AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 811:

  Which of the following best describes a CPA's engagement to report on a nonissuer's internal control over financial reporting?

  A. An attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control.

  B. An audit engagement to render an opinion on the entity's internal control.

  C. A prospective engagement to project, for a period of time not to exceed one year, and report on the expected benefits of the entity's internal control.

  D. A consulting engagement to provide constructive advice to the entity on its internal control.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. An engagement to report on an entity's internal control is best described as an

  attestation engagement to examine and report on management's written assertions about the effectiveness

  of its internal control.

  Choice "b" is incorrect. An audit involves expressing (or disclaiming) an opinion on historical financial

  statements. An engagement to report on internal control is an attestation engagement and not an audit.

  Thus, the engagement is covered under the attestation standards rather than GAAS.

  Choice "c" is incorrect. A prospective engagement is not appropriate for a report on internal control. In fact,

  the CPA's report includes an "inherent limitations" paragraph stating that projections of the internal control

  evaluation to the future are risky, since conditions or the degree of compliance may change.

  Choice "d" is incorrect. In a consulting engagement, the practitioner develops findings, conclusions, and

  recommendations, but does not report on an assertion that is the responsibility of another party. When a

  CPA reports on an entity's internal control, he or she is in effect reporting on management's assertion.

• Question 812:

  Snow, CPA, was engaged by ABC Co., a nonissuer, to examine and report on management's written assertion about the effectiveness of ABC's internal control over financial reporting. Snow's report should state that:

  A. Because of inherent limitations of any internal control, errors or fraud may occur and not be detected.

  B. Management's assertion is based on criteria established by the American Institute of Certified Public Accountants.

  C. The results of Snow's tests will form the basis for Snow's opinion on the fairness of ABC's financial statements in conformity with GAAP.

  D. The purpose of the engagement is to enable Snow to plan an audit and determine the nature, timing, and extent of tests to be performed.

  Correct Answer: A

  Explanation: Choice "a" is correct. The practitioner's report should include a paragraph stating that because of the inherent limitations of any internal control, errors and fraud may occur and not be detected. Choice "b" is incorrect. The examination is performed in accordance with standards established by the AICPA, but management's assertion may be based on criteria established by some other recognized body. Choice "c" is incorrect. An examination (an attestation engagement) of management's assertion on the effectiveness of an entity's internal control over financial reporting does not provide a sufficient basis for an opinion on the fairness of the financial statements. Choice "d" is incorrect. An examination of management's assertion on the effectiveness of an entity's internal control over financial reporting is performed solely to report on that assertion, and not to plan an audit.

• Question 813:

  Which of the following statements is correct concerning an auditor's required communication of significant deficiencies in internal control noted during an audit of a nonissuer?

  A. A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation.

  B. An auditor should perform tests of controls on significant deficiencies before communicating them to the client.

  C. An auditor's report on significant deficiencies should include a restriction on the distribution of the report.

  D. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.

  Correct Answer: C

  Explanation: Choice "c" is correct. The report should state that the communication is intended solely for the use of management, those charged with governance, and others within the organization. Choice "a" is incorrect. Significant deficiencies may represent a conscious decision by management to accept that degree of risk because of cost or other considerations. The auditor may elect to use a primarily substantive approach to test balances, so internal control deficiencies do not necessarily constitute a scope limitation. Choice "b" is incorrect. No requirement to perform tests of controls exists. Significant deficiencies may be identified through the consideration of internal control, the application of audit procedures to balances or transactions, or otherwise during the course of the audit. Choice "d" is incorrect. Significant deficiencies may be communicated during or after the audit.

• Question 814:

  Which of the following conditions is necessary for a practitioner to accept an attest engagement to examine and report on a nonissuer's internal control over financial reporting?

  A. The practitioner anticipates relying on the entity's internal control in a financial statement audit.

  B. Management presents its written assertion about the effectiveness of internal control.

  C. The practitioner is a continuing auditor who previously has audited the entity's financial statements.

  D. Management agrees not to present the practitioner's report in a general-use document to stockholders.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. In order for a practitioner to examine and report on management's assertion about

  the effectiveness of an entity's internal control, management must present its written assertion about the

  effectiveness of internal control.

  Choice "a" is incorrect. The examination may be made separately from or in conjunction with an audit, and

  there is no requirement that the practitioner rely on internal control.

  Choice "c" is incorrect. No requirement for previous engagement experience exists in order to report on a

  client's internal control.

  Choice "d" is incorrect. The practitioner's report is considered appropriate for general distribution.

• Question 815:

  When management's assertion about the effectiveness of a nonissuer's internal control is presented in a representation letter that will not accompany the CPA's report:

  A. Use of the report is restricted to management and the board of directors.

  B. The report should contain a statement of management's assertion.

  C. The CPA should not accept the engagement.

  D. The report should include a negative assurance with respect to the effectiveness of the entity's internal control.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. When management's assertion does not accompany the CPA's report, the first

  paragraph of the report should contain a statement of management's assertion.

  Choice "a" is incorrect. There is no requirement to limit the use of the report, but the report must include a

  statement of management's assertion.

  Choice "c" is incorrect. The CPA may accept such an engagement but is required to include

  management's assertion in the report.

  Choice "d" is incorrect. Negative assurance is prohibited with respect to a report on the effectiveness of an

  entity's internal control.

• Question 816:

  A report on a nonissuer's internal control should include a statement limiting the use of the report when:

  A. Management's assertion is presented in a separate report that will accompany the CPA's report.

  B. Management's assertion is presented as a representation letter to the CPA.

  C. Management's assertion is presented based upon criteria that are available to specific parties.

  D. Management's assertion is not presented.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. When management's assertion is presented based on criteria that are only

  appropriate for or available to specific parties, the report should contain a statement limiting its use.

  Examples include reports based on criteria specified by a regulatory agency and reports based on criteria

  agreed to by management and some other specified party.

  Choice "a" is incorrect. There is no requirement to limit the use of the report when management's assertion

  accompanies the CPA's report.

  Choice "b" is incorrect. When management's assertion is presented as a representation letter to the CPA,

  the report should include a statement of management's assertion, but there is no requirement to limit the

  use of the report.

  Choice "d" is incorrect. Management is required to present its written assertion about the effectiveness of

  the entity's internal control as a condition of engagement performance.

• Question 817:

  Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance?

  A. Management's failure to renegotiate unfavorable long-term purchase commitments.

  B. Recurring operating losses that may indicate going concern problems.

  C. Evidence of a lack of objectivity by those responsible for accounting decisions.

  D. Management's current plans to reduce its ownership equity in the entity.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. A lack of objectivity by those responsible for accounting decisions represents a

  significant internal control deficiency because it may result in financial statements that are biased rather

  than being presented fairly.

  Choice "a" is incorrect. Management's failure to renegotiate unfavorable long-term purchase commitments

  does not represent a significant deficiency in internal control.

  Choice "b" is incorrect. Going concern problems do not represent a significant deficiency in internal control.

  Choice "d" is incorrect. Management's plan to reduce its ownership equity in the entity does not represent

  a significant deficiency in internal control.

• Question 818:

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

  B. Material fraud or illegal acts perpetrated by high-level management.

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

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

  Correct Answer: C

  Explanation: Choice "c" 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. Information that significantly contradicts the auditor's going concern assumption is not considered a significant deficiency. Choice "b" is incorrect. Fraud perpetrated by high-level managers should be reported to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control. Choice "d" is incorrect. Fraud should be reported to an appropriate level of management, and sometimes to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control.

• Question 819:

  Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer?

  A. An auditor is required to search for significant deficiencies during an audit.

  B. All significant deficiencies are also considered to be material weaknesses.

  C. An auditor may communicate significant deficiencies during an audit or after the audit's completion.

  D. An auditor may report that no significant deficiencies were noted during an audit.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Because timely communication may be important, the auditor may choose to

  communicate significant deficiencies during the course of the audit rather than after the audit is concluded.

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

  Choice "b" is incorrect. All material weaknesses are significant deficiencies, but not all significant

  deficiencies are material weaknesses.

  Choice "d" is incorrect. Because of the potential for misinterpretation, the auditor should not issue a written

  report representing that no significant deficiencies were noted during the audit.

• Question 820:

  Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency?

  I. The likelihood that a control will fail to prevent or detect a misstatement.

  II.

  The magnitude of the misstatement that could result from the deficiency.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. When evaluating whether a control deficiency is a significant deficiency or a material

  weakness, the auditor should consider both the likelihood and magnitude of any potential misstatement.

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