AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 801:

  Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an audit of a nonissuer?

  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 audit of a nonissuer, the auditor is required to 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.

  Choice "c" is incorrect. The auditor's report includes the definition of significant deficiencies and a list of

  such deficiencies noted, followed by the definition of material weaknesses and a list of such weaknesses

  noted.

  Choice "d" is incorrect. Both significant deficiencies and material weaknesses are required to be

  communicated to management and those charged with governance.

• Question 802:

  For a nonissuer, a control deficiency would be considered a material weakness when the likelihood and magnitude of potential financial statement misstatements are:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: A

  Explanation:

  Choice "a" is correct. A material weakness is a significant deficiency, or combination of significant

  deficiencies, that results in more than a remote likelihood that a material misstatement of the entity's

  financial statements will not be prevented or detected.

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

• Question 803:

  For a nonissuer, a control deficiency would be considered a significant deficiency when the likelihood and magnitude of potential financial statement misstatements are:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Explanation:

  Choice "c" is correct. A significant deficiency is a control deficiency, or combination of control deficiencies,

  that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data

  reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of

  the entity's financial statements that is more than inconsequential will not be prevented or detected.

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

• Question 804:

  Management of ABC Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated a material weakness previously noted in its assessment of internal control, and has hired Henna and Company, CPAs, to attest to the improvements in internal control. Which of the following is true of this engagement?

  A. It is required by PCAOB standards.

  B. It is only required if ABC Industries elects to have an audit in accordance with PCAOB standards.

  C. ABC's management must provide a written report to accompany Henna and Company's report.

  D. It is required by generally accepted auditing standards.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. ABC's management must provide a written report to accompany Henna and

  Company's report.

  Choices "a" and "d" are incorrect. An engagement to report on whether a previously reported internal

  control weakness continues to exist is a voluntary engagement, not required by professional standards.

  Choice "b" is incorrect. An engagement to report on whether a previously reported internal control

  weakness continues to exist is a voluntary engagement, not required by professional standards. In

  addition, as an issuer, ABC must have an audit in accordance with PCAOB standards.

• Question 805:

  Which of the following is true regarding significant deficiencies in internal control?

  A. Auditors must search for them.

  B. Auditors must communicate them to management and to those charged with governance.

  C. They must be included in the financial statements.

  D. They must be disclosed in footnotes.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The auditor is required to communicate to management and to those charged with

  governance (the audit committee) any significant deficiencies in internal control that the auditor observes.

  Choice "a" is incorrect. The auditor is not obligated to search specifically for significant deficiencies in

  internal control.

  Choice "c" is incorrect. Significant deficiencies in internal control are not typically included in the financial

  statements, as they relate to controls and not to the presentation and disclosure of financial information.

  Choice "d" is incorrect. Significant deficiencies in internal control are not typically included in the footnotes

  to the financial statements, as they relate to controls and not to the presentation and disclosure of financial

  information.

• Question 806:

  Hannah, CPA, has been engaged to perform financial statement audits for three different clients. The first two clients, ABC Shop and XYZ Technologies, are both nonissuers, while the third client, DEF Industries, is an issuer. Hannah is required to follow PCAOB standards in her audit of DEF Industries. She has also been asked to conduct the XYZ audit in accordance with both generally accepted auditing standards and the auditing standards of the PCAOB. Regarding the ABC engagement, Hannah has decided to follow only generally accepted auditing standards, and not the standards of the PCAOB. Which of the following best describes the scope of Hannah's work related to internal control in these three engagements?

  A. Hannah must express an opinion on the effectiveness of internal control in all three engagements.

  B. Hannah must express an opinion on the effectiveness of internal control in both the DEF and XYZ engagements, but is not required to express such an opinion in the ABC engagement.

  C. Hannah must express an opinion on the effectiveness of internal control in the DEF engagement, but is not required to express such an opinion in the XYZ and ABC engagements.

  D. Hannah is not required to express an opinion on the effectiveness of internal control in any of the three engagements, since she was hired to perform a financial statement audit and not to report on internal control.

  Correct Answer: C

  Explanation: Choice "c" is correct. Be careful. While it is true that Hannah is following PCAOB standards in both the DEF and XYZ engagements, PCAOB standards do not require expanded testing and reporting on internal control for nonissuers. Therefore, only in the DEF engagement would Hannah be required to express an opinion on the effectiveness of internal control. Choice “a” is incorrect. Hannah is not required to express an opinion on internal control in either the XYZ engagement (because PCAOB standards do not require such an opinion for financial statement audits of nonissuers) or the ABC engagement (because generally accepted auditing standards do not require such an opinion for financial statement audits). Choice “b” is incorrect. Hannah is not required to express an opinion on internal control in the XYZ engagement because PCAOB standards do not require such an opinion for financial statement audits of nonissuers. Choice “d” is incorrect. Hannah is required to express an opinion on internal control in the DEF engagement. PCAOB standards require the auditor to express such an opinion, in conjunction with financial statement audits of issuers.

• Question 807:

  Rachel, CPA, is conducting an audit of ABC company, a nonissuer. Rachel has conducted her audit in accordance with generally accepted auditing standards, and she wishes to emphasize in her report that such standards do not require the same level of testing and reporting on internal control as is required for audits of issuers under the Sarbanes-Oxley Act. Which report modification would be most appropriate in this situation?

  A. Only the scope paragraph should be modified.

  B. An explanatory paragraph should be added following the opinion paragraph.

  C. An explanatory paragraph should be added preceding the opinion paragraph, and the opinion paragraph should state, "Except for the matter discussed in the preceding paragraph..."

  D. No report modification should be made in this scenario.

  Correct Answer: A

  Explanation: Choice "a" is correct. The auditor may expand the scope paragraph to state that internal control was considered as a basis for designing appropriate audit procedures, but not for the purpose of expressing an opinion on the effectiveness of internal control. This serves to emphasize that the extended level of testing and reporting on internal control required by the Sarbanes-Oxley Act did not apply in this case. Choice "b" is incorrect. The auditor should modify the scope paragraph, not add an additional explanatory paragraph. Choice "c" is incorrect. An "except for" qualified opinion would not be appropriate in this case. Choice "d" is incorrect. Although a report modification is not required, the question states that Rachel wishes to emphasize the scope of her work on internal control. In such situations, the scope paragraph should be modified.

• Question 808:

  How do the scope, procedures, and purpose of an engagement to express a separate opinion on a nonissuer's internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: D

  Explanation:

  Choice "d" is correct. In an engagement to express a separate opinion on an entity's internal control, the

  scope is extensive, and the purpose is directed primarily toward the internal control report. In an audit, the

  scope is less extensive, and the purpose is to determine the nature, timing, and extent of auditing

  procedures. Similar procedures generally would be used in both types of engagements.

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

• Question 809:

  A letter issued on significant deficiencies relating to an entity's internal control observed during an audit of the financial statements of a nonissuer should include a:

  A. Restriction on the use of the report.

  B. Description of tests performed to search for material weaknesses.

  C. Statement of compliance with applicable laws and regulations.

  D. Paragraph describing management's evaluation of the effectiveness of internal control.

  Correct Answer: A

  Explanation: Choice "a" is correct. Any report issued on significant deficiencies noted during an audit should (1) indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control, (2) include the definition of significant deficiencies, and (3) include a restriction on the use of the report. Choice "b" is incorrect. Because the auditor does not search for material weaknesses, a description of tests performed in this regard would not be included in a written report. Choice "c" is incorrect. There is no required statement of compliance with applicable laws and regulations in a letter issued on significant deficiencies. Choice "d" is incorrect. There is no paragraph describing management's evaluation in a letter issued on significant deficiencies.

• Question 810:

  When communicating internal control related matters noted in an audit of a nonissuer, an auditor's report issued on significant deficiencies should indicate that:

  A. Errors or fraud may occur and not be detected because there are inherent limitations in any internal control.

  B. The issuance of an unqualified opinion on the financial statements may be dependent on corrective follow-up action.

  C. A material weakness exists when the deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions.

  D. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

  Correct Answer: D

  Explanation: Choice "d" is correct. Any report issued on significant deficiencies should indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control. Choice "a" is incorrect. A statement that errors or irregularities may occur and not be detected due to inherent limitations in internal control is included in the report when an auditor is engaged to express an opinion on internal control, not when the auditor is reporting as part of an audit. Choice "b" is incorrect. The issuance of an unqualified opinion on the financial statements is never dependent on corrective follow-up action. Choice "c" is incorrect. A control deficiency (and not necessarily a material weakness) exists when deficiencies are not detected within a timely period by employees in the normal course of performing their assigned functions.