Question 1

An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for:

Accepted Answer

Choice "C" is correct. The working trial balance generally contains a column for adjustments and reclassifications. Choice "A" is incorrect. The working trial balance does not ordinarily contain information about cash flows. Choice "B" is incorrect. Audit objectives and assertions are contained in the audit plan, which is generally kept separate from the working trial balance. Choice "D" is incorrect. Reconciliations and tickmarks are found in other parts of the audit documentation.

Question 2

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that:

Accepted Answer

Choice "C" is correct. Tracing from invoices to shipping documents would provide evidence that sales billed to customers were actually shipped. An invoice for which the corresponding shipping documents could not be located might be indicative of fictitious sales (i.e., sales that were recorded but never actually shipped). Choice "A" is incorrect. The auditor would need to start with shipping documents and trace to invoices to ensure that shipments were properly billed. Choice "B" is incorrect. An invoice may exist for which no entry was made in the accounts receivable subsidiary ledger. Therefore, the auditor would need to trace from entries in the accounts receivable subsidiary ledger (and not from invoices) to shipping documents, to obtain evidence that recorded receivables were for sales actually shipped. Choice "D" is incorrect. Tracing from invoices to shipping documents would not necessarily indicate when a duplicate shipment was made, as the auditor would not necessarily realize that two sets of shipping documents related to the same invoice.

Question 3

The permanent file of the audit documentation for an engagement generally would not include:

Accepted Answer

Choice "C" is correct. A working trial balance is a part of the current year's audit documentation. Choice "A" is incorrect. Bond indenture agreements are typically found in the permanent file. Choice "B" is incorrect. Lease agreements are typically found in the permanent file. Choice "D" is incorrect. An internal control flowchart is typically found in the permanent file.

Question 4

Which of the following documentation is required for an audit in accordance with generally accepted auditing standards?

Accepted Answer

Choice "C" is correct. The quantity, type, and content of audit documentation vary with the circumstances, but it should be sufficient to show that the accounting records agree or reconcile with the financial statements. Choice "A" is incorrect. The auditor's understanding of internal control can be documented in a variety of different ways. Flowcharts and internal control questionnaires are two methods that might be used to assist the auditor in obtaining an understanding of internal control, but they generally do not provide information about the effectiveness of the entity's internal controls. Choice "B" is incorrect. An engagement letter (and not a representation letter) summarizes the timing and details of the auditor's planned field work. Choice "D" is incorrect. A list of procedures and findings is required for an agreed-upon procedures engagement, not for an audit.

Question 5

Which of the following is not true regarding audit documentation for a specific audit?

Accepted Answer

Choice "C" is correct. Quality control standards relate to the conduct of a firm's audit practice as a whole, and compliance with such standards would not be demonstrated by audit documentation for one specific audit engagement. Choice "A" is incorrect. Audit documentation should clearly indicate the work performed and the evidence obtained. Choice "B" is incorrect. Audit documentation should indicate which parties performed and reviewed the work. Choice "D" is incorrect. Audit documentation should demonstrate compliance with the standards of fieldwork. It should indicate an appropriate level of planning and supervision, that a sufficient understanding of the entity and its environment, including its internal control, was obtained, and that a sufficient level of appropriate evidence was obtained.

Question 6

Which of the following is not true about the report release date?

Accepted Answer

Choice "A" is correct. The documentation completion date (and not the report release date) is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such. Choice "B" is incorrect. The report release date is often the date on which the report is delivered to the client. Choice "C" is incorrect. The report release date is the date on which the auditor grants the client permission to use the report. Choice "D" is incorrect. The report release date is used to define the beginning of the retention period.

Question 7

Which of the following internal control activities is not usually performed in the vouchers payable department?

Accepted Answer

Choice "D" is correct. Accounting for unused prenumbered purchase orders and receiving reports is an effective control, but it would not typically be performed in the vouchers payable department. Choice "A" is incorrect. Reconciling the vendor invoice with the related receiving report is typically performed by a vouchers payable clerk. Choice "B" is incorrect. The vouchers payable department is responsible for approving vouchers for payment. Choice "C" is incorrect. Indicating the asset and expense accounts to be debited is not an internal control procedure.

Question 8

Under properly designed internal control, the same employee most likely would match vendors' invoices with receiving reports and also:

Accepted Answer

Choice "B" is correct. Matching vendor's invoices with receiving reports provides authorization for payment and is generally performed in the accounts payable department. Recalculation of vendor invoices is compatible with this authorization function. Choice "A" is incorrect. Posting the accounts payable records (recording) is incompatible with matching (authorization). Generally, these functions would be performed by two different employees. Choice "C" is incorrect. This review procedure (independent verification) should be performed by someone independent of the employee who approved the invoice for payment. Choice "D" is incorrect. Payment and cancellation of vendor invoices should be performed by someone (generally the treasurer) other than the individual authorizing payment.

Question 9

After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of:

Accepted Answer

Choice "C" is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management's assertion that accounts receivable are collectible (allocation and valuation). Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion. Choices "A", "B", and "D" are incorrect, based on the above Explanation.

Question 10

An audit supervisor reviewed the work performed by the staff to determine if the audit was adequately performed. The supervisor accomplished this by primarily reviewing which of the following?

Accepted Answer

Choice "Bb" is correct. Audit documentation, or working papers, comprises the principal record of audit procedures performed, evidence obtained, and conclusions reached. Reviewing the working papers allows a supervisor to understand the work performed and the evidence obtained, and to evaluate whether the audit was adequately performed. Choice "A" is incorrect. Checklists might be used within the audit documentation, but checklists alone would not provide a comprehensive record of the audit procedures performed, the evidence obtained, and conclusions reached. Choice "C" is incorrect. Analytical procedures might be documented within the working papers, but such procedures alone would not provide a comprehensive record of the audit procedures performed, the evidence obtained, and conclusions reached. Choice "D" is incorrect. Reviewing the financial statements would provide no information regarding the audit procedures performed, the evidence obtained, or conclusions reached, and therefore would provide no basis on which to review the work performed by the staff.

Question 11

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of:

Accepted Answer

Choice "C" is correct. In testing the existence or occurrence assertion, the auditor is concerned that fictitious or overstated receivables may have been recorded. Observing the mailing of monthly statements and reviewing evidence of follow-up on errors reported by customers provides evidence that procedures are in place to identify and correct such errors. Choice "A" is incorrect. Follow up of errors in monthly statements does not provide any evidence to support understandability and classification. Choice "B" is incorrect. Follow up of errors in monthly statements does not provide any evidence to support understandability and classification, but does provide evidence regarding the existence of receivables. Choice "D" is incorrect. Follow up of errors in monthly statements does provide evidence regarding the existence of receivables, since customers will be likely to report discrepancies.

Question 12

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?

Accepted Answer

Choice "B" is correct. Examination of reports of shipments not recorded in the sales journal is an appropriate test of controls to determine whether all sales have been recorded. Choice "A" is incorrect. Verification that extensions and footings on sales invoices and statements have been recomputed by client personnel ensures that independent checks are being performed, but does not address whether all sales transactions have been recorded. Choice "C" is incorrect. Comparison of invoiced prices with the client's authorized price list ensures that the prices charged are authorized, but does not address whether all sales transactions have been recorded. Choice "D" is incorrect. Inquiring about credit policies is an appropriate audit procedure to verify authorization and valuation of sales transactions, not completeness.

Question 13

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Accepted Answer

Choice "C" is correct. The function of cash receipts is part of the treasurer's department and should be separate from the role of posting credits to the A/R ledger. Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by posting credits against the related A/R balance. Choice "A" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated. Choice "B" is incorrect. Even the lack of effective internal controls would not allow this fraud to be perpetrated for long, since the customers that submitted the claim would complain that the credit was not properly applied as soon as they received their next statement or invoice. Choice "D" is incorrect. The failure to prepare shipping documents may cause inventory to be overstated, but it is unlikely to be perpetrated as a fraud since it does not allow theft of cash. In addition, the internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory.

Question 14

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may:

Accepted Answer

Choice "D" is correct. A bank employee may not have access to all information about transactions with the audit client and thus may be unaware of all the financial relationships the bank has with the client. Choice "A" is incorrect. Standard bank confirmations contain a signature from an authorized client employee and are a very commonly used audit procedure. It is unlikely that a bank would refuse the request since it has been authorized by the client. Choice "B" is incorrect. The confirmation is used to verify the bank balance as of year-end. Bank employees generally would not have access to the client's bank reconciliation. Choice "C" is incorrect. Even though it is likely that the bank would have access to a cutoff bank statement, the detail on this statement is unnecessary to confirm the final balance.

Question 15

Which of the following cash transfers results in a misstatement of cash at December 31, 20X1?

Accepted Answer

Choice "D" is correct. Since the disbursement was not recorded until January 20X2 while the receipt was recorded in December 20X1, cash will be overstated at December 31, 20X1. Choices "A" and "C" are incorrect. Both the disbursement and the receipt are recorded in 20X1, so there will be no misstatement of cash at December 31, 20X1. Choice "B" is incorrect. Both the disbursement and the receipt are recorded in 20X2, so there will be no misstatement of cash at December 31, 20X1.

Question 16

Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?

Accepted Answer

Choice "C" is correct. Vouchers should be approved before payment occurs. Overriding this control to expedite payment may result in unauthorized payments being made. The auditor would need to consider this change in evaluating current controls and determining the nature, timing, and extent of testing. Choice "A" is incorrect. If the internal audit function is being eliminated after the balance sheet date, there would be little effect on the current year's audit. Choice "B" is incorrect. Resignation of the audit committee chairperson would not imply that internal controls are less adequate than in the past, as long as a new, competent person steps up to become chair. Choice "D" is incorrect. Changing the frequency of the accounts payable check runs from biweekly to weekly would not automatically imply that controls are inadequate. The auditor would need to review the new procedures to determine whether adequate controls were still in place.

Question 17

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

Accepted Answer

Choice "A" is correct. The revenue cycle includes sales, receivables, and cash receipts, so an auditor using a transaction cycle approach would be likely to test sales and receivables together. Choice "B" is incorrect. Purchases are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together. Choice "C" is incorrect. Payables are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together. Choice "D" is incorrect. Sale of long-term debt falls within the "other liabilities" transaction cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.

Question 18

Which of the following procedures most likely would not be an internal control designed to reduce the risk of errors in the billing process?

Accepted Answer

Choice "D" is correct. Reconciling control totals for sales invoices with the accounts receivable subsidiary ledger is not an effective control related to the billing process, since errors that exist in the preparation of invoices would likely carry through to accounts receivable. Choice "A" is incorrect. Comparing shipping totals with sales invoice totals is an effective control to reduce billing errors. Choice "B" is incorrect. Computer controls related to pricing and mathematical accuracy will reduce billing errors. Choice "C" is incorrect. Matching shipping documents with approved sales orders ensures that invoices are properly authorized and only goods ordered have been shipped.

Question 19

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?

Accepted Answer

Choice "A" is correct. A lockbox system is the best means of preventing defalcation of cash by employees because the employees never have direct access to cash receipts. Choice "B" is incorrect. The use of prenumbered remittance advices is not effective in preventing theft of receipts by employees because it does not prevent employee access to cash receipts. Choice "C" is incorrect. While the performance of monthly bank reconciliations is a good control, it would not be effective in preventing the theft of receipts because it does not prevent employee access to cash receipts. (It might, however, be effective at detecting a theft that has already occurred). Choice "D" is incorrect. Daily deposit of cash receipts is not an effective control for preventing theft of receipts by employees because it does not prevent employee access to cash receipts.

Question 20

Which of the following sets of information does an auditor usually confirm on one form?

Accepted Answer

Choice "B" is correct. The standard AICPA bank confirmation form includes spaces for the bank to confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the bank. Choice "A" is incorrect. Purchase commitments are not typically confirmed on an accounts payable confirmation request. Choice "C" is incorrect. Contingent liabilities (confirmed in a letter of inquiry to the client's attorney or bank) and inventory on consignment (confirmed with the consignee) are not confirmed together. Choice "D" is incorrect. Accrued interest receivable (usually on investments held by a trust company) is not typically confirmed along with trade accounts receivable.

Exam 1: CPA Auditing and Attestation Exam