AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 981:

  An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for:

  A. Cash flow increases and decreases.

  B. Audit objectives and assertions.

  C. Reclassifications and adjustments.

  D. Reconciliations and tickmarks.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. The working trial balance generally contains a column for adjustments and

  reclassifications.

  Choice "a" is incorrect. The working trial balance does not ordinarily contain information about cash flows.

  Choice "b" is incorrect. Audit objectives and assertions are contained in the audit plan, which is generally

  kept separate from the working trial balance.

  Choice "d" is incorrect. Reconciliations and tickmarks are found in other parts of the audit documentation.

• Question 982:

  The permanent file of the audit documentation for an engagement generally would not include:

  A. Bond indenture agreements.

  B. Lease agreements.

  C. Working trial balance.

  D. Flowchart of internal control.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. A working trial balance is a part of the current year's audit documentation.

  Choice "a" is incorrect. Bond indenture agreements are typically found in the permanent file.

  Choice "b" is incorrect. Lease agreements are typically found in the permanent file.

  Choice "d" is incorrect. An internal control flowchart is typically found in the permanent file.

• Question 983:

  Audit documentation serves mainly to:

  A. Provide the principal support for the auditor's report.

  B. Satisfy the auditor's responsibilities concerning the Code of Professional Conduct.

  C. Monitor the effectiveness of the CPA firm's quality control activities.

  D. Document the level of independence maintained by the auditor.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Audit documentation serves mainly to provide 1) the principal support for the

  auditor's report; 2) assistance in the planning, conduct, and supervision of the audit; 3) accountability; and

  4) useful information.

  Choice "b" is incorrect. Audit documentation does not satisfy the auditor's responsibilities concerning the

  Code of Professional Conduct.

  Choice "c" is incorrect. Audit documentation does not monitor the effectiveness of the CPA firm's quality

  control activities.

  Choice "d" is incorrect. Audit documentation does not document the level of independence maintained by

  the auditor.

• Question 984:

  Which of the following pairs of accounts would be analyzed together in the audit documentation?

  A. Notes receivable and interest income.

  B. Accrued interest receivable and accrued interest payable.

  C. Notes payable and notes receivable.

  D. Interest income and interest expense.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The auditor would most likely analyze notes receivable and its related income

  statement account, interest income, together.

  Choice "b" is incorrect. Accrued interest payable would be analyzed along with notes payable; accrued

  interest receivable would be analyzed along with notes receivable.

  Choice "c" is incorrect. Notes payable would be analyzed along with interest payable and interest expense;

  notes receivable would be analyzed along with interest income.

  Choice "d" is incorrect. Interest income would be analyzed with notes receivable; interest expense would

  be analyzed with notes payable.

• Question 985:

  The permanent (continuing) file of audit documentation most likely would include copies of the:

  A. Lead schedules.

  B. Attorney's letters.

  C. Bank statements.

  D. Debt agreements.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The permanent file includes items with continuing audit significance, such as debt

  agreements.

  Choice "a" is incorrect. Lead schedules would be included in the current audit documentation since they

  are applicable to the current year's audit only.

  Choice "b" is incorrect. Attorney's letters would be included in the current audit documentation since they

  are applicable to the current year's audit only.

  Choice "c" is incorrect. Bank statements would be included in the current audit documentation since they

  are applicable to the current year's audit only.

• Question 986:

  Which of the following is not true regarding audit documentation for a specific audit?

  A. Audit documentation should be sufficient to enable members of the audit team with supervisory responsibilities to understand the nature, timing, extent, and results of auditing procedures performed.

  B. Audit documentation should indicate which member(s) of the audit team performed and reviewed the audit work.

  C. Audit documentation should demonstrate compliance with quality control standards.

  D. Audit documentation should demonstrate compliance with the standards of fieldwork.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Quality control standards relate to the conduct of a firm's audit practice as a whole,

  and compliance with such standards would not be demonstrated by audit documentation for one specific

  audit engagement.

  Choice "a" is incorrect. Audit documentation should clearly indicate the work performed and the evidence

  obtained.

  Choice "b" is incorrect. Audit documentation should indicate which parties performed and reviewed the

  work.

  Choice "d" is incorrect. Audit documentation should demonstrate compliance with the standards of

  fieldwork. It should indicate an appropriate level of planning and supervision, that a sufficient

  understanding of the entity and its environment, including its internal control, was obtained, and that a

  sufficient level of appropriate evidence was obtained.

• Question 987:

  Which of the following would not be considered a significant audit finding that should be included in audit documentation?

  A. Retirement of the accounts payable manager and subsequent hiring of a replacement.

  B. Discovery of a material sale recorded in the current year that properly belonged in the subsequent year.

  C. Determination that there is substantial doubt about the entity's ability to continue as a going concern.

  D. Implementation of a new accounting standard to account for a complex and unusual transaction.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Significant audit findings do not include staffing changes at the client.

  Choice "b" is incorrect. Discovery of a material sale recorded in the current year that properly belonged in

  the subsequent year represents a possible material misstatement in the financial statements. Possible

  material misstatements are considered to be significant audit findings.

  Choice "c" is incorrect. When substantial doubt about an entity's ability to continue as a going concern

  exists, there is likely to be a modification to the auditor's standard report. Items resulting in report

  modifications are generally considered to be significant audit findings.

  Choice "d" is incorrect. Matters related to the application of accounting principles to complex and unusual

  transactions are considered to be significant audit findings.

• Question 988:

  After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Explanation:

  Choice "c" is correct. By ensuring that credit approval is obtained before goods are shipped to customers,

  the auditor is testing management's assertion that accounts receivable are collectible

  (allocation and valuation). Ensuring that credit approval is obtained before goods are shipped does not

  support the rights and obligations assertion.

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

• Question 989:

  Which of the following cash transfers results in a misstatement of cash at December 31, 20X1?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Since the disbursement was not recorded until January 20X2 while the receipt was

  recorded in December 20X1, cash will be overstated at December 31, 20X1.

  Choices "a" and "c" are incorrect. Both the disbursement and the receipt are recorded in 20X1, so there

  will be no misstatement of cash at December 31, 20X1.

  Choice "b" is incorrect. Both the disbursement and the receipt are recorded in 20X2, so there will be no

  misstatement of cash at December 31, 20X1.

• Question 990:

  An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Explanation: Choice "c" is correct. In testing the existence or occurrence assertion, the auditor is concerned that fictitious or overstated receivables may have been recorded. Observing the mailing of monthly statements and reviewing evidence of follow-up on errors reported by customers provides evidence that procedures are in place to identify and correct such errors. Choice "a" is incorrect. Follow up of errors in monthly statements does not provide any evidence to support understandability and classification. Choice "b" is incorrect. Follow up of errors in monthly statements does not provide any evidence to support understandability and classification, but does provide evidence regarding the existence of receivables. Choice "d" is incorrect. Follow up of errors in monthly statements does provide evidence regarding the existence of receivables, since customers will be likely to report discrepancies.