Question 1

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:

Accepted Answer

Choice "D" is correct. In order to observe the physical inventory count, the auditor would have to coordinate schedules with the client. This timing is usually agreed upon before implementation of the audit strategy. Choice "A" is incorrect. It would not be appropriate for the client to be involved in determining the amount of evidence necessary to provide a basis for an opinion. Choice "B" is incorrect. It would not be appropriate for the client to be involved in determining the procedures necessary to obtain evidence about litigation, claims and assessments. Choice "C" is incorrect. Determination of the pending legal matters to be included in a letter to the client's attorney would not generally be made during the planning stage of the audit.

Question 2

The existence of audit risk is recognized by the statement in the auditor's standard report that the:

Accepted Answer

Choice "D" is correct. The existence of audit risk is recognized by the statement in the standard report that the auditor obtained reasonable assurance about whether the financial statements are free of material misstatement. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated. Choice "A" is incorrect. This statement defines the distinction between the responsibility of the auditor and that of management. Choice "B" is incorrect. The purpose of this section is to note that fair presentation is not necessarily impacted by immaterial errors. Choice "C" is incorrect. This statement explains the nature of an audit.

Question 3

This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below. Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure. Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft. Accountant's Review Report We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co. A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose. The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date. Jordan and Stone, CPAs March 1, 20X3 Supervisor's Review Notes There should be an indication that no auditing procedures were performed after the date of the report on the prior year's financial statements in the fourth (separate) paragraph.

Accepted Answer

Correct. In the fourth paragraph, there should be an indication that the auditors performed no auditing procedures after the date of the report on the prior year's financial statements.

Question 4

Which of the following matters generally is included in an auditor's engagement letter?

Accepted Answer

Choice "A" is correct. An understanding with the client should be established regarding management's responsibilities, which include identifying and ensuring that the entity complies with applicable laws and regulations. The understanding should be documented through a written communication, such as an engagement letter. Choice "B" is incorrect. Judgments about materiality are the auditor's responsibility and would not be included in an engagement letter. Choice "C" is incorrect. Management would not necessarily be responsible for illegal acts committed by employees. Choice "D" is incorrect. The auditor is not responsible for searching for significant internal control deficiencies.

Question 5

A successor auditor ordinarily should request to review the predecessor's audit documentation relating to:

Accepted Answer

Choice "A" is correct. A review of the predecessor's audit documentation related to matters of continuing accounting and auditing significance would be permitted. This would include documentation concerning contingencies and internal controls. Choice "B" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to internal controls. Choice "C" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to contingencies as they may have an impact on the current year financial statements. Choice "D" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to internal controls and contingencies.

Question 6

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

Accepted Answer

Choice "B" is correct. The auditor's preliminary judgment about materiality is generally based on either annualized interim financial statements or annual financial statements from a prior period. Choice "A" is incorrect. The anticipated sample size for substantive tests is irrelevant in making a preliminary judgment about materiality. Choice "C" is incorrect. The results of the internal control questionnaire would be relevant for making a preliminary assessment of control risk; however, these results are irrelevant for determining a preliminary level of materiality. Choice "D" is incorrect. The management representation letter is obtained at the end of the audit and would not be available when preliminary assessments of materiality are made during planning.

Question 7

In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:

Accepted Answer

Choice "A" is correct. Because the statements are interrelated, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements. Choices "B", "C", and "D" are incorrect, based on the above explanation.

Question 8

Which of the following statements is correct about the auditor's use of the work of a specialist?

Accepted Answer

Choice "D" is correct. Although the appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist, the auditor should obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements. Choice "A" is incorrect. An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed. Choice "B" is incorrect. The auditor may consider performing substantive procedures to verify the specialist's findings if the specialist is related to the client, but is not required to do so. Choice "C" is incorrect. An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed.

Question 9

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective?

Accepted Answer

Choice "C" is correct. Because the auditor has the ultimate responsibility to express an opinion on the financial statements, judgments about assessments of risk, the materiality of misstatements, the sufficiency of tests performed, the evaluation of significant accounting estimates, and other matters affecting the auditor's report should always be those of the auditor. Choices "A", "B", and "D" are incorrect, based on the above explanation.

Question 10

Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?

Accepted Answer

Choice "D" is correct. The auditor is not required to evaluate operating effectiveness as part of obtaining an understanding of internal control, and therefore need not document the basis for this decision. Choice "A" is incorrect. The auditor is required to prepare a written audit plan. Choice "B" is incorrect. Audit documentation should be sufficient to show that the accounting records agree or reconcile with the financial statements. Choice "C" is incorrect. Establishing an understanding with the client is required by GAAS, and an engagement letter is a presumptively mandatory requirement.

Question 11

The work of internal auditors may affect the independent auditor's:

Accepted Answer

Choice "D" is correct. The internal auditors' work may affect the nature, timing, and extent of the audit, including procedures the auditor performs when obtaining an understanding of the entity's internal control, when assessing risk, and when performing substantive procedures. Choice "A" is incorrect. It is likely that many procedures performed by internal auditors will affect the independent auditor's substantive testing, by providing direct evidence about material misstatements in assertions. Choice "B" is incorrect. It is likely that the work of internal auditors will aid the independent auditor in assessing control risk, since so much of the internal auditors' function is involved with monitoring the control structure. Choice "C" is incorrect. It is very likely that the work of internal auditors will affect the independent auditor's procedures for obtaining an understanding of internal control, because monitoring the control system is the primary responsibility of the internal auditors. Their flowcharts, narratives, and analyses of controls could be helpful to the independent auditor.

Question 12

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed?

Accepted Answer

Choice "D" is correct. Intentional misapplication of accounting principles would indicate that management lacks integrity and as a result, the auditor might conclude that a financial statement audit cannot be performed. Choice "A" is incorrect. Management's failure to modify prescribed internal controls for changes in information technology would preclude the auditor from relying on those controls but would not prevent the auditor from performing a financial statement audit. Choice "B" is incorrect. If management rarely monitors segregation of duties, the auditor would not rely on that particular control, but this would not prevent the auditor from performing a financial statement audit. Choice "C" is incorrect. If management is dominated by one person who is also the majority stockholder, the risk of fraudulent financial reporting is increased, but this would not preclude the auditor from performing a financial statement audit.

Question 13

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?

Accepted Answer

Choice "B" is correct. The control environment is the foundation for all other components of internal control. Management's disregard of its responsibility to maintain an adequate internal control environment therefore compromises its ability to provide reasonable assurance regarding reliable financial reporting. The auditor may conclude that the risk of misrepresentation in the financial statements is great enough that an audit should not be conducted. Choice "A" is incorrect. The CPA does not need to understand the internal auditor's techniques in order to accept a new audit engagement. Choice "C" is incorrect. Related party transactions (by definition) are not considered to be arm's-length transactions, and evaluation of such transactions does not affect the CPA's decision regarding acceptance of new clients. Choice "D" is incorrect. Substantive tests are generally performed after year-end, since prior to that time the financial statements have not been finalized.

Question 14

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

Accepted Answer

Choice "D" is correct. An auditor must consider the availability and adequacy of the client's accounting records and the integrity of management in deciding whether or not to accept a new audit engagement. A prospective client that is unwilling to provide all financial records would give the auditor cause for concern about both of these issues. Choice "A" is incorrect. The auditor may apply acceptable alternative procedures to audit inventory. Choice "B" is incorrect. The auditor can accept the engagement and obtain an understanding of the client's operations and industry after acceptance. Choice "C" is incorrect. Inability to review the predecessor's audit documentation means the auditor will expend greater effort auditing beginning balances. It does not mean the engagement should be declined.

Question 15

In auditing the financial statements of Star Corp., Land discovered information leading Land to believe that Star's prior year's financial statements, which were audited by Tell, require substantial revisions. Under these circumstances, Land should:

Accepted Answer

Choice "D" is correct. If, during the audit, the successor auditor becomes aware of information indicating that the financial statements reported on by the predecessor auditor may require revision, he or she should request the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter. Choice "A" is incorrect. It is not the successor auditor's responsibility to inform readers that the financial statements, which were audited by another firm, cannot be relied upon. Choice "B" is incorrect. The prior year's financial statements should not be reissued until the two auditing firms and the client have an opportunity to discuss the matter. There is a reasonable likelihood that the successor firm is unaware of other information that supports the current condition of the prior year financial statements. Choice "C" is incorrect. The successor firm should not notify the predecessor directly but should request that the client do so.

Question 16

Which of the following risks may be assessed in nonquantitative terms?

Accepted Answer

Choice "C" is correct. Both the risk of material misstatement (including control risk and inherent risk) and detection risk may be assessed in quantitative terms such as percentages or in nonquantitative terms that range, for example, from a minimum to a maximum. Choices "A", "B", and "D" are incorrect, based on the above explanation.

Question 17

During an audit an internal auditor may provide direct assistance to an independent CPA in:

Accepted Answer

Choice "d" is correct. Internal auditors may assist the auditor in obtaining an understanding of internal control and in performing tests of controls and substantive tests. Choices "a", "b", and "c" are incorrect, based on the above explanation.

Question 18

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Accepted Answer

Choice "B" is correct. A requirement during planning is to perform analytical procedures, which involve comparisons of recorded amounts to expectations. Choice "A" is incorrect. Inquiry of the client's legal counsel is typically performed near the end of fieldwork. Choice "C" is incorrect. Tests of controls are performed after audit planning is complete. Choice "D" is incorrect. The search for unrecorded liabilities is generally performed at or after year-end.

Question 19

In assessing the objectivity of internal auditors, an independent auditor should:

Accepted Answer

Choice "D" is correct. When assessing the internal auditors' objectivity, the auditor should obtain information about whether the internal auditor reports to an officer of sufficient status to ensure broad audit coverage and adequate consideration of, and action on, the findings and recommendations of the internal auditors. Choice "A" is incorrect. A quality control program would impact the competence of the internal audit staff, not their objectivity. Choice "B" is incorrect. Examining documentary evidence produced by the internal auditors would help the auditor evaluate the quality and effectiveness of the internal auditors' work, but would not help assess objectivity. Choice "C" is incorrect. Testing a sample of transactions and balances examined by the internal auditors would help the auditor evaluate the quality and effectiveness of the internal auditors' work, but would not help assess objectivity.

Question 20

The objective of performing analytical procedures in planning an audit is to identify the existence of:

Accepted Answer

Choice "A" is correct. The objective of performing analytical procedures during planning is to discover unusual transactions or events that may have an impact on the planning of the financial statement audit. Choice "B" is incorrect. Analytical procedures are not effective in identifying illegal acts that went undetected due to internal control weaknesses. Choice "C" is incorrect. Analytical procedures are not effective in identifying related party transactions. Choice "D" is incorrect. Analytical procedures are not effective as tests of controls to identify unauthorized transactions.

Exam 1: CPA Auditing and Attestation Exam