Question 1

When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor should prepare a written report on the auditor's:

Accepted Answer

Choice "B" is correct. Government Auditing Standards require that the auditor issue a written report on internal control in all audits. As part of this reporting requirement, the auditor must describe the scope of the auditor's work in obtaining an understanding of internal control and his or her assessment of control risk. Choice "A" is incorrect. In the report, the auditor would identify significant deficiencies (reportable conditions) and material weaknesses (not performance problems) found in the examination of the entity's internal control. Choice "C" is incorrect. A report on fieldwork and procedures that substantiated the auditor's specific findings and conclusions would not be prepared as part of a GAGAS audit. Choice "D" is incorrect. The objective of the audit of the financial statements is to provide an opinion on the financial statements, not on the entity's attainment of goals and objectives.

Question 2

Reporting on internal control under Government Auditing Standards differs from reporting under generally accepted auditing standards in that Government Auditing Standards requires a:

Accepted Answer

Choice "B" is correct. Government Auditing Standards require a description of the scope of the auditor's testing of compliance and of internal control. This is not required under generally accepted auditing standards. Choice "A" is incorrect. Although a written report on internal control is required, the auditor does not have to identify procedures specifically designed to prevent fraud, abuse, and illegal acts. Choice "C" is incorrect. Government Auditing Standards require tests of compliance with applicable laws and regulations governing a particular grant, because the grant money received can only be spent for certain purposes. However, neither GAGAS nor GAAS requires that negative assurance be given with respect to internal controls. Choice "D" is incorrect. Although Government Auditing Standards require tests of compliance with applicable laws and regulations governing a particular grant (the grant money received can only be spent for certain purposes), auditors are not required to give positive assurance that internal controls designed to detect material errors and fraud were tested under either GAGAS or GAAS.

Question 3

Which of the following is a documentation requirement that an auditor should follow when auditing in accordance with Government Auditing Standards?

Accepted Answer

Choice "B" is correct. Per Government Auditing Standards, audit documentation should contain sufficient information so that supplementary oral Explanations are not required. Choice "A" is incorrect. The auditor should obtain written representation from management acknowledging responsibility for "violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." Choice "C" is incorrect. The auditor should document procedures performed to evaluate compliance with laws and regulations that have a direct and material effect on the determination of financial statement amounts. Choice "D" is incorrect. There is no such requirement that audit documentation contain this caveat.

Question 4

An auditor most likely would be responsible for communicating significant deficiencies in the design of internal control:

Accepted Answer

Choice "B" is correct. When reporting under Government Auditing Standards, the auditor should consider whether any noted deficiencies in such internal controls should be reported to specific legislative and regulatory bodies. Choice "A" is incorrect. The auditor would report significant deficiencies to the audit committee. The auditor is prohibited from disclosing confidential client information to the SEC by the Code of Professional Conduct. Choice "C" is incorrect. When there is no audit committee, the auditor would report significant deficiencies in the design of the client's internal control to an otherwise formally designated committee with oversight over the financial reporting process, not necessarily to a court-appointed creditors' committee. Choice "D" is incorrect. The auditor would report significant deficiencies to the audit committee. The auditor is prohibited from disclosing confidential client information to significant shareholders by the Code of Professional Conduct.

Question 5

Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to:

Accepted Answer

Choice "B" is correct. The report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and present the results of those tests. Choice "A" is incorrect. The auditor's report on internal controls indicates whether or not material weaknesses were found, but it does not provide assurance that specific internal control activities are consistent with the entity's objectives. Choice "C" is incorrect. The auditor is not required to provide negative assurance regarding the override of internal control, although the audit report will provide negative assurances regarding internal control over financial reporting and its operations that may involve a material weakness. Choice "D" is incorrect. There is no requirement that the auditor describe the scope of substantive tests. However, under Government Auditing Standards, the report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting. Communication with Those Charged with Governance

Question 6

The date of the management representation letter should coincide with the date of the:

Accepted Answer

Choice "C" is correct. Because the auditor is concerned with events occurring through the date of the audit report that may require adjustment to or disclosure in the financial statements, the management representation letter should be dated as of the date of the auditor's report. Choice "A" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is generally after the balance sheet date. Choice "B" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is unrelated to the date of the latest interim financial information. Choice "D" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is unrelated to the dates of related party transactions.

Question 7

In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity's compliance with laws and regulations. This report should:

Accepted Answer

Choice "A" is correct. Basic elements of a report on compliance include a statement that tests of compliance with laws, regulations, contracts, and grants that have a direct and material effect on the financial statements is part of obtaining reasonable assurance that the financial statements are free of material misstatement. Choice "B" is incorrect. It is not necessary to describe the laws and regulations with which the entity must comply. Choice "C" is incorrect. The objective of the audit of the financial statements is not to provide an opinion on overall compliance with laws and regulations. Choice "D" is incorrect. While the auditor does not possess legal skills and cannot make legal judgments, it is not necessary to disclose this in the report.

Question 8

"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a (an):

Accepted Answer

Choice "C" is correct. The written representation obtained by the auditor from management will ordinarily include information regarding any violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency. Choice "A" is incorrect. A client engagement letter is used to document the understanding between the client and the auditor. The letter is generally sent from the auditor to the client, although the client may be requested to sign it. The statement, "There are no violations or possible violations of laws or regulations..." should come from management. It would not be appropriate to include this in an engagement letter, which is often sent before the year has even ended. Choice "B" is incorrect. An auditor would prepare a report on compliance with laws and regulations. The statement, "There are no violations or possible violations of laws or regulations..." should come from management. Choice "D" is incorrect. An auditor would prepare an attestation report on internal control. The statement, "There are no violations or possible violations of laws or regulations..." should come from management.

Question 9

A written client representation letter most likely would be an auditor's best source of corroborative information of a client's plans to:

Accepted Answer

Choice "D" is correct. A written client representation letter should include representations regarding matters that may affect recognition, measurement, and disclosure. Management's plans to discontinue a line of business may affect financial statement disclosure, since the results of operations of a component classified as "held for sale" would be reported separately in the income statement under "discontinued operations." Choice "A" is incorrect. A client's plan to terminate an employee pension plan would not affect recognition, measurement, or disclosure in the current period financial statements. Choice "B" is incorrect. A client's plans to make a public offering of its common stock would not affect recognition, measurement, or disclosure in the current period financial statements. Choice "C" is incorrect. A letter from the client's attorney most likely would be an auditor's best source of corroborative information of a client's plans to settle an outstanding lawsuit for an amount less than the accrued loss contingency.

Question 10

An enterprise engaged a CPA to audit its financial statements in accordance with Government Auditing Standards (the Yellow Book) because of the provisions of government grant funding agreements. Under these circumstances, the CPA is required to report on the enterprise's internal controls either in the report on the financial statements or in:

Accepted Answer

Choice "D" is correct. The report on the audit of the financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and should either present the results of those tests or refer to a separate report containing that information. Choice "A" is incorrect. The CPA was engaged to audit financial statements in accordance with the Yellow Book, not to perform a performance audit. Choice "B" is incorrect. The notes to the financial statements are a management representation and would not be used by the CPA to comply with requirements to either report or opine in conformity with Yellow Book requirements. Choice "C" is incorrect. Governmental Auditing Standards require that the auditor describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting and present the results of those tests as part of their report or in a separate report, not simply in a letter to the funding agency.

Question 11

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

Accepted Answer

Choice "B" is correct. The auditor should determine that those charged with governance are informed about the initial selection of and changes in significant accounting policies or their application. Choice "A" is incorrect. The communication is incidental to the audit; accordingly, it is not required to occur before the issuance of the auditor's report as long as the communication occurs on a timely basis. (Note, however, that for audits of issuers, the communication must be made before the auditor's report is filed with the SEC.) Choice "C" is incorrect. Communication with management is not required. Choice "D" is incorrect. Unless all those charged with governance are also involved with managing the entity, the auditor should inform those charged with governance about adjustments that could, either individually or in the aggregate, have a significant effect on the entity's financial reporting process, regardless of whether the adjustment was recorded.

Question 12

An auditor would least likely initiate a discussion with those charged with governance concerning:

Accepted Answer

Choice "B" is correct. The auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. Materiality assessments are not typically discussed with those charged with governance. Choice "A" is incorrect. The auditor should communicate with those charged with governance about the appropriateness of significant accounting policies, such as the methods used to account for significant unusual transactions. Choice "C" is incorrect. The auditor should inform those charged with governance of illegal acts that come to the auditor's attention during the course of the audit. Fraud involving senior management should also be reported directly to those charged with governance. Choice "D" is incorrect. The auditor should discuss with those charged with governance any disagreements with management, whether or not they were satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity's financial statements or the auditor's report.

Question 13

Which of the following statements might be included among additional written client representations obtained by the auditor?

Accepted Answer

Choice "A" is correct. The purpose of the management representation letter is to confirm management's oral evidence supplied during the engagement. Specific written representations obtained by the auditor might include acknowledgment that all compensating balances or other restrictions on cash have been disclosed. Choice "B" is incorrect. Management acknowledges responsibility for the fair presentation of the financial statements, not for illegal actions committed by employees. Choice "C" is incorrect. The auditor must decide whether there is sufficient audit evidence available to permit the issuance of an unqualified opinion, and does not request management confirmation of this decision. Choice "D" is incorrect. Management is responsible for the design and maintenance of internal control of the company, but it is the auditor who must determine whether material weaknesses in internal control exist.

Question 14

In identifying matters for communication with those charged with governance, an auditor most likely would ask management whether:

Accepted Answer

Choice "B" is correct. The auditor is required to communicate to those charged with governance regarding certain matters, including management consultation with other auditors. Consequently, the auditor must ask management about this matter. Choice "A" is incorrect. Unusually high turnover in the accounting department is a negative factor in assessing control risk, but it is not a matter that needs to be communicated to those charged with governance. Choice "C" is incorrect. Inquiry of management concerning any subsequent events of which the auditor is unaware is a required audit procedure, which would also be confirmed as part of the management representation letter, but it is not a matter that needs to be communicated to those charged with governance. (They should already know!) Choice "D" is incorrect. The auditor alone has responsibility for judgments regarding the assessed level of control risk, and the auditor would not generally discuss this assessment with management.

Question 15

Which of the following matters is an auditor not required to communicate to those charged with governance?

Accepted Answer

Choice "D" is correct. The auditor is not required to communicate to those charged with governance the degree of reliance placed on the management representation letter. Choice "A" is incorrect. Unless all those charged with governance are also involved with managing the entity, the auditor should inform those charged with governance about adjustments arising from the audit, regardless of whether or not management recorded them. Choice "B" is incorrect. The auditor should communicate qualitative aspects of the process used by management in formulating sensitive accounting estimates, which would likely include discussion of the basis for the auditor's conclusions regarding the reasonableness of those estimates. Choice "C" is incorrect. The auditor should communicate the level of responsibility that he/she is assuming under GAAS.

Question 16

Which of the following should be included as a written representation from management?

Accepted Answer

Choice "A" is correct. The representation letter should include management's belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Choice "B" is incorrect. If the misstatements have been corrected, there is no need for management to make representations regarding their materiality. Choice "C" is incorrect. Management (and not the auditor) is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles. Choice "D" is incorrect. Management states its belief that the financial statements are fairly presented in conformity with GAAP. Fair presentation does not mean that the financial statements are completely accurate in all respects, but that they are accurate in all material respects.

Question 17

Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has:

Accepted Answer

Choice "A" is correct. The auditor should obtain written representation that management has disclosed all laws and regulations that have a direct and material effect on its financial statements. Choice "B" is incorrect. Management need not acknowledge that it has implemented internal control activities to detect all illegal acts. Choice "C" is incorrect. Management should state that it is responsible for compliance with all laws and regulations. Choice "D" is incorrect. Management need not employ internal auditors.

Question 18

Which of the following expressions most likely would be included in a management representation letter?

Accepted Answer

Choice "A" is correct. It is appropriate for the representation letter to contain a statement regarding subsequent events. Choice "B" is incorrect. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events. The communication of significant deficiencies in internal control does not fall within these categories. Choice "C" is incorrect. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events. A waiver of attorney-client privilege does not fall within these categories. Choice "D" is incorrect. While this may be an accurate statement, it is not something that would be included in the management representation letter. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events.

Question 19

Which of the following matters would an auditor most likely communicate to those charged with governance?

Accepted Answer

Choice "D" is correct. The auditor should communicate the initial selection of, and changes in, significant accounting policies to those charged with governance. Choice "A" is incorrect. Negative trends and adverse financial ratios are evaluated by an auditor when considering an entity's ability to continue as a going concern. These trends and ratios are not required to be communicated to those charged with governance. Choice "B" is incorrect. The auditor's communications to those charged with governance include the level of responsibility that the auditor is assuming regarding matters of interest to those charged with governance, not the level of responsibility assumed by management. Choice "C" is incorrect. The auditor is required to inform the audit committee about difficulties encountered with management during the audit. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables generally would not be communicated to those charged with governance, since such difficulties are not related to management.

Question 20

The scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies. Which of the following elements do these audits have in common?

Accepted Answer

Choice "C" is correct. Auditors engaged to perform audits of federal financial assistance (generally under the provisions of the Single Audit Act) must perform procedures to obtain an understanding of internal control pertaining to compliance, and should document this understanding of internal control. Choice "A" is incorrect. The auditor is required to disclose actual instances of fraud and illegal acts, not all situations that could be indicative of fraud, abuse, or illegal acts. Choice "B" is incorrect. Materiality levels of organizations receiving federal financial assistance are set by the auditor, not the government. Materiality levels depend upon auditor judgment and will not fall or rise purely as a result of federal participation. Choice "D" is incorrect. Statistical sampling applications are permitted, and 100% verification of accounts is not required.

Exam 1: CPA Auditing and Attestation Exam