrect. The basis for assessing control risk, preliminary judgments about materiality levels, and the justification for performing substantive procedures at interim dates are matters of auditor judgment that need not be shared with those charged with governance.

• Question 767:

  Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

  A. This communication is required to occur before the auditor's report on the financial statements is issued.

  B. This communication should include management changes in the application of significant accounting policies.

  C. Any significant matter communicated to those charged with governance also should be communicated to management.

  D. Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The auditor should determine that those charged with governance are informed

  about the initial selection of and changes in significant accounting policies or their application.

  Choice "a" is incorrect. The communication is incidental to the audit; accordingly, it is not required to occur

  before the issuance of the auditor's report as long as the communication occurs on a timely basis.

  (Note, however, that for audits of issuers, the communication must be made before the auditor's report is

  filed with the SEC.)

  Choice "c" is incorrect. Communication with management is not required.

  Choice "d" is incorrect. Unless all those charged with governance are also involved with managing the

  entity, the auditor should inform those charged with governance about adjustments that could, either

  individually or in the aggregate, have a significant effect on the entity's financial reporting process,

  regardless of whether the adjustment was recorded.

• Question 768:

  An auditor would least likely initiate a discussion with those charged with governance concerning:

  A. The methods used to account for significant unusual transactions.

  B. The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

  C. Indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor.

  D. Disagreements with management as to accounting principles that were resolved during the current year's audit.

  Correct Answer: B

  Explanation: Choice "b" is correct. The auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. Materiality assessments are not typically discussed with those charged with governance. Choice "a" is incorrect. The auditor should communicate with those charged with governance about the appropriateness of significant accounting policies, such as the methods used to account for significant unusual transactions. Choice "c" is incorrect. The auditor should inform those charged with governance of illegal acts that come to the auditor's attention during the course of the audit. Fraud involving senior management should also be reported directly to those charged with governance. Choice "d" is incorrect. The auditor should discuss with those charged with governance any disagreements with management, whether or not they were satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity's financial statements or the auditor's report.

• Question 769:

  In identifying matters for communication with those charged with governance, an auditor most likely would ask management whether:

  A. The turnover in the accounting department was unusually high.

  B. It consulted with another CPA firm about accounting matters.

  C. There were any subsequent events of which the auditor was unaware.

  D. It agreed with the auditor's assessed level of control risk.

  Correct Answer: B

  Explanation: Choice "b" is correct. The auditor is required to communicate to those charged with governance regarding certain matters, including management consultation with other auditors. Consequently, the auditor must ask management about this matter. Choice "a" is incorrect. Unusually high turnover in the accounting department is a negative factor in assessing control risk, but it is not a matter that needs to be communicated to those charged with governance. Choice "c" is incorrect. Inquiry of management concerning any subsequent events of which the auditor is unaware is a required audit procedure, which would also be confirmed as part of the management representation letter, but it is not a matter that needs to be communicated to those charged with governance. (They should already know!) Choice "d" is incorrect. The auditor alone has responsibility for judgments regarding the assessed level of control risk, and the auditor would not generally discuss this assessment with management.

• Question 770:

  Which of the following matters would an auditor most likely communicate to those charged with governance?

  A. A list of negative trends that may lead to working capital deficiencies and adverse financial ratios.

  B. The level of responsibility assumed by management for the preparation of the financial statements.

  C. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables.

  D. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance.

  Correct Answer: D

  Explanation: Choice "d" is correct. The auditor should communicate the initial selection of, and changes in, significant accounting policies to those charged with governance. Choice "a" is incorrect. Negative trends and adverse financial ratios are evaluated by an auditor when considering an entity's ability to continue as a going concern. These trends and ratios are not required to be communicated to those charged with governance. Choice "b" is incorrect. The auditor's communications to those charged with governance include the level of responsibility that the auditor is assuming regarding matters of interest to those charged with governance, not the level of responsibility assumed by management. Choice "c" is incorrect. The auditor is required to inform the audit committee about difficulties encountered with management during the audit. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables generally would not be communicated to those charged with governance, since such difficulties are not related to management.