Question 1

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the:

Accepted Answer

Choice "C" is correct. The purpose of segregating the duties of hiring personnel (personnel department/human resources) and distributing payroll checks (treasurer's department) is to separate the authorization of transactions (hiring, pay rates, etc. are authorized by the personnel department/human resources) from the custody of related assets (cash or checks are held in the treasurer's department). Choice "A" is incorrect. Segregation of hiring personnel (human resources/personnel) from distribution of payroll checks (treasurer's department) does not involve the controllership function. Choice "B" is incorrect. Keeping administrative controls (management's directives) and accounting controls separate is not accomplished by segregating the hiring and distribution functions. Choice "D" is incorrect. Neither operational responsibility nor recordkeeping responsibility includes distributing checks or hiring personnel.

Question 2

Which of the following evidence provides the greatest assurance of reliability?

Accepted Answer

Choice "A" is correct. External evidence is more reliable than internal evidence. A bank statement is external evidence. Choices "B", "C", and "D" are incorrect. Bank reconciliations, the cash receipts journal, and the cash disbursements journal are all internal evidence, which is not as reliable as external evidence.

Question 3

An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the:

Accepted Answer

Choice "B" is correct. An auditor is responsible for evaluating the reasonableness of significant accounting estimates made by management. An entity's information system may affect the quality of such estimates and therefore should be considered by the auditor. Choices "A", "C", and "D" are incorrect. Control activities such as those designed to limit access, ensure proper authorization, and discover fraud are not directly related to the information system relevant to financial reporting.

Question 4

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables:

Accepted Answer

Choice "C" is correct. Confirmation of accounts receivable provides evidence that the customer and the receivable exist. Choice "A" is incorrect. Accounts receivable confirmations do not provide evidence regarding valuation, since they do not indicate whether customers have the intent or the ability to pay. Choice "B" is incorrect. Accounts receivable confirmations do not provide evidence regarding the appropriate classification of receivables in the financial statements. Choice "D" is incorrect. Accounts receivable confirmations are sent to recorded customers, so they do not provide evidence regarding the possible omission of valid accounts (i.e., completeness).

Question 5

Which of the following procedures most likely would be considered a weakness in an entity's internal controls over payroll?

Accepted Answer

Choice "C" is correct. If the employee who distributes payroll checks returns unclaimed checks to the payroll department, an unscrupulous payroll department employee might be able to set up a fictitious employee and convert the checks once they are returned to the payroll department. Unclaimed checks should be turned over to the cashier in the treasurer's department. Choices "A", "B", and "D" are incorrect. All of the following procedures are good controls over the payroll system: A. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary. B. Payroll checks are prepared by the payroll department and signed by the treasurer. D. The personnel department sends employees' hire and termination notices to the payroll department

Question 6

An auditor most likely would extend substantive tests of payroll when:

Accepted Answer

Choice "C" is correct. An auditor most likely would extend (increase) substantive tests of payroll when significant errors, such as overpayments, are discovered in performing the tests of details. Choice "A" is incorrect. The extensive auditing of payroll by the state government might serve to decrease substantive testing since presumably the extensive audit would have already flushed out any problem areas. Choice "B" is incorrect. A substantial increase in payroll expense would not necessarily increase the substantive tests of payroll if the increase is readily explainable and supportable with analytical review procedures. Choice "D" is incorrect. An increase in overtime would not necessarily cause the auditor to extend substantive tests of payroll, as long as the effect on payroll is supportable with analytical review procedures.

Question 7

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:

Accepted Answer

Choice "D" is correct. The documents available to support accounts payable balances come from external sources, which makes them more reliable. Choice "A" is incorrect. Confirmation of accounts payable is not a duplication of cutoff tests. Cutoff testing addresses questions about proper period (allocation) while confirmation of accounts payable balances generally tests for understated balances. Choice "B" is incorrect. If liabilities are not paid before the audit is completed, accounts payable confirmations would be more important, since there would be less other evidence supporting the liability. Choice "C" is incorrect. Legal action usually takes a long time and correspondence with an attorney may not disclose all nonpayment problems. (Notice the all-inclusive word "all," usually the tip-off to a wrong answer.)

Question 8

Which of the following is not true about accounting estimates?

Accepted Answer

Choice "D" is correct. An accounting estimate pertains to determining the approximation of past events that cannot be determined on a timely, cost-effective basis. If the effect of a past event can be determined on a timely, cost-effective basis, there would be no reason to make an estimate. Choices "A", "B", and "C" are incorrect. Accounting estimates may: A. Measure the effects of past transactions that cannot be determined in a timely cost-effective manner. B. Measure the effects of the present status of an asset or liability. C. Be used to approximate an account pending the outcome of a future event (e.g., uncollectible accounts receivable).

Question 9

Which of the following presumptions does not relate to the reliability of audit evidence?

Accepted Answer

Choice "B" is correct. The concept of cost-benefit is embodied in the auditor's opinion which, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. The cost-benefit concept, however, bears no relationship to the reliability of audit evidence. Choice "A" is incorrect. The more effective the internal control structure, the higher level of assurance it provides about the accounting data and financial statements, and the more reliable audit evidence will be. Choice "C" is incorrect. Evidence obtained from independent sources outside the entity is more persuasive, or reliable, than evidence secured solely within the entity. Choice "D" is incorrect. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive (more reliable) than information obtained indirectly.

Question 10

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that:

Accepted Answer

Choice "B" is correct. By vouching to time card data, the auditor is testing the existence assertion for hours worked. Choice "A" is incorrect. Vouching to approved time card data would provide evidence about hours worked, not pay rates. Pay rates would be tested by comparing to personnel records. Choice "C" is incorrect. Vouching to approved time cards does not provide evidence about segregation of duties. Choice "D" is incorrect. Vouching to the approved time cards does not provide evidence about internal controls related to unclaimed paychecks. The auditor would need to observe a payroll distribution to evaluate these controls.

Question 11

Which of the following evidence provides the least assurance of reliability?

Accepted Answer

Choice "B" is correct. Internal evidence is less reliable than external evidence. A sales invoice is internal evidence. Choices "A", "C", and "D" are incorrect. Accounts receivable confirmations, vendor invoices, and bank statements are all external evidence, which is more reliable than internal evidence.

Question 12

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because:

Accepted Answer

Choice "C" is correct. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because the auditor cannot infer that all nonrespondents have verified their account information. Choice "A" is incorrect. Both positive and negative confirmations are equally affected by recipients' lack of willingness to respond objectively. Choice "B" is incorrect. Both positive and negative confirms are equally affected by recipients' reporting of incorrect balances. Choice "D" is incorrect. Negative confirmations returned do produce information (e.g., errors noted in accounts) that can be statistically quantifiable.

Question 13

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about:

Accepted Answer

Choice "D" is correct. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about valuation and allocation (i.e., if the inventory is becoming older, an obsolescence reserve might be required). Choice "A" is incorrect. The existence assertion addresses whether assets, liabilities, and equity interests exist. Analysis of inventory turnover would not provide evidence concerning this assertion. Choice "B" is incorrect. Rights and obligations pertain to ownership of assets and liabilities. Analysis of inventory turnover would not provide evidence concerning this assertion. Choice "C" is incorrect. Understandability and classification deal with whether the components of the financial statements are properly presented, described, and disclosed. Analysis of inventory turnover would not provide evidence concerning this assertion.

Question 14

In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether the estimates are:

Accepted Answer

Choice "D" is correct. In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether the estimates are reasonable in the circumstances and in conformity with GAAP. Choice "A" is incorrect. Most estimates are subjective in nature and thus subject to bias. Choice "B" is incorrect. Industry guidelines generally do not determine the amount of an accounting estimate, which is developed in accordance with GAAP. Choice "C" is incorrect. Estimates are generally not based upon objective assumptions; rather, they are uncertain in nature, pending the outcome of future events.

Question 15

Which of the following procedures would provide the most reliable audit evidence?

Accepted Answer

Choice "D" is correct. External evidence, such as bank statements obtained directly from the client's financial institution, is more reliable than internal evidence. Choices "A", "B", and "C" are incorrect, which are all based on internally generated sources of evidence.

Question 16

Which of the following is true about an auditor's responsibility with respect to accounting estimates?

Accepted Answer

Choice "C" is correct. The auditor is responsible for evaluating the reasonableness of accounting estimates. Choices "A" and "B" are incorrect. Management is responsible for establishing a process for preparing accounting estimates. Choice "D" is incorrect. The auditor must determine whether the accounting estimate is reasonable in the circumstances.

Question 17

Two assertions for which confirmation of accounts receivable balances provides primary evidence are:

Accepted Answer

Choice "C" is correct. Two assertions for which the confirmation of accounts receivable balances provides primary evidence are rights and obligations (does the client have a right to the receivable?) and existence (does the receivable really exist?). Choices "A", "B", and "D" are incorrect. Confirmation of receivables does not provide evidence about completeness, since the sample begins with recorded receivables. (To test completeness, we would be looking for unrecorded receivables). In addition, confirmation of receivables does not necessarily provide evidence related to the valuation assertion. While the existence of the receivables is confirmed, their collectibility is not.

Question 18

Which of the following statements concerning audit evidence is correct?

Accepted Answer

Choice "B" is correct. The measure of the sufficiency of audit evidence lies in the auditor's judgment. Choice "A" is incorrect. To be appropriate, audit evidence should be both reliable and relevant. Choice "C" is incorrect. The difficulty and expense of obtaining audit evidence concerning an account balance is not a valid basis for omitting the test when there is no acceptable alternative procedure. Choice "D" is incorrect. By itself, a client's accounting data cannot be sufficient audit evidence to support the financial statements. Sufficient, appropriate external evidence must also be obtained to corroborate management's assertions.

Question 19

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of:

Accepted Answer

Choice "B" is correct. When an auditor selects items for test counts and traces the test counts to the client's inventory listing, the auditor has obtained evidence concerning management's assertion of completeness (All inventory on hand has been properly included in the physical listing.) Choice "A" is incorrect. The assertion of rights and obligations would be tested by examining paid vendor's invoices, consignment agreements, and contracts. Choice "C" is incorrect. The assertion of existence would be supported by selecting from a sample of inventory items included in the physical listing and tracing to the floor to determine that the inventory was actually on hand. (Note how changing the direction of testing provides evidence for different assertions.) Choice "D" is incorrect. Valuation pertains to presentation of balances at their appropriate amounts, whereas tracing test counts to the client's inventory listing relates to the testing of inventory quantities.

Question 20

In evaluating the reasonableness of an accounting estimate, an auditor would be least likely to use which of the following approaches?

Accepted Answer

Choice "D" is correct. Even if estimates were discussed during board meetings and/or shareholder meetings, it is unlikely that review of such discussion would provide evidence that the estimate is reasonable. Choices "A", "B", and "C" are incorrect. Reviewing subsequent events, developing an independent expectation, and reviewing and testing the process used to develop the estimate are all appropriate methods used to evaluate the reasonableness of an accounting estimate.

Exam 1: CPA Auditing and Attestation Exam