AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 891:

  An auditor's plan to examine long-term debt most likely would include steps that require:

  A. Comparing the carrying amount of the debt to its year-end market value.

  B. Correlating interest expense recorded for the period with outstanding debt.

  C. Verifying the existence of the holders of the debt by direct confirmation.

  D. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.

  Correct Answer: B

  Explanation: Choice "b" is correct. An auditor's plan to examine long-term debt most likely would include steps that require correlating interest expense recorded for the period with outstanding debt. This is an analytical procedure that would provide evidence regarding the reasonableness of the interest expense balance. Choice "a" is incorrect. This question was released prior to the issuance of FAS 107, which requires disclosure of the fair values of financial instruments. Accordingly, the auditor now needs to audit the year-end market values of long-term debt. Choice "a" is still not the best answer, however, since the auditor would not need to compare the carrying amount to the year-end market value. (Both values are shown, as FAS 107 does not require that debt securities be written down to (a lower) market value.) Choice "c" is incorrect. Generally the existence of the holders of the debt is not verified. Choice "d" is incorrect. Inspecting the accounts payable subsidiary ledger would be included in the audit of accounts payable, not long-term debt.

• Question 892:

  The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit inquiry limits the response to:

  A. Matters to which the attorney has given substantive attention in the form of legal representation.

  B. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity.

  C. The attorney's opinion of the entity's historical experience in recent similar litigation.

  D. The probable outcome of asserted claims and pending or threatened litigation.

  Correct Answer: A

  Explanation: Choice "a" is correct. The scope of an audit is not restricted when an attorney's response is limited to matters to which the attorney has given substantive attention in the form of legal representation. The attorney may also limit his or her response to matters that are considered individually or collectively to be material. Choices "b", "c", and "d" are incorrect. The scope of an audit may be restricted when an attorney's response is limited to:

  1.

  An evaluation of the likelihood of an unfavorable outcome of the matter disclosed by the entity. (The attorney's response should also address the nature of the claim, the progress to date, and the intended response.)

  2.

  The attorney's opinion of the entity's historical experience in recent similar litigation. (The attorney's response should address the current situation, which may not parallel historical experience).

  3.

  The probable outcome of asserted claims and pending or threatened litigation. (The attorney's response should also address the nature of the claim, the progress to date, and the intended response, as well as unasserted claims).

• Question 893:

  An auditor's program to examine long-term debt should include steps that require:

  A. Examining bond trust indentures.

  B. Inspecting the accounts payable subsidiary ledger.

  C. Investigating credits to the bond interest income account.

  D. Verifying the existence of the bondholders.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Examination of bond trust indentures should be included in audit program of longterm

  debt to assure that the client was not in violation of any covenants in the indentures.

  Choice "b" is incorrect. Inspecting the accounts payable subsidiary ledger relates to accounts payable, a

  current liability.

  Choice "c" is incorrect. Long-term debt generates interest expense, not interest income.

  Choice "d" is incorrect. Generally, the existence of the bondholders of debt is not verified.

• Question 894:

  The primary evidence regarding year-end cash balances in the financial statements is documented in the:

  A. Standard bank confirmations.

  B. Bank reconciliations.

  C. Interbank transfer schedule.

  D. Bank deposit lead schedule.

  Correct Answer: B

  Explanation: Choice "b" is correct. The primary evidence regarding year-end cash balances in the financial statements is documented in the bank reconciliation, which reconciles the balance per the bank to that per the financial statements. Choice "a" is incorrect. The standard bank confirmation does not provide evidence about certain transactions that are necessary to compute the cash balance, such as deposits in transit and outstanding checks. Choice "c" is incorrect. The interbank transfer schedule provides evidence about bank transfers over a period of time. It is used to detect kiting, not to support the year-end cash balance. Choice "d" is incorrect. A "cash lead schedule" is a schedule that summarizes all the various balances that comprise cash. It is created by the auditor and is not, in and of itself, evidence supporting cash.

• Question 895:

  In an audit of contingent liabilities, which of the following procedures would be least effective?

  A. Reviewing a bank confirmation letter.

  B. Examining customer confirmation replies.

  C. Examining invoices for professional services.

  D. Reading the minutes of the board of directors.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Customer confirmations relate to receivables, and would not be likely to disclose a

  contingent liability.

  Choice "a" is incorrect. A standard bank confirmation will most likely identify contingent liabilities because it

  contains confirmation of discounted drafts and/or guarantees of notes and/or other open letters of credit.

  Choice "c" is incorrect. Examining professional invoices may disclose a contingent liability. For example,

  invoices from attorneys may provide information regarding litigation, claims, and assessments.

  Choice "d" is incorrect. Reviewing the board minutes may identify a contingent liability. For example, the

  board may discuss contingencies during one of its meetings.

  Other procedures that may be effective in an audit of contingent liabilities include:

  Discussing long-term purchase commitments with the purchasing agent.

  Reviewing long-term leases.

  Obtaining a client representation letter.

• Question 896:

  An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to:

  A. Provide the data necessary to prepare a proof of cash.

  B. Request a cutoff bank statement and related checks be sent to the auditor.

  C. Detect kiting activities that may otherwise not be discovered.

  D. Seek information about contingent liabilities and security agreements.

  Correct Answer: D

  Explanation: Choice "d" is correct. The standard confirmation request seeks information on contingent liabilities and security agreements in addition to information related to deposit account balances. Choice "a" is incorrect. The standard confirmation request does not provide all of the data necessary to prepare a "proof of cash" (i.e., bank reconciliation), since it only confirms the balances at the end of a period, and does not provided information about the activity during the period under audit. Such information is necessary to perform a bank reconciliation and would be provided in a bank statement. Choice "b" is incorrect. A request for a cut-off statement, and not the standard bank confirmation form, is used to obtain a cut-off bank statement and related checks. Choice "c" is incorrect. The bank cut-off statement, not the standard confirmation request, is used to detect kiting activities that may not otherwise be discovered.

• Question 897:

  In testing for unrecorded retirements of equipment, an auditor most likely would:

  A. Select items of equipment from the accounting records and then locate them during the plant tour.

  B. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment.

  C. Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger.

  D. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Tracing (old) equipment recorded in the books to the actual equipment during a plant

  tour is a control which tests for unrecorded retirements.

  Choice "b" is incorrect. Determining which assets are fully depreciated does not tell you which ones are

  retired, as fully depreciated assets may continue to be used.

  Choice "c" is incorrect. Selecting items from the plant tour and then tracing them to the equipment

  subsidiary ledger will provide evidence that all equipment is recorded. It will not detect whether recorded

  equipment has been retired. (This step is backwards.)

  Choice "d" is incorrect. Scanning the general journal for unusual equipment additions and excessive debits

  to repairs and maintenance expense provides evidence regarding fixed asset additions, not retirements.

• Question 898:

  Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for:

  A. Segregation of duties of employees in the accounts payable department.

  B. Independent verification of invoices for disbursements recorded as equipment acquisitions.

  C. Investigation of variances within a formal budgeting system.

  D. Authorization by the board of directors of significant equipment acquisitions.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Equipment acquisitions that are misclassified as maintenance expense most likely

  would be detected by internal control procedures that provide for investigation of variances within a formal

  budgeting system.

  Choice "a" is incorrect. Segregation of duties of employees in the accounts payable department would not

  prevent the misclassification of equipment acquisitions as maintenance expense.

  Choice "b" is incorrect. Verifying invoices for disbursements already recorded as equipment acquisitions

  would not include examining invoices for disbursements recorded as maintenance expense.

  Choice "d" is incorrect. Since the authorization by the board of directors occurs before the disbursement is

  recorded, this control would not prevent any misclassification.

• Question 899:

  Which of the following internal controls most likely would justify a reduced assessed level of control risk concerning plant and equipment acquisitions?

  A. Periodic physical inspection of plant and equipment by the internal audit staff.

  B. Comparison of current-year plant and equipment account balances with prior-year actual balances.

  C. The review of prenumbered purchase orders to detect unrecorded trade-ins.

  D. Approval of periodic depreciation entries by a supervisor independent of the accounting department.

  Correct Answer: A

  Explanation: Choice "a" is correct. Periodic physical inspection of plant and equipment by the internal audit staff is an internal control that would most likely justify a reduced assessed level of control risk concerning plant and equipment acquisitions. Such inspections would provide assurance that recorded acquisitions are real (existence assertion). Choice "b" is incorrect. The comparison of current-year plant and equipment account balances with prioryear actual balances might indicate that acquisitions occurred, but it would not justify a reduced assessed level of control risk, since the controls over the acquisition process are not tested. Choice "c" is incorrect. A review of prenumbered purchase orders is unlikely to provide evidence regarding plant and equipment acquisitions. (Generally, a special requisition form is used for such acquisitions.) Choice "d" is incorrect. Approval of depreciation entries has little bearing on the control risk relating to plant and equipment acquisitions.

• Question 900:

  Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions?

  A. Inspecting documents and physically examining assets.

  B. Recomputing calculations and obtaining written management representations.

  C. Observing operating activities and comparing balances to prior period balances.

  D. Confirming ownership and corroborating transactions through inquiries of client personnel.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. In order to obtain evidence about fixed asset additions, an auditor would most likely

  inspect documents (e.g., purchase invoices) and physically examine the new assets.

  Choice "b" is incorrect. Recomputing calculations might provide evidence about depreciation, and

  obtaining management representations might provide evidence about commitments with respect to fixed

  assets, but neither procedure provides specific evidence about fixed asset additions.

  Choice "c" is incorrect. Observing operating activities and comparing balances to prior years might provide

  evidence that depreciation expense was properly recorded, but does not provide evidence supporting

  additions.

  Choice "d" is incorrect. Inquiry alone is not as persuasive as direct personal observation.