Question 1

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. Our use of professional judgment and the assessment of audit risk and materiality for the purpose of our audit mean that matters may have existed that would have been assessed differently by you. We make no representation as to the sufficiency or appropriateness of the information in our audit documentation for your purposes.

Accepted Answer

Choice "P" is correct. An audit of a new client may be facilitated by review of the predecessor's audit documentation. The predecessor should make it clear that they are not responsible for the sufficiency or appropriateness of the information in their audit documentation for the successor auditor's purposes.

Question 2

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. The company considers the decline in value of equity securities classified as available-for-sale to be temporary.

Accepted Answer

Choice "N" is correct. Management's discussion regarding the temporary nature of a decline in the value of equity securities provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.

Question 3

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. The timetable set by management to complete our audit was unreasonable considering the failure of the company's personnel to complete schedules on a timely basis and delays in providing necessary information.

Accepted Answer

Choice "F" is correct. The auditor should inform the audit committee of any serious difficulties encountered with management during the performance of the audit.

Question 4

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

Accepted Answer

Choice "B" is correct. Accounts receivable turnover is calculated as sales / receivables. A decline in this ratio may indicate that there was an improper cutoff of sales at the end of the year. For example, if sales made at the beginning of the subsequent year were inadvertently recorded in the current year, both sales and receivables would be overstated by the same amount. This would generally result in a larger proportionate effect on receivables (since the receivables balance is smaller than sales for the year), and an overall decrease in the ratio. Choice "A" is incorrect. Failure to write down obsolete inventory would not affect sales or receivables, and so would have no effect on accounts receivable turnover. Choice "C" is incorrect. Write-off of an unusually large receivable would reduce the receivables balance without affecting sales. This in turn would cause an increase in accounts receivable turnover. Choice "D" is incorrect. The aging of accounts receivable does not affect the overall receivable balance, and therefore would have no effect on accounts receivable turnover.

Question 5

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to:

Accepted Answer

Choice "C" is correct. Statistical sampling helps the auditor to measure the sufficiency of the audit evidence because the auditor can quantify the audit risk, thus assisting in limiting it to an acceptable level. Choice "A" is incorrect. Nonsampling errors relate to the improper evaluation of evidence by the auditor and are not dependent on the sampling method used. Choice "B" is incorrect. Audit risk can be reduced to a relatively low level with non-statistical sampling. Materiality is not affected by the sampling method used. Choice "D" is incorrect. The use of statistical sampling does not necessarily minimize the failure to detect errors and fraud.

Question 6

Symbol A most likely represents:

Accepted Answer

Choice "C" is correct. The accounts receivable master file is the file most likely to be affected by sales and cash receipts transactions, as noted immediately above symbol "A" in the flowchart. Choice "A" is incorrect. Remittance advices are used to update the accounts receivable file, but a separate "remittance advice file" generally is not created. Choice "B" is incorrect. The inventory/purchase/cash disbursements cycle would include a receiving report file, not the revenue cycle. Choice "D" is incorrect. Cash disbursements are not part of the revenue cycle.

Question 7

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. The company considers the decline in value of equity securities classified as available-for-sale to be temporary.

Accepted Answer

Choice "N" is correct. Management's statement that there have been no communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices provides information regarding the completeness of information, and would be included in the management representation letter.

Question 8

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 "D" is correct. 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 valuation or allocation, which pertain to the presentation of assets, liabilities, and equity interests at appropriate amounts. The auditor is concerned with the proper valuation of those receivables. Choice "A" is incorrect. Understandability and classification deals with whether the components of the financial statements are properly presented, described, and disclosed, not whether they are properly valued. Choice "B" is incorrect. Existence relates to whether assets, liabilities, and equity interests exist. Choice "C" is incorrect. Rights and obligations pertain to ownership of assets and liabilities, not to the valuation of those accounts.

Question 9

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. It is our opinion that the possible liability to the company in this proceeding is nominal in amount.

Accepted Answer

Choice "D" is correct. In response to an audit inquiry letter, a lawyer would provide corroboration regarding the likelihood of an unfavorable outcome to pending litigation and an estimate of any potential loss.

Question 10

Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?

Accepted Answer

Choice "D" is correct. The most effective control in assuring that recorded purchases are free of material errors is the independent matching of the purchase order, receiving report, and vendor's invoices in preparing the vouchers on which the disbursement check is based. Choice "A" is incorrect. The receiving department should not have access to the quantity ordered on the purchase order. This forces receiving department employees to actually perform an independent count. Choice "B" is incorrect. It is not enough to compare only vendor invoices and purchase orders, as this will still allow payment for goods that were not received. Choice "C" is incorrect. Requiring that receiving reports be authorized by the individual who authorized the purchase does not ensure that the invoice and the related payment will be properly recorded.

Question 11

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the:

Accepted Answer

Choice "D" is correct. Both the risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement. Choice "A" is incorrect. Allowable risk of tolerable misstatement does not exist. Choice "B" is incorrect. The risk of incorrect acceptance and risk of assessing control risk too low are unrelated to preliminary estimates of materiality. Choice "C" is incorrect. The efficiency of the audit is related to the risk of incorrect rejection and the risk of assessing control risk too high.

Question 12

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would trace:

Accepted Answer

Choice "D" is correct. Tracing from the inventory listing to the inventory tags and the auditor's recorded count sheets verifies the validity (existence) of the items. Choice "A" is incorrect. Tracing inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices might be used to verify completeness of purchases or payables. Choice "B" is incorrect. Tracing from receiving reports and vendors' invoices to the inventory listing are cut-off procedures used to verify completeness of the inventory listing. Choice "C" is incorrect. Tracing from inventory tags to the inventory listing schedule verifies the completeness of the schedule, not the existence (or validity) of the items.

Question 13

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:

Accepted Answer

Choice "B" is correct. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support the assertion of valuation and allocation (i.e., to determine whether the allowance for doubtful accounts properly adjusts the receivables balance to net realizable value). Choice "A" is incorrect. Evaluating the adequacy of the allowance for doubtful accounts does not pertain to existence. To support the assertion of existence, an auditor would most likely confirm accounts receivable. Choice "C" is incorrect. An auditor would trace from shipping records to the sales journal and the accounts receivable ledger to determine if all shipments were properly recorded as sales (completeness assertion). Choice "D" is incorrect. The assertion of rights and obligations relating to accounts receivable would be supported by examining appropriate supporting documentation, not by evaluating the allowance for doubtful accounts.

Question 14

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. Indicate in the space provided below whether this information agrees with your records. If there are exceptions, please provide any information that will assist the auditor in reconciling the difference.

Accepted Answer

Choice "J" is correct. Receivable confirmations request customers of the client to confirm balances and identify discrepancies.

Question 15

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:

Accepted Answer

Choice "A" is correct. Selection of every twentieth item results in a sample that is 5% (1/20 = .05) of the population. The sample results indicate a net overstatement of $3,500 (= $3,700 $200), which is then projected to the total population as $70,000 (= $3,500 / .05). (Alternatively, 3,500 × 20 = 70,000). Since the projected misstatement of $70,000 exceeds the tolerable misstatement of $60,000, there is an unacceptably high risk that the actual misstatement in the population will exceed the tolerable misstatement. Choice "B" is incorrect. Tolerable misstatement is compared to the projected misstatement, not to the actual error in the sample. Choices "C" and "D" are incorrect. The asset account is not fairly stated because the projected misstatement exceeds the tolerable misstatement.

Question 16

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. Blank checks are maintained in an unlocked cabinet along with the check-signing machine. Blank checks and the check-signing machine should be locked in separate locations to prevent the embezzlement of funds.

Accepted Answer

Choice "B" is correct. Failure to lock blank checks and the check-signing machine in separate locations is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.

Question 17

An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider:

Accepted Answer

Choice "C" is correct. The sample size in an attribute sampling application is affected by the allowable risk of assessing control risk too low, the tolerable deviation rate, and the expected deviation rate. The average dollar value of the check requests has no effect on the sample size. Choices "A", "B", and "D" are incorrect, per the above Explanation.

Question 18

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations. You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. In case 1 the required sample size from population 1 is:

Accepted Answer

Choice "A" is correct. A lower risk of incorrect acceptance requires a greater sample size. Choices "B", "C", and "D" are incorrect, based on the above

Question 19

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. During the year under audit, we were advised that management consulted with Better & Best, CPAs. The purpose of this consultation was to obtain another CPA firm's opinion concerning the company's recognition of certain revenue that we believe should be deferred to future periods. Better & Best's opinion was consistent with our opinion, so management did not recognize the revenue in the current year.

Accepted Answer

Choice "F" is correct. Unless all of those charged with governance are also involved with managing the entity, the auditor should discuss with those charged with governance significant accounting or auditing matters that were the subject of outside consultation.

Question 20

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the:

Accepted Answer

Choice "A" is correct. The sample size in a variables sampling application is affected by the variability in the population (generally represented by the standard deviation), the acceptable level of risk (i.e., the risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement. Choices "B", "C", and "D" are incorrect, per the above Explanation.

Exam 1: CPA Auditing and Attestation Exam