AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 931:

  An auditor would be most likely to identify a contingent liability by obtaining a (an):

  A. Accounts payable confirmation.

  B. Transfer agent confirmation.

  C. Standard bank confirmation.

  D. Related party transaction confirmation.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. An auditor would be most likely to identify a contingent liability by obtaining a

  standard bank confirmation, which has an "exceptions and comments" box that specifically discloses

  contingent liabilities as endorser of loans, for open letters of credit, etc.

  Choice "a" is incorrect. Confirmations of accounts payable relate to existing liabilities, not to contingent

  liabilities. They are not always performed and rarely disclose contingencies.

  Choice "b" is incorrect. Transfer agent confirmations relate to purchase and sale of securities. They are not

  always used and rarely disclose contingencies.

  Choice "d" is incorrect. Confirmations of related party transactions relate to transactions that have already

  occurred. They are not always used and rarely disclose contingencies.

• Question 932:

  Which of the following is not a reason justifying the use of accounting estimates?

  A. The valuation or measurement of some accounts is uncertain pending the outcome of future events.

  B. Data about past events cannot be accumulated in a cost-effective manner.

  C. Data about future events cannot be accumulated in a cost-effective manner.

  D. Data about past events cannot be accumulated in a timely manner.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Accounting estimates are not used to measure future events. (Although, the

  measurement of some accounts may be uncertain pending the outcome of future events.)

  Choice "a" is incorrect. Valuation of certain historical accounts is uncertain, and may be dependent upon

  the outcome of future events. Accounting estimates are used in such situations to more properly reflect the

  account balance.

  Choices "b" and "d" are incorrect. If data about past events cannot be accumulated in a timely, cost-

  effective manner, accounting estimates may be required.

• Question 933:

  Which of the following is true about an auditor's responsibility with respect to accounting estimates?

  A. The auditor is responsible for both preparing accounting estimates and evaluating their reasonableness.

  B. The auditor is responsible for preparing accounting estimates in accordance with generally accepted auditing standards.

  C. The auditor is responsible for evaluating the reasonableness of accounting estimates.

  D. The auditor has no responsibility with respect to accounting estimates.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. The auditor is responsible for evaluating the reasonableness of accounting

  estimates.

  Choices "a" and "b" are incorrect. Management is responsible for establishing a process for preparing

  accounting estimates.

  Choice "d" is incorrect. The auditor must determine whether the accounting estimate is reasonable in the

  circumstances.

• Question 934:

  In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether the estimates are:

  A. Not subject to bias.

  B. Consistent with industry guidelines.

  C. Based on objective assumptions.

  D. Reasonable in the circumstances.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. In evaluating an entity's accounting estimates, one of an auditor's objectives is to

  determine whether the estimates are reasonable in the circumstances and in conformity with GAAP.

  Choice "a" is incorrect. Most estimates are subjective in nature and thus subject to bias.

  Choice "b" is incorrect. Industry guidelines generally do not determine the amount of an accounting

  estimate, which is developed in accordance with GAAP.

  Choice "c" is incorrect. Estimates are generally not based upon objective assumptions; rather, they are

  uncertain in nature, pending the outcome of future events.

• Question 935:

  An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the:

  A. Safeguards used to limit access to computer facilities.

  B. Process used to prepare significant accounting estimates.

  C. Procedures used to assure proper authorization of transactions.

  D. Policies used to detect the concealment of irregularities.

  Correct Answer: B

  Explanation: Choice "b" is correct. An auditor is responsible for evaluating the reasonableness of significant accounting estimates made by management. An entity's information system may affect the quality of such estimates and therefore should be considered by the auditor. Choices "a", "c", and "d" are incorrect. Control activities such as those designed to limit access, ensure proper authorization, and discover fraud are not directly related to the information system relevant to financial reporting.

• Question 936:

  Which of the following is not true about accounting estimates?

  A. Accounting estimates measure the effects of past transactions or events that cannot be determined in a timely cost-effective manner.

  B. Accounting estimates measure the effects of the present status of an asset or liability.

  C. An accounting estimate is an approximation of an account pending the outcome of a future event.

  D. An accounting estimate is an approximation of past events that can be determined on a timely cost-effective basis.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. An accounting estimate pertains to determining the approximation of past events that

  cannot be determined on a timely, cost-effective basis. If the effect of a past event can be determined on a

  timely, cost-effective basis, there would be no reason to make an estimate.

  Choices "a", "b", and "c" are incorrect. Accounting estimates may:

  A. Measure the effects of past transactions that cannot be determined in a timely cost-effective manner.

  B. Measure the effects of the present status of an asset or liability.

  C. Be used to approximate an account pending the outcome of a future event (e.g., uncollectible accounts receivable).

• Question 937:

  Which of the following evidence provides the least assurance of reliability?

  A. Accounts receivable confirmation.

  B. Sales invoice.

  C. Vendor invoice.

  D. Bank statement.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Internal evidence is less reliable than external evidence. A sales invoice is internal

  evidence.

  Choices "a", "c", and "d" are incorrect. Accounts receivable confirmations, vendor invoices, and bank

  statements are all external evidence, which is more reliable than internal evidence.

• Question 938:

  Which of the following procedures would be most effective in reducing attestation risk?

  A. Discussion with responsible individuals.

  B. Examination of evidence.

  C. Inquiries of senior management.

  D. Analytical procedures.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Evidence obtained directly by the accountant (e.g., through physical examination)

  provides more persuasive evidence than evidence obtained through inquiry, discussion, or analytical

  procedures, and therefore reduces attestation risk.

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

• Question 939:

  Which of the following procedures would yield the most reliable evidence?

  A. A scanning of trial balances.

  B. An inquiry of client personnel.

  C. A comparison of beginning and ending retained earnings.

  D. A recalculation of bad debt expense.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The auditor's direct personal knowledge (obtained through observation, examination,

  inspection, or recalculation) is one of the most reliable forms of evidence.

  Choice "a" is incorrect. Scanning of trial balances may indicate areas where more attention should be

  focused (e.g., unusual balances, zero balances, etc.), but would seldom provide reliable evidence in and of

  itself.

  Choice "b" is incorrect. Inquiry of client personnel provides evidence that is not particularly reliable, which

  is why it often needs to be corroborated by the auditor.

  Choice "c" is incorrect. A comparison of beginning and ending retained earnings may provide information

  about certain transactions and events (e.g., dividends, income, etc.), but would not in and of itself provide

  evidence supporting those items.

• Question 940:

  An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?

  A. Test of transactions.

  B. Analytical procedures.

  C. Test of controls.

  D. Test of details.

  Correct Answer: B

  Explanation: Choice "b" is correct. Analytical procedures are evaluations of financial information made by a study of plausible relationships among data, and they include comparisons between current year and prior year financial information. Choice "a" is incorrect. Tests of transactions involve selecting specific transactions and evaluating whether they were properly recorded. Comparing current year and prior year gross margin would not provide information regarding specific transactions. Choice "c" is incorrect. Tests of controls are performed to evaluate the effectiveness of controls. Comparing current year and prior year gross margin would not provide information regarding controls. Choice "d" is incorrect. Test of details are audit procedures used to gather evidence to support specific account balances. Comparing current year and prior year gross margin does not provide much information regarding specific account balances, although it might identify an account balance worthy of further consideration.