Question 1

When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should:

Accepted Answer

Choice "C" is correct. Tolerable misstatement is the maximum monetary misstatement in an account balance that may exist without causing the financial statements to be materially misstated. Tolerable misstatement is a planning concept related to the auditor's preliminary judgments about materiality levels. Choice "A" is incorrect. The auditor's overall business risk is not related to the tolerable misstatement used in planning a sample for a substantive test of details. Choice "B" is incorrect. The tolerable misstatement should be adjusted for both qualitative and quantitative factors. Choice "D" is incorrect. The auditor should modify his or her consideration of tolerable misstatement if, during the audit process, information used to determine the initial level of tolerable misstatement changes.

Question 2

With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention, which should be communicated to an entity's management and those charged with governance because they represent:

Accepted Answer

Choice "B" is correct. Significant deficiencies in the design or operation of internal control should be communicated to management and those charged with governance because there is more than a remote likelihood that they will result in a financial statement misstatement that is more than inconsequential. Choice "A" is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if such acts occur through collusion). Choice "C" is incorrect. Significant deficiencies do not necessarily involve violations of an entity's conflict-of-interest policies. Choice "D" is incorrect. Interfering with the auditor's procedures would not constitute a significant deficiency, since such interference would not affect the financial statements.

Question 3

During consideration of internal control in a financial statement audit, an auditor is not obligated to:

Accepted Answer

Choice "A" is correct. During consideration of internal control in a financial statement audit, an auditor is not obligated to search for all significant deficiencies in the operation of internal control, but should communicate any such situations noted to management and those charged with governance. Choice "B" is incorrect. The auditor is required to obtain an understanding of each of the five components of internal control, including the control environment and the (accounting) information system. Choices "C" and "D" are incorrect. As part of planning, the auditor is required to obtain an understanding of the design of relevant controls and to determine whether they have been implemented.

Question 4

An auditor's communication of internal control related matters noted in an audit usually should be addressed to:

Accepted Answer

Choice "A" is correct. An auditor's communication of internal control related matters noted in an audit usually should be addressed to management and those charged with governance. Choices "B", "C", and "D" are incorrect. The director of internal auditing, the chief financial officer, and the chief accounting officer all would have access to the letter; however, it would not be addressed to them since they do not have the same level of authority and responsibility to the shareholders as management and those charged with governance.

Question 5

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

Accepted Answer

Choice "D" is correct. Variables sampling is used to estimate a numerical measurement of a population, such as the dollar value or the dollar value of errors in the population. Choice "A" is incorrect. Discovery sampling is a special case of sampling for "attributes" (errors) where the auditor's initial estimate of error occurrence is zero or near zero. It does not sample for dollar value. Choice "B" is incorrect. The term "numerical sampling" is not used in statistical sampling and is merely a well-designed distractor. Choice "C" is incorrect. Attribute sampling is sampling for errors (or some other attribute). The auditor determines whether the attribute appears or not, but does not try to estimate a numerical measurement of the population.

Question 6

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the:

Accepted Answer

Choice "D" is correct. A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the sample size. Choices "A", "B", and "C" are incorrect. The risk of overreliance, the tolerable rate, and the expected population deviation rate are factors considered in determining a statistical sample size.

Question 7

When engaged to express an opinion on a nonissuer's internal control, an accountant should:

Accepted Answer

Choice "A" is correct. An auditor should obtain management's written assertion about the effectiveness of the entity's internal control. Choice "B" is incorrect. The accountant should disclaim (not qualify) an opinion on management's assertions that the cost of correcting weaknesses exceeds the benefits. Choice "C" is incorrect. The accountant has no responsibility to evaluate the effect of subsequent events. In fact, the report on an entity's internal control specifically states that projections of the internal control evaluation to future periods is inappropriate. Choice "D" is incorrect. The accountant does provide an opinion (and not a disclaimer) on the effective operation of internal control.

Question 8

An auditor may decide to decrease the acceptable level of risk when:

Accepted Answer

Choice "D" is correct. Decreasing the acceptable level of risk will result in a larger sample size, which the auditor might not want to do unless the cost and effort of selecting additional sample items is low. Choice "A" is incorrect. Decreasing the acceptable level of risk doesn't increase the reliability of a given sample. It does, however, result in selection of a larger sample, which in turn makes it less likely that the auditor will make an incorrect decision. Choice "B" is incorrect. The auditor's acceptable level of risk is not affected by the extent to which differences are expected. Choice "C" is incorrect. Control risk is not relevant in assessing the acceptable level of risk, which is a factor of substantive testing.

Question 9

Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually:

Accepted Answer

Choice "B" is correct. A stratified sample generally is more efficient than an unstratified sample since the population is classified in a manner that emphasizes the higher dollar value items. The result is an estimate having a desired level of precision with a smaller sample size. Choice "A" is incorrect. Both stratified and unstratified MPU may be used for populations where many monetary errors are expected to occur. Choice "C" is incorrect. Stratified sampling reduces the variability among items in a stratum. Choice "D" is incorrect. Standard deviations measure variability, and stratification would tend to reduce the strata standard deviations as compared to the overall standard deviation of the population.

Question 10

Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?

Accepted Answer

Choice "C" is correct. In PPS sampling, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. The inputs for PPS are tolerable error, risk of incorrect acceptance, number of errors allowed, and the recorded amount of the population being sampled. Choice "A" is incorrect. The sampling distribution does not have to approximate the normal distribution in order for PPS sampling to be used. Choice "B" is incorrect. Overstated units have a higher (not lower) probability of sample selection than units that are understated, because with PPS sampling, each item is given a probability of selection in proportion to its recorded amount (probability-proportional-to-size). Choice "D" is incorrect. In PPS sampling, the sampling interval is calculated by dividing the recorded amount of the population (not the number of physical units) by the sample size.

Question 11

Which of the following characteristics distinguishes computer processing from manual processing?

Accepted Answer

Choice "A" is correct. Computer processing virtually eliminates the occurrence of (random) computational errors normally associated with manual processing. This is a major benefit of computer processing over manual processing. Choice "B" is incorrect. Depending on human involvement and review, errors or irregularities in computer processing may not be detected quickly. Choice "C" is incorrect. The potential for systematic errors (e.g., incorrect programming, incorrect data entry) is greater in a computerized system due to reduced human involvement in processing. Choice "D" is incorrect. Only poorly designed computerized systems provide no audit trail capabilities.

Question 12

Which of the following statements is correct concerning significant deficiencies noted in an audit of a nonissuer?

Accepted Answer

Choice "D" is correct. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses. Choice "A" is incorrect. Not all significant deficiencies are material weaknesses. Choice "B" is incorrect. The auditor is not obligated to search for significant deficiencies. The auditor is obligated to communicate to the client any significant deficiencies identified while auditing the financial statements. Choice "C" is incorrect. The auditor is obligated to re-communicate significant deficiencies each year, even if management has acknowledged its understanding of such deficiencies.

Question 13

An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as:

Accepted Answer

Choice "C" is correct. Test data often contains invalid information (such as invalid job numbers) that is used to test EDP controls. Choices "A", "B", and "D" are incorrect. While approvals and authorizations should all be tested, they are not IT controls and would not be tested through use of test data.

Question 14

To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the:

Accepted Answer

Choice "A" is correct. When determining the sample size for a test of controls, the auditor should consider the expected deviation rate (which is the auditor's best estimate of the deviation rate in the population before the sampling plan is executed), the tolerable deviation rate, and the allowable risk of assessing control risk too low. Choice "B" is incorrect. The upper deviation rate is used to evaluate a balance after a sampling plan has been performed, not to determine the sample size for a test of controls. Choices "C" and "D" are incorrect. The risk of incorrect acceptance and risk of incorrect rejection are considered in direct tests of balances (i.e., substantive tests), not in tests of controls.

Question 15

Which of the following statements is correct concerning statistical sampling in tests of controls?

Accepted Answer

Choice "D" is correct. As the auditor's tolerable rate decreases (the auditor cannot accept as large an error rate), the sample size increases and vice-versa. Therefore, there is an inverse relationship between the sample size and the tolerable rate. Choice "A" is incorrect. Deviations from control procedures at a given rate usually result in misstatements at a lower rate (i.e., not every deviation from an internal control procedure will necessarily result in a misstatement in the financial statements). Choice "B" is incorrect. When using statistical sampling for tests of controls, changing the size of the population has very little effect on the sample size (unless the population is very small). Choice "C" is incorrect. Consideration should be given to the qualitative aspects of deviations, including the nature and cause of deviations and the possible relationship of the deviations to other phases of the audit.

Question 16

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

Accepted Answer

Choice "A" is correct. An auditor is required to communicate certain matters to those charged with governance, including disagreements with management about significant audit adjustments, whether or not satisfactorily resolved. Choice "B" is incorrect. Written communications should include a limitation on the use of the communication. Choice "C" is incorrect. The auditor is not required to distribute the report to management, especially since certain matters might be inappropriate for discussion with management. Choice "D" is incorrect. The auditor is not required to make the communication before the auditor's report on the financial statements is finalized, 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 filled with the SEC.)

Question 17

Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?

Accepted Answer

Choice "B" is correct. A material weakness in internal control is a significant deficiency that results in more than a remote likelihood that a material misstatement in the financial statements will not be prevented or detected. Choice "A" is incorrect. The auditor is required to separately identify and communicate significant deficiencies and material weaknesses. Choice "C" is incorrect. Significant deficiencies (including material weaknesses) are generally communicated to the appropriate parties after the audit is complete. They may, at the auditor's discretion, be communicated during the audit, but there is no requirement for immediate communication. Choice "D" is incorrect. A material weakness is a significant deficiency that results in more than a remote likelihood that a material misstatement in the financial statements will not be prevented or detected. Not all significant deficiencies will meet this description.

Question 18

A purpose of a management representation letter is to reduce:

Accepted Answer

Choice "C" is correct. A purpose of a management representation letter is to reduce the possibility of a misunderstanding concerning management's responsibility for the financial statements. The first representation made in the letter states "we are responsible for the fair presentation in the financial statements of financial position, results of operations and cash flows in conformity with GAAP." Choice "A" is incorrect. The management representation letter confirms oral representations made by management but does not have an effect on audit risk. Choice "B" is incorrect. The management letter is important audit evidence but it does not reduce the auditor's responsibility to detect material misstatements. Choice "D" is incorrect. The management letter is important audit evidence but it does not reduce the scope of an auditor's procedures concerning related party transactions and subsequent events (or any other generally accepted audit procedure).

Question 19

Which of the following matters is an auditor required to communicate to those charged with governance?

Accepted Answer

Choice "A" is correct. Yes - Yes. Unless all of those charged with governance are also involved with managing the entity, the auditor is required to communicate significant audit adjustments. The auditor is always required to communicate changes in significant accounting policies. Choices "A", "C", and "D" are incorrect, based on the above .

Question 20

Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files?

Accepted Answer

Choice "C" is correct. Microcomputer systems are sometimes characterized by weak file and data security, and are usually accessible by many office personnel. (Manual systems, in contrast, generally restrict one user from accessing other users' files.) Thus, it is usually easier (increased risk) for unauthorized persons to access and alter computer system files, especially microcomputer system files. Choice "A" is incorrect. No difference exists between manual and computer-based systems for detecting transposition errors. Choice "B" is incorrect. Transactions should always be authorized before they are executed and recorded, in both manual and computer-based systems. Choice "D" is incorrect. Because computer-based processing imposes strict rules on input and processing, generally there are fewer random processing errors.

Exam 1: CPA Auditing and Attestation Exam