Question 1

Which of the following procedures would an auditor least likely perform before the balance sheet date?

Accepted Answer

Choice "A" is correct. The auditor should consider whether the year-end balances of the particular asset or liability accounts that might be selected for interim examination are reasonably predictable with respect to amount, relative significance, and composition. Accounts payable is relatively difficult to predict because it may fluctuate at management's discretion. Choice "B" is incorrect. The auditor should consider whether the year-end balances of the particular asset or liability accounts that might be selected for interim examination are reasonably predictable with respect to amount, relative significance, and composition. Inventory is relatively predictable with respect to amount, composition and relative significance. Choice "C" is incorrect. During planning, the auditor is required to obtain an understanding of the entity and its environment, including its internal control, and to assess risk. Such preliminary planning is often conducted prior to the balance sheet date. Choice "D" is incorrect. Audit testing at interim dates may permit early consideration of significant matters affecting the year-end financial statements, such as the identification of related parties.

Question 2

Which of the following are considered control environment factors?

Accepted Answer

Choice "c" is correct. Control environment factors include: 1. Communication and enforcement of integrity and ethical values. 2. Commitment to competence. 3. Participation of those charged with governance. 4. Management's philosophy and operating style. 5. Organizational structure. 6. Assignment of authority, responsibility, and accountability. 7. Human resource policies and practices. Choice "A" is incorrect. Detection risk is the risk that an auditor's procedures will lead to the conclusion that a material error does not exist in an account balance when, in fact, such error does exist. Choices "B" and "D" are incorrect, per the above.

Question 3

Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control structure. Lake is considering Cope's report on EDP's internal control structure in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion?

Accepted Answer

Choice "D" is correct. The user auditor should not make reference to the report of the service auditor as a basis, in part, for his or her own opinion on the user organization's financial statements. Since the service auditor is not responsible for the examination of any part of the user organization's financial statements, division of responsibility would be inappropriate. Choices "A", "B", and "C" are incorrect, based on the above explanation.

Question 4

Which of the following factors is most important concerning an auditor's responsibility to detect errors and fraud?

Accepted Answer

Choice "D" is correct. The most important factor concerning an auditor's responsibility to detect errors and fraud is the risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements. Choice "A" is incorrect. The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles is something the auditor must consider, but it does not describe the auditor's responsibility to detect errors and fraud. Choice "B" is incorrect. The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements is something the auditor must consider, but it does not describe the auditor's responsibility to detect errors and fraud. Choice "C" is incorrect. The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the existence of illegal acts is something the auditor must consider, but it does not describe the auditor's responsibility to detect errors and fraud.

Question 5

Which of the following factors are included in an entity's control environment?

Accepted Answer

Choice "D" is correct. An entity's control environment includes participation of those charged with governance, management's philosophy, and the organizational structure.

Question 6

The monitoring component of internal control excludes:

Accepted Answer

Choice "D" is correct. Monitoring is the process of assessing the quality of internal control performance over time and taking necessary corrective actions. Eliminating a control that is not operating effectively would not be an appropriate corrective action. Choice "A" is incorrect. Information derived from external parties (such as customer complaints and regulator comments) may be useful in identifying problems with the internal control structure. Choices "B" and "C" are incorrect. Assessing the quality of internal control performance over time and improving controls that are not operating effectively are part of the monitoring process.

Question 7

On receiving a client's bank cutoff statement, an auditor most likely would trace:

Accepted Answer

Choice "A" is correct. The auditor should obtain bank cutoff statements that include transactions for 10 to 15 days after year-end. The outstanding checks and deposits in transit at year-end on the bank reconciliation should agree with the information in the bank cutoff statement. Choice "B" is incorrect. The deposits in transit are listed in the year-end bank reconciliation and traced to actual deposits appearing on the bank cutoff statement. The cutoff statement includes actual deposits received, not deposits in transit. Choice "C" is incorrect. Checks dated after year-end would not be included in the year-end outstanding checklist. Choice "D" is incorrect. Deposits recorded in the cash receipts journal after year-end do not affect the cash balance at year-end, and therefore the auditor would not perform audit procedures with respect to those deposits.

Question 8

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding:

Accepted Answer

Choice "A" is correct. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding disagreements the predecessor had with the client concerning auditing procedures and accounting principles. Choice "B" is incorrect. The successor auditor may make specific inquiries of the predecessor auditor regarding the predecessor's evaluation of matters of continuing accounting significance, but this would occur after accepting the engagement. Choice "C" is incorrect. The successor auditor may make specific inquiries of the predecessor auditor regarding the degree of cooperation the predecessor received concerning the inquiry of the client's lawyer, but this would occur after accepting the engagement. Choice "D" is incorrect. The successor auditor would generally come to his or her own conclusions regarding assessments of inherent risk and judgments about materiality without consulting the predecessor auditor.

Question 9

Disclosure of fraud to parties other than a client's senior management, those charged with governance, or its board of directors ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose irregularities exist?

Accepted Answer

Choice "d" is correct. The accountant may have a duty to disclose irregularities to all of the following outside parties: Yes - The SEC when the client reports an auditor change. Yes - A successor auditor when the successor makes appropriate inquiries. Yes - A government funding agency from which the client receives financial assistance. Choices "a", "b", and "c" are incorrect, based on the above explanation.

Question 10

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement due to fraud?

Accepted Answer

Choice "A" is correct. A properly designed and executed audit may not detect a material misstatement that is concealed through collusion. The auditor's responsibility is to design audit procedures that can reasonably be expected to detect material misstatements (errors and fraud) in the financial statements. Intentional misstatements that are concealed through collusion, however, are very difficult to detect, and generally the auditor is not responsible to discover them. Choice "B" is incorrect. An audit is designed to provide reasonable assurance of detecting material misstatements (both errors and fraud). Choice "C" is incorrect. If the factors considered in assessing control risk indicated an increased risk of intentional misstatements, a properly designed and executed audit would have taken the increased risk into consideration with additional audit procedures. Choice "D" is incorrect. In a properly designed and executed audit, the auditor would consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.

Question 11

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:

Accepted Answer

Choice "C" is correct. Before performing substantive tests at an interim date, an auditor should consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable with respect to amount, relative significance and composition. Choice "A" is incorrect. It is not necessary for control risk to be assessed at a low level for the assertions relating to the accounts that will be substantively tested at an interim date. It may simply be more efficient to perform a substantive audit. As long as the balances tested at interim are reasonably predictable with respect to amount, relative significance and composition, the account may be tested at interim. Choice "B" is incorrect. Material account balances, such as accounts receivable and inventory, are commonly tested at an interim date. Choice "D" is incorrect. The written representation letter will not be obtained until after year-end.

Question 12

Which of the following statements best describes how a detailed audit plan of a CPA who is engaged to audit the financial statements of a large publicly held company compares with the audit client's comprehensive internal audit program?

Accepted Answer

Choice "C" is correct. "Internal auditors" are part of the system of internal control. Their audits would cover more areas in greater depth than those of the "independent auditors," whose concerns are limited to areas materially affecting the "financial statements taken as a whole." Choices "A", "B", and "D" are incorrect, as described above.

Question 13

Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor's audit documentation relating to:

Accepted Answer

Choice "A" is correct. Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor's audit documentation relating to matters of continuing accounting and auditing significance, including both contingencies and balance sheet accounts. Contingencies have continuing significance as they may continue to affect the current year financial statements (either by remaining as contingencies or by being resolved); balance sheet accounts from the prior year-end have continuing significance since they are the opening balances for the current year. Choices "B", "C", and "D" are incorrect, per above explanation.

Question 14

Which of the following statements is true regarding the risk assessment component of internal control?

Accepted Answer

Choice "C" is correct. The auditor needs to understand how management addresses risks relevant to financial reporting in order to properly plan the audit. Choice "A" is incorrect. An entity's risk assessment differs from an auditor's assessment of audit risk. The entity is concerned with managing risks that affect entity objectives (financial reporting, operations, and compliance) whereas the auditor is concerned with the risk that material misstatements could occur in the financial statements. Choice "B" is incorrect. The five components of internal control are applicable to the audit of every entity. Choice "D" is incorrect. The auditor needs to understand how management addresses risks relevant to financial reporting in order to properly plan the audit.

Question 15

When assessing an internal auditor's objectivity, an independent auditor should:

Accepted Answer

Choice "C" is correct. When assessing an internal auditor's objectivity, an independent auditor should consider the organizational level to which the internal auditor reports. Choice "A" is incorrect. Evaluating the adequacy of the internal auditor's audit plans would be performed when assessing an internal auditor's competence. Choice "B" is incorrect. Inquiring about the internal auditor's educational background and professional certification would be performed when assessing an internal auditor's competence. Choice "D" is incorrect. Reviewing the internal auditor's audit documentation (to determine the quality of the reports and recommendations) would be performed when assessing an internal auditor's competence.

Question 16

An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the:

Accepted Answer

Choice "C" is correct. When an auditor cannot rely on management's representations, he or she should withdraw from the engagement. Choice "A" is incorrect. As long as the client takes appropriate remedial action, the auditor would not need to withdraw from the engagement simply because the client receives federal financial assistance. However, the auditor would be subject to a variety of reporting requirements related to this discovery. Choice "B" is incorrect. If there is no evidence that an illegal act was committed, management may be unable to take remedial action against the related employees. As long as the illegal act is immaterial and the auditor is satisfied that management's response is appropriate in the circumstances, there would be no reason for the auditor to withdraw. Choice "D" is incorrect. The auditor should evaluate the adequacy of disclosure in the financial statements with respect to the potential effects of an illegal act. If the auditor concludes that disclosure is inadequate, he or she should express a qualified or adverse opinion, but would not necessarily need to withdraw from the engagement (unless the client refused to accept the modified report).

Question 17

Dunn, CPA, is auditing the financial statements of Taft Co. Taft uses Quick Service Center (QSC) to process its payroll. Price, CPA, is expressing an opinion on a description of the controls placed in operation at QSC regarding the processing of its customers' payroll transactions. Dunn expects to consider the effects of Price's report on the Taft engagement. Price's report should contain a (an):

Accepted Answer

Choice "A" is correct. Price, CPA (the "service auditor") should include in his or her report a description of the scope and nature of the procedures performed. Choices "B" and "D" are incorrect. A report on controls placed in operation does not provide an opinion on operating effectiveness, and therefore may not be used to assess control risk. Choice "C" is incorrect. A report on controls placed in operation includes a statement that, "our examination included procedures to obtain reasonable assurance about whether the controls were suitably designed."

Question 18

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's:

Accepted Answer

Choice "C" is correct. It is not appropriate for the successor auditor to request a review of the predecessor auditor's engagement letter. This is a business matter between the client and the predecessor auditor that has no impact on the successor's audit. Conversely, review of the predecessor auditor's audit documentation is appropriate and customary to facilitate the successor's audit. Choices "A", "B", and "D" are incorrect, based on the above explanation.

Question 19

Which of the following information discovered during an audit most likely would raise a question concerning possible illegal acts?

Accepted Answer

Choice "B" is correct. Information that may raise a question concerning possible illegal acts include unusually large payments made to: - Cash - Bearer - Purchase cashier's checks - Transfer funds to numbered accounts Choice "A" is incorrect. Related party transactions may provide an indication of fraud, particularly if not made in the ordinary course of business, but they are generally not indicative of illegal acts. Choice "C" is incorrect. Failure to correct material internal control weaknesses may represent a conscious decision by management to accept that degree of risk because of cost or other considerations. Choice "D" is incorrect. Contributions to local political candidates are legal and generally would not raise a question about possible illegal acts.

Question 20

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:

Accepted Answer

Choice "A" is correct. When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, detection risk must be reduced accordingly. This may be accomplished by increasing the extent of tests of details. Choice "B" is incorrect. The level of inherent risk is not directly related to the planned level of control risk. Choice "C" is incorrect. The auditor performs tests of controls to evaluate the operating effectiveness of those controls. Once they have been determined to be ineffective, there would be no reason to perform further tests of those controls. Choice "D" is incorrect. The level of detection risk that the auditor could accept would decrease if the planned level of control risk increased.

Exam 1: CPA Auditing and Attestation Exam