Question 1

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Accepted Answer

Choice "C" is correct. The function of cash receipts is part of the treasurer's department and should be separate from the role of writing off receivables. Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by writing off the related receivable balance. Choice "A" is incorrect. Internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to the purchase and receipt of goods. Choice "B" is incorrect. Internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory valuation. Choice "D" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated.

Question 2

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?

Accepted Answer

Choice "D" is correct. The treasurer does not perform duties that are incompatible with authorizing write ffs since he or she is usually not involved with sales transactions or recordkeeping. Choice "A" is incorrect. Recording accounts receivable and authorizing write-offs would constitute an improper segregation of duties. Choice "B" is incorrect. Granting credit and authorizing write-offs represents an improper segregation of duties since non-existent customers could have credit authorized and then have their accounts written off. Choice "C" is incorrect. The accounts payable department is typically involved in the expenditure cycle, not the revenue cycle.

Question 3

Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements?

Accepted Answer

Choice "B" is correct. If control accounts in the general ledger do not reconcile to the subsidiary ledgers, there may be a problem in the way transactions were recorded and posted. Failure to investigate such differences implies that, if such a problem exists, it has not been identified and corrected. The auditor would therefore suspect that material misstatements exist in the client's financial statements. Choice "A" is incorrect. The assumptions used in developing accounting estimates generally do change as new information becomes available or as situations or conditions change. This would not necessarily indicate that a material misstatement exists. Choice "C" is incorrect. Since responses to negative confirmations are only received when there are discrepancies, a lower response rate likely would be indicative of fewer problems with accounts receivable. This corresponds to a reduced likelihood of material misstatement. Choice "D" is incorrect. Management's consultation with another CPA firm about complex accounting matters indicates proactive steps on the part of management to accurately address those matters. Material misstatements with respect to the complex accounting matters therefore would be less likely to exist.

Question 4

Which of the following factors would least likely affect the nature and extent of audit documentation?

Accepted Answer

Choice "D" is correct. The content of the representation letter will generally not affect the nature and extent of audit documentation. Factors affecting the nature and extent of audit documentation include: 1. The risk of material misstatement. 2. The extent to which judgment was required in performing the work and evaluating the results. 3. The nature of the specific auditing procedure. 4. The significance of the evidence obtained. 5. The nature and extent of any problems identified; and 6. The need to document conclusions that may not be obvious.

Question 5

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

Accepted Answer

Choice "B" is correct. Tracing from a sample of shipping documents to matching sales invoices would provide support for the completeness assertion for billing. Choice "A" is incorrect. Scanning the sales journal for sequential and unusual entries tests the completeness and existence assertions for sales, but would not provide assurance that shipped goods were properly billed. Choice "C" is incorrect. Comparing the accounts receivable ledger to the daily sales summary helps ensure that all sales were recorded as receivables and all receivables were recorded as sales, but it does not provide assurance that shipped goods were properly billed. Choice "D" is incorrect. Inspecting the consecutive numbering of unused sales invoices might identify fictitious sales, but it would not ensure that goods that have been shipped were properly billed.

Question 6

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

Accepted Answer

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 7

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:

Accepted Answer

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.

Question 8

Audit documentation serves mainly to:

Accepted Answer

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 9

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:

Accepted Answer

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 10

In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?

Accepted Answer

Choice "B" is correct. Vouching to supporting documents tests the occurrence assertion. Choice "A" is incorrect. Tracing from supporting documentation to the voucher register would support the completeness assertion. Choice "C" is incorrect. The accuracy assertion would be tested by examining the details of the supporting documents. Choice "D" is incorrect. The rights and obligations assertion does not relate to transactions and events.

Question 11

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:

Accepted Answer

Choice "A" is correct. Assertions about valuation and allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts, and any resulting valuation adjustments are appropriately recorded. For example, management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value. Choice "B" is incorrect. Assertions about understandability and classification deal with whether financial information is appropriately presented and described, and disclosures are clearly expressed. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "C" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interest of the entity exist at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "D" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.

Question 12

Audit documentation should be prepared in enough detail so that:

Accepted Answer

Choice "D" is correct. Audit documentation should be prepared in enough detail so that an experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained. Choice "A" is incorrect. The requirement is that audit documentation be detailed enough that an experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained. This is a higher standard than simply requiring the audit documentation to be appropriate for an auditor who is already familiar with the client. Choices "B" and "C" are incorrect. Readers of the financial statements typically would not have access to the audit documentation.

Question 13

Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible employee should:

Accepted Answer

Choice "C" is correct. Upon receipt of cash, a remittance listing should be prepared. Choice "A" is incorrect. Recording the check in the daily cash summary would ordinarily be done by a second party after the initial listing has been prepared. Choice "B" is incorrect. Verifying that each check is supported by a valid invoice is not necessary. Choice "D" is incorrect. Recording the check in the cash receipts journal would ordinarily be done by a second party after the initial listing has been prepared.

Question 14

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

Accepted Answer

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 15

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:

Accepted Answer

Choice "B" is correct. By stamping the voucher "paid," the check signer cancels the voucher so it cannot be resubmitted for payment. Choice "A" is incorrect. Even invoices that are supported by prenumbered sales invoices can be resubmitted for payment if they are not canceled, resulting in duplicate payments. Choice "C" is incorrect. Accounting for the sequence of prenumbered vouchers would only test whether all vouchers are present. It would not prevent a voucher from being paid twice. Choice "D" is incorrect. Proper authorization would help ensure that payments were properly authorized, but would not prevent duplicate payments.

Question 16

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:

Accepted Answer

Choice "C" is correct. Shipping documents provide evidence that a sale occurred, and therefore selecting from a population of shipping documents allows the auditor to test whether corresponding invoices exist for each sale. Choices "A" and "B" are incorrect. The existence of customer orders and sales orders does not necessarily imply that a sale occurred. For example, the particular item requested may be out of stock. In such cases, there would properly be no sales invoice. Choice "D" is incorrect. Since the weakness the auditor is concerned about involves missing sales invoices, selecting from a sample of existing sales invoices would not identify this problem.

Question 17

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

Accepted Answer

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 18

Which best describes the documentation completion date?

Accepted Answer

Choice "A" is correct. According to PCAOB standards, the documentation completion date is forty-five days following the report release date. Choice "B" is incorrect. According to auditing standards, the documentation completion date is sixty days following the report release date. Choices "C" and "D" are incorrect. Seven years and five years refer to the required retention period under PCAOB standards and auditing standards, respectively.

Question 19

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to:

Accepted Answer

Choice "C" is correct. In general, an audit procedure can be restated as the question to be answered. In this case, tracing a sample of purchase orders and related receiving reports to the purchases journal and the cash disbursements journal seeks to answer the question, "Were all purchases properly recorded?" (the completeness assertion). Choice "A" is incorrect. Tracing a sample of source documents to summary records would not identify unusually large transactions requiring additional attention. Choice "B" is incorrect. In order to verify that cash disbursements were for goods actually received, a sample of cash disbursements should be vouched back to receiving reports. Choice "D" is incorrect. In order to verify that cash disbursements were for goods actually ordered, a sample of cash disbursements should be vouched back to purchase orders.

Question 20

Which of the following internal controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?

Accepted Answer

Choice "A" is correct. Comparison of daily sales summaries to daily postings to the accounts receivable ledger would ensure the completeness of the accounts receivable ledger. Choice "B" is incorrect. Comparison of sales invoices to shipping documents verifies occurrence of the sale, not completeness of the accounts receivable ledger. Choice "C" is incorrect. Reconciliation of the accounts receivable ledger to the general ledger would not assure the accuracy and completeness of the accounts receivable ledger because a sale which was improperly excluded from receivables would likely be omitted from both ledgers. Choice "D" is incorrect. Ensuring that all shipments are billed verifies completeness of sales transactions, but does not provide evidence that all sales are recorded in the accounts receivable ledger. In other words, the fact that a shipment was billed does not mean that the invoice was also recorded in the accounts receivable ledger.

Exam 1: CPA Auditing and Attestation Exam