Question 1

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the:

Accepted Answer

Choice "B" is correct. An increase in the assessed level of control risk means that the assessed risk of material misstatement has also increased, and this requires a corresponding decrease in detection risk to maintain the same (presumably low) level of overall audit risk. Increasing the extent of tests of details will result in a reduction in detection risk. Choice "A" is incorrect. Increasing detection risk would result in a corresponding increase in overall audit risk, which is the opposite of the desired response. Choice "C" is incorrect. The auditor cannot change the level of inherent risk, which is based on the nature of the related assertion. Choice "D" is incorrect. If the auditor has already determined that certain control activities are ineffective, increasing the extent of those tests is not likely to be helpful. The auditor needs to find a way to compensate for the increased level of risk in order to keep overall audit risk to a low level.

Question 2

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective?

Accepted Answer

Choice "C" is correct. Because the auditor has the ultimate responsibility to express an opinion on the financial statements, judgments about assessments of risk, the materiality of misstatements, the sufficiency of tests performed, the evaluation of significant accounting estimates, and other matters affecting the auditor's report should always be those of the auditor. Choices "A", "B", and "D" are incorrect, based on the above explanation.

Question 3

Which of the following statements is not correct about materiality?

Accepted Answer

Choice "B" is correct. Materiality levels include an overall level for each statement; however, because the statements are interrelated, and for reasons of efficiency, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements. Choice "A" is incorrect. The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for the fair presentation of financial statements in conformity with GAAP, while other matters are not important. Choice "C" is incorrect. Materiality judgments are made in light of the surrounding circumstances and necessarily involve both quantitative and qualitative considerations. Choice "D" is incorrect. The auditor's consideration of materiality is influenced by his or her perception of the needs of a reasonable person relying on the financial statements.

Question 4

A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements in a Statement of Financial Accounting Standards. Which of the following information sources would the CPA most likely consult for this information?

Accepted Answer

Choice "A" is correct. The AICPA's Accounting Trends & Techniques is an annual survey of accounting practices followed in 600 stockholders' annual reports. Choice "B" is incorrect. FASB Technical Bulletins are considered to be a source of established accounting principles that expand upon or further clarify GAAP. They do not provide information regarding how various companies comply with GAAP. Choice "C" is incorrect. AICPA Audit and Accounting Guides are interpretive publications that provide additional guidance regarding the application of auditing standards. They do not provide information regarding how various companies comply with GAAP. Choice "D" is incorrect. FASB Statements of Financial Accounting Concepts establish the objectives and concepts for use by the FASB in developing accounting and reporting standards. They do not provide information regarding how various companies comply with GAAP.

Question 5

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:

Accepted Answer

Choice "B" is correct. Before accepting an engagement, the auditor should make specific inquiries of the predecessor auditor in order to assist the auditor in deciding whether or not to accept the engagement. Inquiry should include the predecessor's understanding of the reasons for the change in auditors. Choice "A" is incorrect. The predecessor generally does not provide an opinion on events occurring subsequent to the issuance of the audit report. Choice "C" is incorrect. The successor (and not the predecessor) evaluates the consistency in the application of GAAP. This evaluation occurs after acceptance. Choice "D" is incorrect. The predecessor generally allows the successor to review audit documentation related to matters of continuing accounting significance, but this occurs subsequent to acceptance.

Question 6

An auditor obtains knowledge about a new client's business and its industry to:

Accepted Answer

Choice "D" is correct. The auditor should obtain knowledge of the client's business and its industry in order to determine the effect of transactions, events, and practices on the client's financial statements. Choice "A" is incorrect. Constructive suggestions concerning improvements in the new client's internal control are generally made after the study and evaluation of the client's internal control, performed subsequent to planning. Knowledge about the new client's business and its industry is generally obtained during planning. Choice "B" is incorrect. The auditor should have an attitude of professional skepticism in conducting the engagement, but this attitude is not necessarily related to the auditor's knowledge of the new client's business and its industry. Choice "C" is incorrect. The auditor should evaluate whether the aggregation of known misstatements materially affects the financial statements, but this is done near the audit's conclusion. Knowledge about the new client's business and its industry is generally obtained during planning.

Question 7

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:

Accepted Answer

Choice "A" is correct. The auditor should consider the methods the entity uses to process accounting information in planning the audit because such methods influence the design of internal control. The extent to which computer processing is used in significant accounting applications, as well as the complexity of the processing, may also influence the nature, timing, and extent of audit procedures. Choice "B" is incorrect. Materiality is a matter of professional judgment and is influenced by the auditor's perceptions of the needs of a reasonable person. It would not be affected by the methods used to process accounting information. Choice "C" is incorrect. The auditor develops specific audit objectives based on financial statement assertions. The methods used to process accounting information would not be relevant to the development of objectives. Choice "D" is incorrect. Audit risk is the risk that the auditor may unknowingly fail to modify the opinion on financial statements that are materially misstated. The acceptable level of audit risk is a matter of auditor judgment, but it would not be affected by the methods used to process accounting information.

Question 8

The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to:

Accepted Answer

Choice "A" is correct. Pre-audit planning meetings are typically held to plan technical and personnel aspects of the audit. Assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform. Choice "B" is incorrect. While staff suggestions regarding time budgets may be discussed, this is not typically the primary reason for the meeting. Choice "C" is incorrect. Establishing the need for specialists and internal auditors may be discussed, but this is not the primary reason for the meeting. Choice "D" is incorrect. Disagreements about technical issues arise and are resolved after testing begins, not during the pre-audit conference.

Question 9

To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would:

Accepted Answer

Choice "B" is correct. Knowledge of an entity's business is ordinarily obtained through experience with the entity or its industry and inquiry of personnel of the entity. Audit documentation from prior years may contain useful information about the nature of the business, its organizational structure, its operating characteristics, and transactions that may require special consideration. Choice "A" is incorrect. Tests of details of transactions and balances are not performed during the planning stage of an audit. Choice "C" is incorrect. Reading industry journals would provide information about the industry in which the entity operates, but reviewing prior-year audit documentation and the permanent file would provide a more thorough understanding of the specific client's business. Choice "D" is incorrect. The client's internal control is not reevaluated during the planning stage of an audit.

Question 10

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to:

Accepted Answer

Choice "B" is correct. Each assistant has a professional responsibility to bring to the attention of appropriate individuals in the firm, disagreements or concerns the assistant might have with respect to accounting and auditing issues that he or she believes are of significance to the financial statements or auditor's report. In addition, each assistant should have a right to document his or her disagreement if he or she believes it is necessary to be disassociated from the resolution of the matter. Choice "A" is incorrect. Quality control committees are primarily concerned with determining whether quality control policies and procedures are being effectively applied. Generally, they would not get involved with disagreements related to specific engagements. Choice "C" is incorrect. Disagreements among an audit firm's staff would generally be handled internally. Discussion of such matters with the client would be inappropriate. Choice "D" is incorrect. Impartial peer review teams are primarily concerned with determining whether quality control policies and procedures are being effectively applied. Generally, they would not get involved with disagreements related to specific engagements.

Question 11

Which of the following procedures would an auditor least likely perform in planning a financial statement audit?

Accepted Answer

Choice "C" is correct. Selecting a sample of vendors' invoices for comparison to receiving reports is performed during fieldwork. This is not part of the planning phase. Choice "A" is incorrect. Coordinating the assistance of entity personnel in data preparation is usually performed during the planning phase. Choice "B" is incorrect. During the planning phase, matters that may affect the audit should be discussed with firm personnel responsible for non-audit services to the entity. Choice "D" is incorrect. During the planning phase, the auditor generally would read the current year's interim financial statements.

Question 12

When assessing the internal auditors' competence, the independent CPA should obtain information about the:

Accepted Answer

Choice "B" is correct. When assessing the internal auditors' competence, the auditor should obtain information about such factors as educational level, experience, professional certification, continuing education, supervision, review, and evaluation of performance. Choice "A" is incorrect. The organizational level to which the internal auditors report is related to their objectivity. Choice "C" is incorrect. Policies prohibiting internal auditors from auditing areas where relatives are employed are related to objectivity. Choice "D" is incorrect. Access to sensitive records and information is related to the overall objectives of the internal audit function, not to internal auditor competence.

Question 13

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the:

Accepted Answer

Choice "B" is correct. Review of assistants' work is necessary to determine whether it was performed in a satisfactory manner and to determine whether the work supports the conclusions presented in the auditor's report. Choice "A" is incorrect. The responsibility of a firm to establish review procedures (a system of quality control) is distinct from the auditor's responsibility to adequately plan and supervise the work on a particular engagement. Quality control standards relate to the conduct of the firm's audit practice as a whole; GAAS relates to the conduct of individual audits. Choice "C" is incorrect. Specific audit procedures are performed based on the auditor's judgment and would not necessarily be approved in the professional standards. Choice "D" is incorrect. Review of an assistant's work would not necessarily be indicative of that assistant's technical training and proficiency. The review process is to determine whether the audit is being performed in a satisfactory manner.

Question 14

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

Accepted Answer

Choice "C" is correct. A conclusion that management lacks integrity would probably cause the auditor not to accept a new engagement. Choice "A" is incorrect. Inadequate understanding of the client's internal control would not prevent the auditor from accepting the engagement, since that understanding could be obtained later. Choice "B" is incorrect. Proximity to year-end would not prevent an auditor from accepting a new audit engagement. Choice "D" is incorrect. While analytical procedures are required during planning, this generally occurs subsequent to accepting the engagement.

Question 15

In assessing the competence and objectivity of an entity's internal auditor, an independent auditor least likely would consider information obtained from:

Accepted Answer

Choice "D" is correct. Analytical procedures may be used to enhance the auditor's understanding of the client's business or to evaluate financial statement assertions, but generally would not be helpful in assessing the competence and objectivity of an entity's internal auditor. Choice "A" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from discussions with management personnel. Choice "B" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from external quality reviews of internal audit activities. Choice "C" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from previous experience with the internal audit function.

Question 16

In using the work of a specialist, an auditor referred to the specialist's findings in the auditor's report. This would be an appropriate reporting practice if the:

Accepted Answer

Choice "B" is correct. When expressing an unqualified opinion, the auditor generally will not refer to the work or findings of a specialist. The auditor may, however, make reference to a specialist in an explanatory paragraph if such a reference will facilitate understanding of the explanatory paragraph or of the departure from an unqualified opinion. Choice "A" is incorrect. Lack of client familiarity with the specialist does not affect the auditor's report. Also, it is the auditor (not the client) who must be satisfied regarding the specialist's qualifications. Choice "C" is incorrect. The auditor must understand the form and content of the specialist's findings in relation to the representations in the financial statements to be able to review the specialist's work. However, this does not affect whether or not the auditor refers to the specialist in the auditor's report. Choice "D" is incorrect. An auditor should not divide responsibility for the audit with a specialist. Further, making reference to the specialist in an unmodified unqualified report generally is inappropriate.

Question 17

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

Accepted Answer

Choice "A" is correct. Prior to acceptance of a new engagement, an auditor must attempt to communicate with the predecessor auditor. Inquiry is important because the predecessor auditor may provide information critical to the acceptance decision. Under the Rules of the Code of Professional Conduct, the auditor must first request the client's permission. Choice "B" is incorrect. Although the auditor is required to obtain an understanding of the entity and its environment, including its internal control, this typically happens after the engagement is accepted, not before. Choice "C" is incorrect. A planning memo setting forth staff requirements and documenting the preliminary audit plan is usually prepared after accepting an engagement. Choice "D" is incorrect. A management representation letter is usually obtained at the conclusion of the audit and is dated as of the date of auditor's report.

Question 18

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

Accepted Answer

Choice "B" is correct. In an audit conducted in accordance with GAAS, the auditor must document the audit plan, setting forth in detail the procedures necessary to accomplish the engagement's objectives. Choice "A" is incorrect. Documentation of the auditor's understanding of the client's internal control is required, but may take different forms. A narrative, an internal control questionnaire, a flowchart, or simply a memorandum (for a small client) may be sufficient. Choice "C" is incorrect. A planning memo, while recommended, is not required under GAAS. Choice "D" is incorrect. Documentation of the auditor's understanding of the client's internal control is required, but may take different forms: narrative, internal control questionnaire, flowchart, or simply a memorandum (for a small client) may be sufficient. In addition, controls do not assure the achievement of objectives.

Question 19

Analytical procedures used in planning an audit should focus on:

Accepted Answer

Choice "C" is correct. The purpose of applying analytical procedures in planning the audit is to assist in planning the nature, timing, and extent of auditing procedures that will be used to obtain audit evidence for specific account balances or classes of transactions. To accomplish this, the analytical procedures used in planning the audit should focus on (a) enhancing the auditor's understanding of the client's business and the transactions and events that have occurred since the last audit date, and (b) identifying areas that may represent specific risks relevant to the audit. Choice "A" is incorrect. Analytical procedures to assess the adequacy of evidence would be used in the final review stage. Choice "B" is incorrect. Testing individual account balances that depend on accounting estimates would be a substantive application of analytical procedures and would not be used in the planning stages of an audit. Choice "D" is incorrect. Analytical procedures are generally not useful in detecting material weaknesses in the client's internal control.

Question 20

Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?

Accepted Answer

Choice "A" is correct. The initiative to communicate with the predecessor auditor rests with the successor auditor. Note, however, that the successor auditor must first receive permission from the client. Choice "B" is incorrect. The predecessor auditor should respond promptly and fully to reasonable inquiries. However, the predecessor is not responsible for initiating communications. Choice "C" is incorrect. The prospective client should authorize the predecessor to respond fully to the successor's inquiries. However, the client is not responsible for initiating communications. Choice "D" is incorrect. The prospective client should authorize the predecessor to respond fully to the successor's inquiries. However, the client is not responsible for initiating communications.

Exam 1: CPA Auditing and Attestation Exam