Question 1

The financial statements of KCP America, a U.S. entity, are prepared for inclusion in the consolidated financial statements of its non-U.S. parent. These financial statements are prepared in conformity with the accounting principles generally accepted in the parent's country and are for use only in that country. How may KCP America's auditor report on these financial statements?

Accepted Answer

Choice "D" is correct. No - Yes - Yes. When financial statements are prepared in conformity with the accounting principles generally accepted in the parent's country and are for use only in that country, the auditor may report using either a U.S.-style report modified to report on the accounting principles of the parent's country or the report form of the parent's country. Choices "A", "B", and "C" are incorrect, per the above Explanation.

Question 2

An auditor concludes that a substantive auditing procedure considered necessary during the prior period's audit was omitted. Which of the following factors would most likely cause the auditor promptly to apply the omitted procedure?

Accepted Answer

Choice "B" is correct. The factor most likely to cause the auditor to promptly apply the omitted procedure would be if the omission impairs the auditor's present ability to support the previously expressed opinion. Choice "A" is incorrect. The auditor would first need to determine whether the omission of the procedure impairs the ability to support the previously expressed opinion. It is possible that other procedures already performed tended to compensate for the omitted procedure, and therefore no further action would be necessary. Choice "C" is incorrect. The availability of the source documents needed to perform the procedure has little bearing on whether the auditor determines that it is necessary to perform the procedure. Choice "D" is incorrect. The rendering of a clean opinion has little importance. The issue is "support of the previously expressed opinion," not what the opinion was.

Question 3

In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of accounting principles to a specific transaction. The accountant's report should include a statement that:

Accepted Answer

Choice "a" is correct. The accountant's report on the application of accounting principles should include a statement that should any facts or circumstances differ from those presented to the accountant, the accountant's conclusions may change. Choice "b" is incorrect. The report should state that the engagement was performed in accordance with "AICPA Standards," not statements on Standards for Consulting Services. Choice "c" is incorrect. The report's use is restricted to "specified parties," which may include parties other than management (e.g., the board of directors). Also, the preparers of the financial statements and the reporting accountant should consult with the entity's continuing accountant. Choice "d" is incorrect. The report does not provide negative assurance with respect to GAAP; rather, it may describe the appropriate accounting principles to be applied.

Question 4

Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:

Accepted Answer

Choice "A" is correct. When subsequently discovered information is found both to be reliable and to have existed at the date of the auditor's report, the auditor should determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. Choice "B" is incorrect. The auditor would request that management disclose the newly discovered information only after determining whether there are persons relying on the information. Choice "C" is incorrect. Management, not the auditor, may issue revised financial statements. Choice "D" is incorrect. The auditor would give public notice that he/she is no longer associated with the FS only after determining that there are persons relying on the information and only if the client refuses to issue revised FS.

Question 5

Which of the following is true regarding the auditor's responsibility to report on information accompanying the basic financial statements in a client-prepared document?

Accepted Answer

Choice "C" is correct. If an auditor chooses to report on information accompanying the basic financial statements in a client-prepared document, the report should include a description of both the character of the audit work performed and the degree of responsibility assumed. Choice "A" is incorrect. There is no requirement that the auditor be specifically engaged to report on such information. If auditing procedures have been applied to the information, the auditor is permitted to report thereon. Choice "B" is incorrect. The auditor is permitted but not required to report on such information. Choice "D" is incorrect. If an auditor chooses to report on information accompanying the basic financial statements in a client-prepared document, the report should include an opinion on the information and a description of both the character of the audit work performed and the degree of responsibility assumed.

Question 6

An auditor reads the letter of transmittal accompanying a county's comprehensive annual financial report and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take?

Accepted Answer

Choice "A" is correct. When information accompanies audited financial statements in a client-prepared document, the auditor is required to read the information. If such information is materially inconsistent with the financial statements and the financial statements do not require revision, the auditor should request that the information (in this case the letter of transmittal) be revised. Choice "B" is incorrect. The auditor would only revise the report to include discussion of the material inconsistency if the client were unwilling to revise the transmittal letter appropriately. Choice "C" is incorrect. The auditor would only consider withdrawing from the engagement if the client were unwilling to revise the transmittal letter appropriately. Choice "D" is incorrect. The auditor would not request a client representation letter acknowledging the inconsistency, as correction (and not simply acknowledgment) of the error is desired.

Question 7

Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

Accepted Answer

Choice "B" is correct. If an auditor becomes aware of material information that existed at the date of the auditor's report, and which would have affected that report, the auditor needs to take appropriate action. Since related party transactions should be disclosed in the financial statements, it is likely that the auditor would need to make further inquiries to determine whether the lack of disclosure will affect the previously issued report. Choice "A" is incorrect. Resolution of a lawsuit that was disclosed in the prior year's audit report would not be likely to affect the audit report, as auditors are not required to update their reports for events occurring after the fact. Choice "C" is incorrect. A technological development that affects the entity's ability to continue as a going concern would not be likely to affect the previous year's audit report, as auditors are not required to update their reports for events occurring after the fact. Choice "D" is incorrect. Sale of a subsidiary would not be likely to affect the previous year's audit report, as auditors are not required to update their reports for events occurring after the fact.

Question 8

Green, CPA, is requested to render an opinion on the application of accounting principles by an entity that is audited by another CPA. Green may:

Accepted Answer

Choice "D" is correct. A "reporting accountant" (an accountant in public practice who is requested to render an opinion on the application of GAAP by an entity audited by another CPA) may accept the engagement, but should consult with the "continuing CPA" to ascertain the available facts relevant to forming a professional judgment. Choices "A" and "B" are incorrect. A reporting CPA may accept an engagement to render an opinion on GAAP of an entity audited by another CPA. The reporting CPA should consult with the continuing CPA to obtain pertinent information. Choice "C" is incorrect. The reporting accountant should consult with the continuing accountant to ascertain all the available, relevant facts.

Question 9

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Accepted Answer

Choice "D" is correct. An auditor would most likely inquire as to whether any unusual adjustments were made after year-end that would require adjustment to and/or disclosure in the year-end financial statements. Choice "A" is incorrect. Obtaining evidence about A/R that were established after year-end would not provide the auditor with information about subsequent events, since any information about these A/R would not require adjustment to or disclosure in the prior year financial statements. Choice "B" is incorrect. Comparing the financial statements being reported on with those of the prior period is not a very good source of subsequent event information. Choice "C" is incorrect. Changes in accounting personnel at any time would probably not result in any subsequent event financial statement adjustment or disclosure.

Question 10

What is an auditor's responsibility for supplementary information which is outside the basic financial statements, but required by the FASB?

Accepted Answer

Choice "C" is correct. For additional supplementary information required by the FASB, the auditor should apply certain limited procedures to the information, and report deficiencies in or omissions of such information. Choice "A" is incorrect. Required supplementary information is considered an essential part of financial reporting, and therefore certain limited procedures should be applied by the auditor. Choice "B" is incorrect. For additional supplementary information required by the FASB, the auditor should apply certain limited procedures to the information, and report deficiencies in or omissions of such information. Choice "D" is incorrect. Certain limited procedures should be applied to required supplementary information, but this information need not be audited.

Question 11

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Accepted Answer

Choice "D" is correct. In obtaining evidence about subsequent events, an auditor would investigate changes in long-term debt occurring after year-end to determine if there was an unrecorded liability as of the end of the year. In addition, subsequent sales of LT debt require footnote disclosure. Choice "A" is incorrect. Changes in employee pay rates occurring after year-end would have no effect on the year under audit. Choice "B" is incorrect. Plant assets sold after the end of the year (that were not related to a current year transaction such as a discontinued operation) have no impact on the current year's financial statements. Choice "C" is incorrect. Following up on payroll checks that were cashed after year-end is generally not the most effective way to audit accrued payroll and would provide little evidence about subsequent events.

Question 12

Investment and property schedules are presented for purposes of additional analysis in an auditor submitted document. The schedules are not required parts of the basic financial statements, but accompany the basic financial statements. When reporting on such additional information, the measurement of materiality is the:

Accepted Answer

Choice "A" is correct. When reporting on additional information accompanying the audited financial statements, the measure of materiality would be the same as that used in forming an opinion on the financial statements taken as a whole. Choices "B", "C", and "D" are incorrect, based on the above Explanation.

Question 13

In the standard report on condensed financial statements that are derived from a public entity's audited financial statements, a CPA should indicate that the:

Accepted Answer

Choice "B" is correct. The auditor's report on condensed statements derived from audited statements should indicate (1) that the CPA audited and expressed an opinion on the complete financial statements, (2) the date of the auditor's report on the complete financial statements, (3) the type of opinion expressed, and (4) whether, in the auditor's opinion, the information set forth in the condensed financial statements is fairly stated in all material respects in relation to the complete financial statements from which it was derived. Choice "A" is incorrect. Condensed financial statements are not prepared in conformity with a comprehensive basis of accounting other than GAAP. Choice "C" is incorrect. The auditor's report on condensed financial statements does not indicate whether they are fairly presented in all material respects; rather, the report indicates whether they are fairly presented in relation to the complete financial statements. Choice "D" is incorrect. The auditor does not express an opinion (or provide any assurance) on whether condensed FS conform with GAAP; only whether such statements are fairly stated in relation to the complete FS.

Question 14

The objective of auditing procedures applied to segment information is to provide the auditor with a reasonable basis for concluding whether:

Accepted Answer

Choice "D" is correct. The auditor's objective is to provide a reasonable basis for concluding whether segment information is presented in conformity with GAAP. Choice "A" is incorrect. The auditor is not required to see that segment information included is comparable to other enterprises. Choice "B" is incorrect. Sufficient audit evidence must be obtained to ensure that segment information is presented in accordance with GAAP, not to allow the auditor to be associated with such information. Choice "C" is incorrect. The inclusion of segment information is a GAAP requirement, and a separate opinion is not required.

Question 15

If information accompanying the basic financial statements in an auditor-submitted document has been subjected to auditing procedures, the auditor may include in the auditor's report on the financial statements an opinion that the accompanying information is fairly stated in:

Accepted Answer

Choice "C" is correct. When an auditor submits a document that contains information in addition to the client's basic financial statements, and this information was subjected to auditing procedures, the auditor may include in the auditor's report an opinion that the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. This statement would follow the opinion paragraph in the standard report. Choice "A" is incorrect. Information in an ASD is not stated in an auditor's report to be in accordance with GAAS. Instead, the auditor would state that the "information has been subjected to the auditing procedures applied in the audit of the basic financial statements..." Choice "B" is incorrect. The auditor would not state that ASD information was fairly stated in accordance with GAAP. The information in an ASD is in addition to that required by GAAP. Choice "D" is incorrect. Reports on ASD are not "attest engagements."

Question 16

On March 15, X4, Kent, CPA, issued an unqualified opinion on a client's audited financial statements for the year ended December 31, X3. On May 4, X4, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first:

Accepted Answer

Choice "B" is correct. In the event of omitted audit procedures, the auditor should first attempt to perform alternative procedures in order to ascertain whether the original opinion can be relied upon. Choice "A" is incorrect. The auditor would only advise the client to notify all stockholders and other financial statement users that the unqualified opinion cannot be relied upon if the auditor cannot satisfy himself (with alternative procedures) as to the propriety of the original opinion. Choice "C" is incorrect. The auditor may need to reissue the audit report if the auditor is unable to satisfy himself using alternative procedures; the opinion issued should be qualified or disclaimed, due to the scope limitation. Choice "D" is incorrect. Tests of controls are not appropriate alternative procedures.

Question 17

An auditor may report on condensed financial statements that are derived from complete audited financial statements if the:

Accepted Answer

Choice "A" is correct. When reporting on condensed financial statements that are derived from complete audited financial statements, the auditor should indicate in his report whether the information in the condensed financial statements is fairly stated in all material respects (in relation to the basic financial statements taken as a whole). Choices "B" and "D" are incorrect. There is no requirement that the condensed financial statements be presented in comparative form, or that they be distributed only to management and the board of directors (i.e., distribution is not restricted). Choice "C" is incorrect. The auditor would not perform or describe additional review procedures related to the condensed financial statements.

Question 18

If management (of a governmental body) declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(an):

Accepted Answer

Choice "D" is correct. If management (of a governmental body) declines to present information required by the GASB, the auditor should issue an unqualified opinion with an additional explanatory paragraph. Choices "A", "B", and "C" are incorrect, per the above Explanation.

Question 19

An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. The prior-period financial statements are restated in the current period to conform with generally accepted accounting principles. The auditor's updated report on the prior-period financial statements should:

Accepted Answer

Choice "a" is correct. When prior-period financial statements are restated in the current period to conform with GAAP, the auditor's updated report on the prior-period financial statements should express an unqualified opinion concerning the restated financial statements. Choice "b" is incorrect. The original auditor's report on the prior period should not be presented. Choice "c" is incorrect. The original report date is used only if the original report is reissued unchanged. Choice "d" is incorrect. A change in accounting principle that is properly accounted for does not result in a qualified opinion. Events Occurring After Year-end

Question 20

An auditor determines that the entity is presenting certain supplementary financial disclosures of pension information that are required by the GASB. Under these circumstances, the auditor should:

Accepted Answer

Choice "D" is correct. The auditor should perform certain limited procedures on supplementary information accompanying the financial statements, including evaluating whether the information is consistent with the audited financial statements. Choice "A" is incorrect. Generally, the auditor's report on the financial statements would not include a reference to required supplementary information unless there were a problem with it (e.g., it was omitted, inappropriately prepared, or the auditor was unable to satisfactorily complete required procedures). Choice "B" is incorrect. An audit can and should be performed in accordance with generally accepted auditing standards even when required supplementary information is presented. Choice "C" is incorrect. The auditor should perform certain limited procedures on supplementary information accompanying the financial statements.

Exam 1: CPA Auditing and Attestation Exam