AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 791:

  The auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book), is required to include:

  I. The scope of the auditor's testing of internal controls.

  II.

  Uncorrected misstatements that were determined by management to be immaterial.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: A

  Explanation: Choice "a" is correct. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book). Choices "b" and "c" are incorrect. Immaterial uncorrected misstatements are not included in the auditor's report on internal controls and compliance with laws and regulations. Choice "d" is incorrect. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book).

• Question 792:

  Gail is auditing the financial statements of ABC, a publicly held company. Gail notes several deficiencies in internal control, and is trying to determine whether each deficiency constitutes a significant deficiency or a material weakness. Which best describes the framework Gail should use in making this evaluation?

  A. A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement.

  B. A significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is more than a remote chance of a material misstatement.

  C. A significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is a reasonable possibility of material misstatement.

  D. A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is more than a remote chance of a material misstatement.

  Correct Answer: A

  Explanation: Choice "a" is correct. For issuers, a significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement. Choice "b" is incorrect. For nonissuers, a significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is more than a remote chance of a material misstatement. However, ABC is an issuer, so different rules apply. Choice "c" is incorrect. For issuers, a significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting.

  Choice "d" is incorrect. For issuers, a material weakness exists when there is a reasonable possibility of material misstatement.

• Question 793:

  In which case might an auditor of an issuer render a qualified opinion on internal control?

  A. When there is a scope limitation.

  B. When there is a material weakness in internal control.

  C. Both "a" and "b".

  D. Neither "a" nor "b".

  Correct Answer: D

  Explanation:

  Choice "d" is correct. A scope limitation requires the auditor to disclaim an opinion or withdraw from the

  engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion.

  Neither situation would result in a qualified opinion.

  Choice "a" is incorrect. A scope limitation requires the auditor to disclaim an opinion or withdraw from the

  engagement.

  Choice "b" is incorrect. A material weakness in internal control requires the auditor to issue an adverse

  opinion.

  Choice "c" is incorrect. A scope limitation requires the auditor to disclaim an opinion or withdraw from the

  engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion.

  Neither situation would result in a qualified opinion.

• Question 794:

  For a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:

  A. Only if the deficiency has a material effect on the auditor's assessment of control risk.

  B. Unless the entity accepts that degree of risk because of cost-benefit considerations.

  C. Only if the deficiency is considered a material weakness.

  D. In writing, during the current audit.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. A previously communicated significant deficiency that has not been corrected

  ordinarily should be communicated again in writing, during the current audit.

  Choices "a" and "c" are incorrect. The auditor is required to communicate significant deficiencies each

  year, regardless of whether the deficiency has a material effect on the auditor's assessment of control risk

  or the deficiency is considered a material weakness.

  Choice "b" is incorrect. The auditor is required to communicate significant deficiencies each year, even if

  the entity accepts that degree of risk because of cost-benefit considerations.

• Question 795:

  Which of the following best describes an auditor's responsibility with respect to communicating internal control deficiencies of issuers?

  A. The auditor is required to communicate all deficiencies in internal control to management, deficiencies that constitute a significant deficiency to the audit committee, and deficiencies that constitute a material weakness to the full board of directors.

  B. The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee.

  C. The auditor is not required to communicate control deficiencies to management or the audit committee unless they constitute a significant deficiency or a material weakness.

  D. The auditor is not required to communicate control deficiencies or significant deficiencies to management or the audit committee, but must communicate material weaknesses to both management and the audit committee.

  Correct Answer: B

  Explanation: Choice "b" is correct. The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee. Choice "a" is incorrect. There is no requirement that material weaknesses be communicated to the full

  board of directors.

  Choice "c" is incorrect. The auditor is required to communicate all deficiencies in internal control to

  management.

  Choice "d" is incorrect. The auditor is also required to communicate significant deficiencies to management

  and the audit committee.

• Question 796:

  Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an attest engagement to examine the effectiveness of a nonissuer's internal control?

  A. The auditor must communicate both significant deficiencies and material weaknesses.

  B. The auditor must communicate material weaknesses, but need not disclose significant deficiencies.

  C. The auditor must communicate significant deficiencies, but need not separately identify material weaknesses.

  D. Neither significant deficiencies nor material weaknesses are required to be communicated.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. In an attest engagement to examine the effectiveness of an entity's internal control,

  the auditor must communicate both significant deficiencies and material weaknesses to management and

  those charged with governance.

  Choice "b" is incorrect. The auditor is required to communicate significant deficiencies.

  Choices "c" and "d" are incorrect. Both significant deficiencies and material weaknesses are required to be

  communicated to management and those charged with governance.

• Question 797:

  Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?

  A. The auditor should design and apply tests of controls to discover significant deficiencies in internal control that could result in material misstatements.

  B. The auditor need not search for significant deficiencies in internal control unless management requests an attestation that "no significant deficiencies in internal control were noted in the audit."

  C. The auditor should search for significant deficiencies in internal control if the auditor expects that controls are operating effectively (i.e., if the auditor plans to rely on controls).

  D. The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.

  Correct Answer: D

  Explanation: Choice "d" is correct. The auditor need not search for significant deficiencies in internal control, but should document and communicate any such deficiencies that are discovered. Choice "a" is incorrect. Tests of controls are designed and applied to evaluate the risk of financial statement misstatement, and to determine the nature, timing, and extent of substantive tests to be performed. They are not designed to discover significant deficiencies in internal control. Choice "b" is incorrect. Searching for significant deficiencies in internal control is not part of an audit, and it would be inappropriate for the auditor to state that no significant deficiencies in internal control were noted (even if management requested such a statement). Choice "c" is incorrect. Searching for significant deficiencies in internal control is not part of an audit even if the auditor expects that controls are operating effectively (i.e., expects to rely on controls).

• Question 798:

  Which of the following best describes the responsibility of the auditor with respect to significant deficiencies and material weaknesses in an audit of an issuer?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: B

  Explanation: Choice "b" is correct. In an audit of an issuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and the audit committee, but only material weaknesses result in an adverse opinion on the effectiveness of internal control. Choice "a" is incorrect. In an audit of an issuer, significant deficiencies (that do not rise to the level of being material weaknesses) do not result in an adverse opinion on the effectiveness of internal control. Choice "c" is incorrect. In an audit of an issuer, both significant deficiencies and material weaknesses must be communicated, in writing, to management and the audit committee. In addition, significant deficiencies (that do not rise to the level of being material weaknesses) do not result in an adverse opinion on the effectiveness of internal control. Choice "d" is incorrect. In an audit of an issuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and the audit committee.

• Question 799:

  In an audit of an issuer:

  I. Management must assess and report on internal control.

  II.

  The auditor must assess and report on internal control.

  A.

  I only.

  B.

  II only.

  C.

  Either I or II.

  D.

  Both I and II.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. It is management's responsibility to assess and report on internal control, but the

  auditor is also required to assess and report on internal control.

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

• Question 800:

  In an audit of an issuer, the auditor must provide an opinion on which of the following?

  I. The financial statements.

  II. The audit committee's oversight of financial reporting and internal control.

  III.

  The effectiveness of internal control.

  A.

  I and III only.

  B.

  I, II, and III.

  C.

  I and II only.

  D.

  I only.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The auditor provides an opinion on the entity's financial statements and on the

  effectiveness of internal control. The auditor is not required to provide an opinion on the audit committee's

  oversight (but is required to report to the board when such oversight is ineffective).

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