Question 1

Gail is auditing the financial statements of Hoefener Home Improvements, a publicly held company. Gail notes several deficiencies in internal control, and is trying to determine whether each deficiency constitutes a significant deficiency or a material weakness. Which best describes the framework Gail should use in making this evaluation?

Accepted Answer

A)  A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement. 
B)  A significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is more than a remote chance of a material misstatement. 
C)  A significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is a reasonable possibility of material misstatement. 
D)  A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is more than a remote chance of a material misstatement.

Question 2

Which of the following statements should not be included in an accountant's standard report based on the compilation of an entity's financial statements?

Accepted Answer

A)  A statement that the compilation was performed in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of CPAs. 
B)  A statement that the accountant has not audited or reviewed the financial statements. 
C)  A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements. 
D)  A statement that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management.

Question 3

Which of the following controls is most likely to prevent the improper disposition of equipment?

Accepted Answer

A)  A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders. 
B)  The use of serial numbers to identify equipment that could be sold. 
C)  Periodic comparison of removal work orders to authorizing documentation. 
D)  A periodic analysis of the scrap sales and the repairs and maintenance accounts.

Question 4

Which of the following matters is covered in a typical comfort letter?

Accepted Answer

A)  Negative assurance concerning whether the entity's internal controls operated as designed during the period being audited. 
B)  An opinion regarding whether the entity complied with laws and regulations under Government Auditing Standards and the Single Audit Act of 1984. 
C)  Positive assurance concerning whether unaudited condensed financial information complied with generally accepted accounting principles. 
D)  An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

Question 5

Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances. The auditor should first:

Accepted Answer

A)  Request the permission of the client to undertake the confirmation of accounts receivable. 
B)  Perform alternative procedures to provide a satisfactory basis for the unqualified opinion. 
C)  Assess the importance of the omitted procedures to the auditor's ability to support the expressed opinion. 
D)  Inquire whether there are persons currently relying, or likely to rely, on the unqualified opinion.

Question 6

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?

Accepted Answer

A)  Inquire about the existence of related party transactions. 
B)  Determine whether accounting estimates deviate from historical patterns. 
C)  Confirm inventories at locations outside the entity. 
D)  Review the lawyer's letter for information about litigation.

Question 7

Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should:

Accepted Answer

A)  Disclose any reservations in an explanatory paragraph and qualify the opinion. 
B)  Apply to the state insurance commission for an advisory opinion. 
C)  Issue a special statutory basis report that clearly disclaims any opinion. 
D)  Explain in the notes to the financial statements the terminology used.

Question 8

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. Our audit cannot be relied upon to disclose significant deficiencies in the design or operation of internal control. Nevertheless, we will communicate to you all such significant deficiencies and potential areas for improvement that we become aware of during the course of our audit.

Accepted Answer

A)  Practitioner's report on management's assertion about an entity's compliance with specified requirements. 
B)  Auditor's communications on significant deficiencies in internal control. 
C)  Audit inquiry letter to legal counsel. 
D)  Lawyer's response to audit inquiry letter. 
E)  Communication from those charged with governance to the auditor.
F) Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control
G) Report on the application of accounting principles.
H) Auditor's engagement letter.
I) Letter for underwriters.
J) Accounts receivable confirmation request.
K) Request for bank cutoff statement.
L) Explanatory paragraph of an auditor's report on financial statements.
M) Partner's engagement review notes.
N) Management representation letter.
O) Successor auditor's communication with predecessor auditor.
P) Predecessor auditor's communication with successor auditor.

Question 9

Internal control over safeguarding of assets may include controls relating to:

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 10

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

Accepted Answer

A)  The prospective client has already completed its physical inventory count. 
B)  The CPA lacks an understanding of the prospective client's operations and industry. 
C)  The CPA is unable to review the predecessor auditor's audit documentation. 
D)  The prospective client is unwilling to make all financial records available to the CPA.

Question 11

Which of the following procedures most likely could assist an auditor in identifying related party transactions?

Accepted Answer

A)  Performing tests of controls concerning the segregation of duties. 
B)  Evaluating the reasonableness of management's accounting estimates. 
C)  Reviewing confirmations of compensating balance arrangements. 
D)  Scanning the accounting records for recurring transactions.

Question 12

Which of the following is necessary in a financial statement audit?

Accepted Answer

A)  An understanding of internal control relevant to each of an entity's operating units. 
B)  An understanding of internal control relevant to each of an entity's business functions. 
C)  An understanding of internal control relevant to an entity's financial reporting objective. 
D)  An understanding of internal control relevant to an entity's compliance objective.

Question 13

The audit plan usually cannot be finalized until the:

Accepted Answer

A)  Consideration of the entity's internal control has been completed. 
B)  Representation letter has been signed by the client. 
C)  Significant deficiencies in internal control have been communicated to those charged with governance. 
D)  Search for unrecorded liabilities has been performed and documented.

Question 14

Which of the following statements is correct concerning materiality in a financial statement audit?

Accepted Answer

A)  Analytical procedures performed during an audit's review stage usually decrease materiality levels. 
B)  If the materiality amount used in evaluating audit findings increases from the amount used in planning, the auditor should apply additional substantive tests. 
C)  The auditor's materiality judgments generally involve quantitative, but not qualitative, considerations. 
D)  Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

Question 15

Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?

Accepted Answer

A)  The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports. 
B)  Vendor's invoices are compared with purchase orders by an employee who is independent of the receiving department. 
C)  Receiving reports require the signature of the individual who authorized the purchase. 
D)  Purchase orders, receiving reports, and vendor's invoices are independently matched in preparing vouchers.

Question 16

A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain:

Accepted Answer

A)  Negative assurance that the procedures did not necessarily disclose all significant deficiencies in internal control. 
B)  An acknowledgment of the practitioner's responsibility for the sufficiency of the procedures. 
C)  A statement of restrictions on the use of the report. 
D)  A disclaimer of opinion on the entity's financial statements.

Question 17

Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows:  The accounts receivable turnover for 20X4 was 5.0 times. What were Lore's 20X4 net credit sales?

Accepted Answer

A)  $105,000 
B)  $107,000 
C)  $110,000 
D)  $210,000

Question 18

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that:

Accepted Answer

A)  Shipments to customers were properly billed. 
B)  Entries in the accounts receivable subsidiary ledger were for sales actually shipped. 
C)  Sales billed to customers were actually shipped. 
D)  No duplicate shipments to customers were made.

Question 19

At December 30, 20X3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, 20X3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 20

Which of the following factors is most important concerning an auditor's responsibility to detect errors and fraud?

Accepted Answer

A)  The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles. 
B)  The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements. 
C)  The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the existence of illegal acts. 
D)  The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements.

Exam 1: CPA Auditing and Attestation Exam

Which of the following statements should not be included in an accountant's standard report based on the compilation of an entity's financial statements?

Which of the following controls is most likely to prevent the improper disposition of equipment?

Which of the following matters is covered in a typical comfort letter?

Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances. The auditor should first:

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?

Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should:

Internal control over safeguarding of assets may include controls relating to:

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

Which of the following procedures most likely could assist an auditor in identifying related party transactions?

Which of the following is necessary in a financial statement audit?

The audit plan usually cannot be finalized until the:

Which of the following statements is correct concerning materiality in a financial statement audit?

Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?

A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain:

Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows: The accounts receivable turnover for 20X4 was 5.0 times. What were Lore's 20X4 net credit sales?

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that:

At December 30, 20X3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, 20X3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Which of the following factors is most important concerning an auditor's responsibility to detect errors and fraud?