Question 1

A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:

Accepted Answer

Choice "D" is correct. Inquiries should include specific questions regarding, among other things, facts that might bear on the integrity of management; disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters; communications with those charged with governance regarding fraud, illegal acts, and matters relating to internal control; and the predecessor's understanding as to the reasons for the change of auditors. Choice "A" is incorrect. Specialized industry accounting principles might be discussed; however, the successor would be more likely to inquire about items specific to the client. Choice "B" is incorrect. The competency of the client's internal audit staff might be discussed; however, inquiries of the predecessor auditor regarding the staff are not required. Choice "C" is incorrect. The uncertainty in applying sampling procedures is not something that is typically discussed with the predecessor auditor.

Question 2

Which of the following statements is correct concerning an auditor's use of the work of a specialist?

Accepted Answer

Choice "A" is correct. The work of a specialist who has a relationship with a client may be acceptable under certain circumstances. If the specialist is related to the client, the auditor should consider performing additional procedures with respect to the specialist's assumptions, methods, or findings to determine that the findings are not unreasonable, or should engage another specialist for that purpose. Choice "B" is incorrect. If the auditor believes the findings are unreasonable, the auditor should apply additional procedures, which may include obtaining the opinion of another specialist. This does not imply that there is a problem with the financial statements, and therefore would not necessarily result in a qualified opinion. Choice "C" is incorrect. If there is a material difference between a specialist's findings and the assertions in the financial statements, and if the specialist's findings are deemed reasonable, either a qualified or an adverse opinion may be issued. (Note that it is also possible that the specialist's findings turn out to be erroneous, in which case an unqualified opinion might be issued.) Choice "Dd" is incorrect. A specialist may be used to determine the physical characteristics relating to inventory (e.g., quantity on hand or condition).

Question 3

Which of the following statements would least likely appear in an auditor's engagement letter?

Accepted Answer

Choice "D" is correct. The auditor does not consult with the client about audit procedures that will be performed. Choice "A" is incorrect. Since the engagement letter serves as a contract between the auditor and client, fee arrangements are typically disclosed in the letter. Choice "B" is incorrect. A discussion regarding possible auditor suggestions is appropriate for inclusion in an engagement letter. Choice "C" is incorrect. The fact that audit risk exists and that an audit only provides reasonable assurance of the detection of errors and fraud is typically disclosed in an engagement letter.

Question 4

Analytical procedures used in planning an audit should focus on:

Accepted Answer

Choice "C" is correct. Analytical procedures used in planning the audit should focus on enhancing the auditor's understanding of the client's business and the transactions and events that have occurred since the last audit date. Choice "A" is incorrect. Analytical procedures used in planning do not reduce tests of controls or substantive tests. Choice "B" is incorrect. Analytical procedures used in planning are not designed to identify material misstatements. Choice "D" is incorrect. Audit evidence has not yet been gathered during the planning process, so its adequacy cannot be assessed.

Question 5

A successor auditor ordinarily should request to review the predecessor's audit documentation relating to:

Accepted Answer

Choice "A" is correct. A review of the predecessor's audit documentation related to matters of continuing accounting and auditing significance would be permitted. This would include documentation concerning contingencies and internal controls. Choice "B" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to internal controls. Choice "C" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to contingencies as they may have an impact on the current year financial statements. Choice "D" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to internal controls and contingencies.

Question 6

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

Accepted Answer

Choice "C" is correct. A CPA cannot render an opinion on financial statements unless he or she has obtained sufficient appropriate audit evidence supporting that opinion. If such evidence were unlikely to be available, the CPA would most likely reject the potential audit engagement. Choice "A" is incorrect. The auditor takes the availability of information into account when planning the audit, and would need to perform testing throughout the period, but this would not be cause for rejecting a potential audit engagement. Choice "B" is incorrect. The risk of management override is considered during planning and would not be cause for rejecting a potential audit engagement. Choice "D" is incorrect. Management may consult with several accounting firms, and this would not be cause for rejecting a potential audit engagement.

Question 7

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?

Accepted Answer

Choice "C" is correct. During the planning stage, the auditor assesses the risk of material misstatement in financial statement accounts. Based on this assessment, the auditor plans the audit procedures to provide reasonable assurance that material misstatements in the financial statements will be detected. Additionally, during the planning stage, conditions may come to the auditor's attention that indicate a necessary extension of audit tests. The auditor would need to consider this factor in determining the time budget and staffing needs for the engagement. Choices "A", "B", and "D" are incorrect. The auditor would need to consider both factors (financial statement accounts likely to contain a misstatement and conditions that require an extension of audit tests) in planning the audit.

Question 8

In using the work of a specialist, an auditor of a nonissuer may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor:

Accepted Answer

Choice "C," is correct. T,he auditor may, as a result of the report or findings of the specialist, decide to add explanatory language to the auditor's standard report or depart from an unqualified opinion. R,eference to and identification of the specialist may be made in the auditor's report if the auditor believes such reference will facilitate an understanding of the reason for the explanatory paragraph or the departure from the unqualified opinion. C,hoice "B," is incorrect. T,he auditor should not refer to the work or findings of the specialist unless the specialist's work results in a change to the auditor's report. C,hoice "C," is incorrect. T,he auditor should not refer to the work or findings of the specialist unless the specialist's work results in a change to the auditor's report. C,hoice "D," is incorrect. T,he identification of significant deficiencies in the design of the client's internal control would not result in a change to the auditor's report. T,he auditor should not refer to the work or findings of the specialist unless the specialist's work results in a change to the auditor's report.

Question 9

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants:

Accepted Answer

Choice "B" is correct. Assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform. Part of the assistant's responsibility is to properly evaluate audit results, and the in-charge auditor would likely discuss this with them. Choice "A" is incorrect. Fraud that causes a material misstatement or involves senior management should be reported to those charged with governance. Choice "C" is incorrect. Preparation and maintenance of the time budget is related to planning rather than supervision. Choice "D" is incorrect. The reasons for transferring documents from the permanent file to the current file need not be explained to the staff assistants.

Question 10

An auditor should design the written audit plan so that:

Accepted Answer

Choice "C" is correct. An audit plan aids in instructing assistants in the work to be done. It should set forth in reasonable detail the audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. Choice "A" is incorrect. Auditors make extensive use of sampling to perform audit tests. Tests of all material transactions would not be economically feasible. Choice "B" is incorrect. Assuming that incremental risk can be controlled, substantive tests can be performed prior to year-end. Choice "D" is incorrect. An account balance does not necessarily have to have tests of controls or tests of transactions applied to it.

Question 11

Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?

Accepted Answer

Choice "C" is correct. Inadequate financial records may preclude the auditor from obtaining sufficient appropriate audit evidence. Choice "A" is incorrect. The complexity of the client's information system generally would not influence an auditor's determination of auditability, although it might indicate the need for an information technology expert. Choice "B" is incorrect. The existence of related party transactions generally would not influence the auditor's determination of auditability. Choice "D" is incorrect. The operating effectiveness of internal controls is determined long after the decision about auditability is made.

Question 12

An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the:

Accepted Answer

Choice "C" is correct. In making judgments about the extent of the effect of the internal auditor's work on the auditor's procedures, the auditor considers the materiality of financial statement amounts, the risk of material misstatement of the assertions related to these financial statement amounts, and the degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions. As the degree of subjectivity increases, the need for the auditor to perform tests of the assertions increases. Testing the existence of fixed asset additions involves very little subjectivity, and thus work performed by the internal auditor may reduce the auditor's testing in this area. Choice "A" is incorrect. Testing the existence of contingencies involves much subjectivity, and should, therefore, be performed by the auditor. Choice "B" is incorrect. Testing the valuation of intangible assets involves much subjectivity, and should, therefore, be performed by the auditor. Choice "D" is incorrect. Testing the valuation of related party transactions involves much subjectivity, and should, therefore, be performed by the auditor.

Question 13

In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements most likely would consider the:

Accepted Answer

Choice "A" is correct. Objectivity is reflected by the organizational level to which the internal auditor reports as well as by policies prohibiting audits of areas where the internal auditor lacks independence. In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements considers information obtained from previous experience, from discussions with management, from external quality reviews (if performed), and from professional internal auditing standards (such as those developed by The Institute of Internal Auditors). Choice "B" is incorrect. Tests of internal control activities that could detect errors and fraud would not help the CPA assess the objectivity of the internal auditor. Choice "C" is incorrect. The materiality of the accounts recently inspected by the internal auditors would not help the CPA assess the objectivity of the internal auditor. Choice "D" is incorrect. Results of the tests of transactions recently performed by the internal auditor would aid the auditor in evaluating the internal auditor's competence rather than his or her objectivity.

Question 14

Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?

Accepted Answer

Choice "A" is correct. An illegal payment of an otherwise immaterial amount could be material if there is a reasonable possibility that it could lead to a material contingent liability or a material loss of revenue. Choice "B" is incorrect. Failure to retire a piece of obsolete office equipment is not likely to have ramifications beyond the immaterial misstatement that would result directly from it. Choice "C" is incorrect. Failure to properly authorize a petty cash fund disbursement is not likely to have ramifications beyond the immaterial misstatement that would result directly from it. Choice "D" is incorrect. Failure to write off a relatively small uncollectible account receivable is not likely to have ramifications beyond the immaterial misstatement that would result directly from it.

Question 15

A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information?

Accepted Answer

Choice "B" is correct. The AICPA's Accounting Trends & Techniques is an annual survey of accounting practices followed in 600 stockholders' annual reports. Choices "A", "C", and "D" are incorrect. These sources do not provide comparative information about accounting practices.

Question 16

Which of the following statements is correct concerning an auditor's use of the work of a specialist?

Accepted Answer

Choice "D" is correct. The purpose of using the work of a specialist is to provide the auditor with specialized skill or knowledge the auditor may lack. The work of a specialist who has a relationship with a client may be acceptable under certain circumstances. If the specialist has a relationship with the client, the auditor should assess the risk that the specialist's objectivity might be impaired. If the auditor believes that the relationship might impair the specialist's objectivity, the auditor should perform additional procedures with respect to the specialist's assumptions, methods, or findings to determine that the findings are not unreasonable or should engage another specialist for that purpose. Choice "A" is incorrect. Although the appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist, the auditor should obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements. Choice "B" is incorrect. The auditor may use, and in fact is encouraged to use, the work of a specialist in matters material to the fair presentation of the financial statements. Choice "C" is incorrect. The appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist; the auditor should, however, obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements.

Question 17

An auditor's engagement letter most likely would include:

Accepted Answer

Choice "A" is correct. An understanding with the client should be established regarding management's responsibilities, which include establishing and maintaining effective internal control over financial reporting. This is generally documented in an engagement letter. Choice "B" is incorrect. During the planning process, the auditor must document evidence of the assessment of the risk of material misstatement due to fraud. This information would be included in the audit documentation, not in the engagement letter. Choice "C" is incorrect. Management is not responsible for illegal acts committed by employees, and therefore the engagement letter would not include such a statement. Choice "D" is incorrect. The auditor generally does not contact the client's lawyer directly; rather, a letter is sent from management to the lawyer requesting corroboration of information related to litigation, claims, and assessments. The engagement letter therefore would not include a request for permission to contact the attorney.

Question 18

During an audit an internal auditor may provide direct assistance to an independent CPA in:

Accepted Answer

Choice "d" is correct. Internal auditors may assist the auditor in obtaining an understanding of internal control and in performing tests of controls and substantive tests. Choices "a", "b", and "c" are incorrect, based on the above explanation.

Question 19

Before accepting an engagement to audit a new client, a CPA is required to obtain:

Accepted Answer

Choice "D" is correct. Inquiry of the predecessor auditor is a required pre-acceptance procedure. However, consent of the prospective client must be obtained before a CPA can make such inquiries of the predecessor auditor. Choice "A" is incorrect. Obtaining an understanding of the client's industry and business is a planning procedure performed after an engagement is accepted. Choice "B" is incorrect. A management representation letter is not obtained until the end of the audit. Choice "C" is incorrect. Obtaining a preliminary understanding of the client's control environment is an audit procedure (required by the second standard of fieldwork) that would be performed after an engagement is accepted.

Question 20

Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?

Accepted Answer

Choice "D" is correct. The auditor considers several factors in planning the nature, timing and extent of auditing procedures. One of these factors is the extent of involvement of the client's internal auditors. Choice "A" is incorrect. Representation letters are obtained by the auditor at the end of the audit. The representation letter should not be dated earlier than the date of the auditor's report. Choice "B" is incorrect. The auditor does not perform tests to detect illegal acts during the planning process. Choice "C" is incorrect. The auditor does obtain and evaluate evidence to support significant accounting estimates, but this occurs subsequent to initial planning.

Exam 1: CPA Auditing and Attestation Exam

A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:

Which of the following statements is correct concerning an auditor's use of the work of a specialist?

Which of the following statements would least likely appear in an auditor's engagement letter?

Analytical procedures used in planning an audit should focus on:

A successor auditor ordinarily should request to review the predecessor's audit documentation relating to:

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?

In using the work of a specialist, an auditor of a nonissuer may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor:

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants:

An auditor should design the written audit plan so that:

Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?

An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the:

In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements most likely would consider the:

Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?

A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information?

Which of the following statements is correct concerning an auditor's use of the work of a specialist?

An auditor's engagement letter most likely would include:

During an audit an internal auditor may provide direct assistance to an independent CPA in:

Before accepting an engagement to audit a new client, a CPA is required to obtain:

Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?