Professional Documents
Culture Documents
ANSWER: A
This answer is correct because the attestation standards on MD&A do not include an
assertion for rights and obligations. Those standards indicate that the four
standards are completeness, consistency with the financial statements, occurrence,
and presentation and disclosure.
A.
B.
C.
D.
A.
B.
C.
D.
Internal control
Yes
No
Yes
No
C
A
D
B.
ANSWER: D
This answer is correct because only an opinion on the financial statements is
required.
4. Carlos, CPA, believes the industry-wide occurrence rate of client billing errors
is 3% and has established a maximum acceptable occurrence rate of 5%. In the review
of
A.
B.
C.
D.
ANSWER: C
This answer is correct because attribute sampling is used to estimate the error rate
for internal control activities.
6. Where no independent stock transfer agents are employed and the corporation
issues its own stocks and maintains stock records, canceled stock certificates
should
A. Be destroyed to prevent fraudulent reissuance.
B. Be defaced and sent to the Secretary of State.
C. Be defaced to prevent reissuance and attached to their corresponding stubs.
D. Not be defaced but segregated from other stock certificates and retained in a
canceled certificates file.
ANSWER: C
This answer is correct because canceled stock certificates should be defaced and
attached to corresponding stubs as is done with voided checks to prevent reissuance.
A.
B.
An assurance engagement
Yes
Yes
An attest engagement
Yes
No
Page 2
C.
D.
A.
B.
C.
D.
No
No
A.
B
C
D
ANSWER: A
This answer is correct because the professional standards consider review to be both
assurance and attest engagements.
11. Before reissuing a report which was previously issued on the financial
statements of a prior period, a predecessor auditor should
A. Review the successor auditors working papers.
B. Obtain a signed engagement letter from the client.
C. Obtain a letter of representation from the successor auditor.
D. Examine significant transactions or events since the date of previous issuance.
ANSWER: C
This answer is correct because the professional standards state that a predecessor
auditor should obtain a letter of representation from the successor auditor. The
predecessor auditor must also read the current financial statements and compare them
to the prior period statements.
13. Which of the following is necessary to audit balances in an on-line EDP system
in an environment of destructive updating?
A. Periodic dumping of transaction files.
B. An integrated test facility.
C. Year-end utilization audit hooks.
D. A well-documented audit trail.
ANSWER: D
Page 4
14. Which of the following is true about requirements to send a letter of audit
inquiry to the clients lawyer under International Standards on Auditing?
A. A lawyers letter must be obtained if the auditor assesses a related risk of
material misstatement.
B. A lawyers letter must be obtained if the client uses an outside attorney.
C. A lawyers letter must be obtained in all audits.
D. A lawyers letter need never be obtained.
ANSWER: A
This answer is correct because under international auditing standards a lawyers
letter is only required when the auditor assesses a related risk of material
misstatement.
15. One important reason why a CPA, during the course of an audit engagement,
prepares internal control flowcharts is to
A. Decpict the organizational structure and document flow in a single chart for
review and reference purposes.
B. Assemble the internal control findings into a comprehensible format suitable for
analysis.
C. Prepare documentation that would be useful in the event of a future consulting
engagement.
D. Reduce the need for inquiries of client personnel concerning the operations of
internal control.
ANSWER: B
This answer is correct because flowcharts are prepared as part of the consideration
of internal control. The use of structure flowcharts assembles the internal control
findings into a comprehensible format.
16. When an auditor tests a computerized accounting system, which of the following
is true of the test data approach?
A. The program tested is different from the program used throughout the year by the
client.
B. Test data must consist of all possible valid and invalid conditions.
C. Test data are processed by the clients computer programs under the auditors
control.
D. Several transactions of each type must be tested.
Page 5
17. Which of the following client computer systems generally can be audited without
examining or directly testing computer programs of the system?
A. A system that performs relatively complicated processing and produces very little
detailed output.
B. A system that performs relatively uncomplicated processes and produces detailed
output.
C. A system that updates a few essential master files and produces no printed output
other than final balances.
D. A system that affects a number of essential master files and produces a limited
output.
ANSWER: B
This answer is correct because auditing around the system is possible if the system
performs uncomplicated processes and produces detailed output.
18. Which of the following procedures would an accountant most likely perform during
an engagement to review the financial statements of a non-issuer?
A. Inquire of management about related-party transactions.
B. Review the predecessor accountants working papers.
C. Communicate internal control deficiencies to senior management.
D. Corroborate litigation information with the entitys attorney.
ANSWER: A
This answer is correct because a review includes inquiries of management (on matters
such as the existence of related-party transactions) and analytical procedures.
19. In auditing through a computer, the test data method is used by auditors to test
the
A. Validity of the output.
B. Normalcy of distribution of test data.
C. Accuracy of input data.
D. Procedures contained within the program.
Page 6
21. Which of the following is an auditors client most likely to use to perform
queries requested by the auditor of a relational database?
A. Data objective language.
B. Data control language.
C. Data manipulation language.
D. Data definition language.
ANSWER: C
This answer is correct because data manipulation language is composed of commands
used to maintain and query a database, including updating, inserting in, modifying
and querying (asking for data).
22. When conducting fieldwork for a physical inventory, an auditor cannot perform
which of the following steps using a generalized audit software package?
A. Recalculating balances in inventory reports.
B. Analyzing data resulting from inventory.
C. Selecting sample items of inventory.
Page 7
23. It would not be appropriate for the auditor to initiate discussion with the
audit committee concerning
A. The extent to which change in the companys organization will influence the scope
of the examination.
B. Details of potential problems which the auditor believes might cause a qualified
opinion.
C. Details of the procedures which the auditor intends to apply.
D. The extent to which the work of internal auditors will influence the scope of the
examination.
ANSWER: C
This answer is correct because while an auditor may reply to audit committee
questions concerning the detailed procedures to be applied, initiating the
discussion is generally not necessary.
24. Tech Company has disclosed an uncertainty due to pending litigation. The
auditors decision to issue a qualified opinion rather than an unqualified opinion
with an explanatory paragraph most likely would be determined by the
A. Lack of insurance coverage for possible losses from such litigation.
B. Lack of sufficient evidence.
C. Inability to estimate the amount of loss.
D. Entitys lack of experience with such litigation.
ANSWER: B
This answer is correct because the lack of sufficient evidence is a scope limitation
that may result in a qualified opinion.
25. When a client with a history of much costly litigation will not permit inquiry
of outside legal counsel, the audit report will ordinarily contain a(n)
A. Disclaimer of opinion.
B. Unqualified opinion with a separate explanatory paragraph.
C. "Except for" qualified opinion.
D. Standard unqualified opinion.
ANSWER: A
Page 8
26. Holding all other factors constant, decreasing the extent of substantive audit
procedures for accounts payable ordinarily has what effect on audit risk?
A. Decreases.
B. Increases.
C. Indeterminate.
D. No effect.
ANSWER: B
This answer is correct because decreasing the extent of substantive audit procedures
increases detection risk, and this will increase audit risk when all other factors
remain constant.
27. The auditor faces a risk that the examination will not detect material
misstatements which occur in the accounting process. In regard to minimizing this
risk, the auditor primarily relies on
A. Internal control.
B. Tests of controls.
C. Statistical analysis.
D. Substantive tests.
ANSWER: D
This answer is correct because the purpose of substantive tests is to obtain
evidence as to the validity and the propriety of accounting treatment of
transactions and balances or, conversely, of errors or irregularities. Thus, the
auditor relies on substantive tests to minimize the risk of failure to detect
material misstatements which occur in the accounting process.
28. A CPA in public practice must be independent in fact and appearance when
providing which of the following services?
A.
B.
Compilation of a
financial forecast
Yes
Yes
Compilation of personal
financial statements
No
Yes
Page 9
C.
D.
A.
B.
C.
D.
C
A
B
D.
ANSWER: D
This answer is correct because a CPA need not be independent when performing
compilations.
29. The AICPA allows an auditor to perform which of the following services for an
audit client?
A. Preparation and posting of journal entries without the clients approval.
B. Preparation of client source documents.
C. Performance of bookkeeping services for the client.
D. Authorization of transactions for the client.
ANSWER: C
This answer is correct in that the AICPA allows performance of bookkeeping services
for an audit client.
30. Which of the following is necessary for an auditor to be able to issue a report
on whether a previously reported material weakness disclosed in an integrated audit
continues to exist?
A. Management must support its written assertion that the material weakness has been
eliminated with sufficient evidence.
B. The auditor must have issued the original audit report indicating the existence
of the material weakness.
C. Management must provide a written assertion indicating that elimination of all
internal control deficiencies is its responsibility.
D. Management must adopt control criteria other than those used relating to the
original reporting on internal control.
ANSWER: A
This answer is correct because management must support its assertion with evidence,
including documentation.
Page 10
33. Which of the following procedures would an auditor most likely perform prior to
the balance sheet date?
A. Review subsequent events.
B. Review detail and test significant travel and entertainment expenses.
C. Send inquiry letter to clients legal counsel.
D. Perform search for unrecorded liabilities.
ANSWER: B
This answer is correct because the auditor may review the detail and test
significant expenses prior to that date and then update the analysis at a subsequent
date.
35. An auditor most likely would apply analytical procedures near the completion of
the audit to
A. Determine whether additional audit evidence may be needed.
B. Identify auditing procedures omitted by the staff accountants.
C. Enhance the auditors understanding of subsequent events.
D. Evaluate the effectiveness of the internal control activities.
ANSWER: A
This answer is correct because these analytical procedures will help the auditor in
assessing the conclusions reached and in the evaluation of the overall financial
statement presentation; accordingly, results of the overall review may indicate that
additional evidence may be needed.
36. Which of the following procedures would best detect the theft of valuable items
from an inventory that consists of hundreds of different items selling for $1 to $10
and a few items selling for hundreds of dollars?
A. Have separate warehouse space for the more valuable items with sequentially
numbered tags.
B. Have an independent CPA firm prepare a report on the effectiveness of internal
control over inventory.
C. Maintain a perpetual inventory of only the more valuable items with frequent
periodic verification of the validity of the perpetual inventory record.
D. Require an authorized officers signature on all requisitions for the more
valuable items.
ANSWER: C
This answer is correct because to detect the theft of valuable items a perpetual
inventory system with periodic verification will be most helpful because differences
between the quantity counted and the quantity in inventory are identified.
37. A CPA establishes quality control policies and procedures for deciding whether
to accept a new client or continue to perform services for a current client. The
primary purpose for establishing such policies and procedures is
Page 12
38. Which of the following statements most likely would be included in an engagement
letter from an auditor to a client?
A. The CPA firm will involve information technology specialists in the performance
of the audit.
B. The CPA firm will adjust the financial statements to correct misstatements before
issuing a report.
C. The CPA firm is responsible for ensuring that the client complies with applicable
laws.
D. The CPA firm will provide absolute assurance about whether the financial
statements are free of material misstatement.
ANSWER: A
This answer is correct because an engagement letter may include information on the
anticipated use of specialists.
40. While performing a review, information indicating that the entity being reviewed
may lack the ability to continue as a going concern has come to the accountants
attention. The client agrees that such a situation does exist, but refuses to add
disclosures relating to it. What effect is this most likely to have the accountants
Page 13
41. Auditing by testing the input and output of a computer system instead of the
computer program itself will
A. Not provide the auditor with confidence in the results of the auditing
procedures.
B. Detect all program errors, regardless of the nature of the output.
C. Provide the auditor with the same type of evidence.
D. Not detect program errors which do not show up in the output sampled.
ANSWER: D
This answer is correct because portions of the program may contain errors which are
not reflected in the output. For example, if a "loop" in a program is not used in
one application, it is not tested and therefore any errors within the "loop" cannot
be detected.
Page 14
44. When compiled financial statements are accompanied by a report, that report
should state all of the following except
A. A compilation is limited to presenting in the form of financial statements
information that is the representation of management.
B. A compilation consists principally of inquiries of company personnel and
analytical procedures applied to financial data.
C. A compilation has been performed.
D. The accountant does not express an opinion or any other form of assurance on
them.
ANSWER: B
This answer is correct because a review report, not a compilation report, states
that a review consists primarily of inquiries and analytical procedures.
45. In estimation sampling for attributes, which one of the following must be known
in order to appraise the results of the auditors sample?
A. Sample size.
B. Standard deviation of the values in the population.
C. Actual occurrence rate of the attribute in the population.
D. Estimated dollar value of the population.
ANSWER: A
This answer is correct because the sample size is needed in order to evaluate the
results of the attribute sampling since it is used to calculate the deviation rate
for the sample.
Page 15
47. The primary responsibility for the adequacy of disclosure in the financial
statements of a publicly held company rests with the
A. Management of the company.
B. Partner assigned to the audit engagement.
C. Securities and Exchange Commission.
D. Auditor in charge of the fieldwork.
ANSWER: A
This answer is correct because financial statements are the representations of
management, and they have the responsibility for producing proper financial
statements.
48. An accountant has been engaged to review a nonissuers financial statements that
contain several departures from GAAP. Management is unwilling to revise the
financial statements, and the accountant believes that modification of the standard
review report is inadequate to communicate the deficiencies. Under these
circumstances, the accountant should
A. Determine the effects of the departures from GAAP and issue a special report on
the financial statements.
B. Withdraw from the engagement and provide no further services concerning these
financial statements.
C. Express a disclaimer of opinion on the financial statements and advise the board
of directors that the financial statements should not be relied on.
D. Inform management that a review of the financial statements cannot be completed
and request a change from a review to a compilation engagement.
ANSWER: B
This answer is correct because SSARS indicate that withdrawal is appropriate.
Page 16
50. In estimation sampling for variables, which of the following must be known in
order to estimate the appropriate sample size required to meet the auditors needs in
a given situation?
A.
B.
C.
D.
The
The
The
The
ANSWER: B
This answer is correct because for an auditor to estimate the appropriate sample
size, the auditor must first know the acceptable level of risk.
Page 17