Question 1

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:

Accepted Answer

Choice "B" is correct. In order to validate the legitimacy of a faxed confirmation, the auditor is likely to call the senders to verify the sources and contents. Choice "A" is incorrect. Examining shipping documents is an alternative procedure that is more likely to be performed if the confirmation was not received at all. Choice "C" is incorrect. Treating the faxes as non-responses would be to ignore an important source of audit evidence. Treating them as unadjusted differences may cause the auditor to conclude that the accounts receivable balance is misstated, when in fact it is not. Choice "D" is incorrect. Inspecting the faxes for forgeries or alterations is beyond the professional capability of the CPA.

Question 2

Which of the following statements is generally correct about the reliability of audit evidence?

Accepted Answer

Choice "A" is correct. The reliability of accounting data and financial statements is enhanced by a satisfactory system of internal control. Choice "B" is incorrect. The sufficiency (not reliability) of audit evidence refers to the amount of corroborative evidence obtained. Reliability refers to the quality of evidence. Choice "C" is incorrect. The auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly from independent outside sources. Choice "D" is incorrect. The reliability of audit evidence refers to its quality, and reliable audit evidence may be obtained from both inside and outside the entity.

Question 3

In a credit sales and cash receipts system flowchart symbol X could represent:

Accepted Answer

Choice "B" is correct. Remittance advices (for customer payments) are the input document not identified in the credit sales and cash receipts system flowchart. Choice "A" is incorrect. The flowchart shows the client's processing of receipts, not the auditor's tests of controls. Choice "C" is incorrect. Error reports, also called exception reports, are generated after processing, not before. Choice "D" is incorrect. Credit authorization forms would not be an input used to create a transaction file, although they should be used prior to granting credit.

Question 4

Which of the following statements concerning audit evidence is correct?

Accepted Answer

Choice "D" is correct. Audit evidence consists of the underlying accounting data and all corroborating information available to the auditor. A client's accounting data by itself is not considered sufficient audit evidence to support the financial statements. Choice "A" is incorrect. Reliable evidence supporting management's assertions only needs to be corroborative or persuasive, not conclusive. Choice "B" is incorrect. An effective internal control structure contributes greatly to the reliability of the evidence created within the entity. Choice "C" is incorrect. The cost of obtaining evidence is an important consideration to an auditor in selecting appropriate audit procedures. The cost of a procedure may be a valid reason for omitting that procedure, as long as an appropriate alternative procedure is available.

Question 5

The third standard of fieldwork states that the auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. The appropriate audit evidence required by this standard may be obtained, in part, through:

Accepted Answer

Choice "C" is correct. Analytical procedures are substantive tests that provide audit evidence used to assess the reasonableness of account balances. Choice "A" is incorrect. Flowcharting the internal control structure is used in obtaining an understanding of internal control, but it is not a procedure by which audit evidence is obtained. Choice "B" is incorrect. Audit evidence with respect to the year-end financial statement balances generally is not obtained as part of the planning process. Choice "D" is incorrect. Audit documentation describes the procedures followed and results of testing. Since it is prepared by the auditor, it does not represent audit evidence by itself.

Question 6

The negative request form of accounts receivable confirmation is useful particularly when the:

Accepted Answer

Choice "A" is correct. The negative request form of accounts receivable confirmation is useful particularly when: -the assessed level of control risk relating to receivables is low (if control risk is high, then positive confirmation requests would probably be sent), -there are many small balances (which would make it difficult to keep the number of positive confirmations to a reasonably low level), and -consideration of the confirmation by the recipient is likely (since the auditor is relying on the customers' consideration as the sole basis of support for the confirmation). Choices "B", "C", and "D" are incorrect, based on the above Explanation.

Question 7

The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an):

Accepted Answer

Choice "D" is correct. To test controls pertaining to the existence of payroll transactions, entries in the payroll register would be the population from which the sample is selected. (To test existence, the auditor needs to start with the accounting records and vouch backward to the source documents.) Choice "A" is incorrect. After the sample is taken from the payroll register, the selected samples are traced to clock cards or time tickets to verify that payroll transactions really exist/occurred. Choices "B" and "C" are incorrect. Sampling employee form W-2s and employee personnel records would test controls related to the completeness of recorded payroll, not existence of specific transactions.

Question 8

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

Accepted Answer

Choice "B" is correct. Inspecting agreements to determine whether any inventory is pledged as collateral or subject to liens provides the most reliable evidence concerning the entity's assertion of rights and obligations. These documents will probably verify ownership and show lenders' restrictions on the inventories. Choice "A" is incorrect. Tracing from the auditor's test counts to the entity's summarization of quantities would provide evidence concerning the completeness assertion. Choice "C" is incorrect. Determining whether shipments were recorded as sales provides evidence about the completeness of recorded sales. Choice "D" is incorrect. Inspecting the open purchase order file for significant commitments that should be disclosed would provide evidence concerning the appropriate presentation, description, and disclosure of such items.

Question 9

Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?

Accepted Answer

Choice "D" is correct. If a prospective client is unwilling to permit inquiry of its legal counsel, the CPA must consider the implications of this refusal. Such refusal may indicate a lack of cooperativeness on the part of management, or an attempt to be less than forthright with respect to litigation, claims, and assessments. Furthermore, a client's refusal to permit inquiry of its legal counsel ordinarily would result in a disclaimer of opinion. It would be unlikely that a CPA would accept a new engagement under these circumstances. Choice "A" is incorrect. An understanding of the client's operations and industry should be obtained during the planning stage of the audit. It does not necessarily need to be obtained before acceptance of the engagement. Choice "B" is incorrect. The fact that the entity has had recurring operating losses may increase the auditor's assessment of risk on the engagement, but it would not preclude acceptance of the engagement. Choice "C" is incorrect. Although the predecessor's audit documentation provides some audit evidence with respect to opening balances, consistency of accounting principles, and other matters of continuing significance, alternative means of obtaining such evidence generally do exist.

Question 10

In a comparison of 20X2 to 20X1, Neir Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

Accepted Answer

Choice "D" is correct. Gross profit percentage decreased. In order for the inventory turnover ratio to increase, either cost of sales must increase or average inventory must decrease. Since the question indicates that inventory is unchanged, cost of sales must have increased. If the cost of sales increased and sales remained constant, the gross profit percentage would decrease. Choice "A" is incorrect. If cost of goods sold decreases, the inventory turnover ratio would also decrease. Choice "B" is incorrect. Accounts receivable turnover is calculated as sales divided by receivables. If sales remain the same while this ratio increases, receivables have likely declined. This would have no impact on inventory turnover. Choice "C" is incorrect. Total asset turnover is calculated as sales divided by total assets. If sales remain the same while this ratio increases, total assets have likely declined. This would have no impact on inventory turnover.

Question 11

An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including understandability and classification, and:

Accepted Answer

Choice "A" is correct. An auditor reviews the overhead allocation to determine that no excessive costs for idle plant were charged to inventory. This is one of the procedures performed by an auditor to determine that the inventory balance is properly valued (assertion of valuation and allocation). Choice "B" is incorrect. Completeness relates to ensuring that all assets, liabilities, and equity interests are properly included in the financial statements. The allocation of overhead costs to inventory does not affect this assertion. Choice "C" is incorrect. Existence relates to whether assets, liabilities, and equity interests exist. The allocation of overhead costs to inventory does not affect this assertion. Choice "D" is incorrect. Rights and obligations pertain to ownership of assets and liabilities. The allocation of overhead costs to inventory does not affect this assertion.

Question 12

Which of the following is not a reason justifying the use of accounting estimates?

Accepted Answer

Choice "C" is correct. Accounting estimates are not used to measure future events. (Although, the measurement of some accounts may be uncertain pending the outcome of future events.) Choice "A" is incorrect. Valuation of certain historical accounts is uncertain, and may be dependent upon the outcome of future events. Accounting estimates are used in such situations to more properly reflect the account balance. Choices "B" and "D" are incorrect. If data about past events cannot be accumulated in a timely, cost-effective manner, accounting estimates may be required.

Question 13

An auditor most likely would perform substantive tests of details on payroll transactions and balances when:

Accepted Answer

Choice "C" is correct. An auditor most likely would perform substantive tests of details on payroll transactions and balances when analytical procedures indicate unusual fluctuations in recurring payroll entries. Generally, an auditor can audit the payroll accounts utilizing mostly analytical procedures; however, if the results of such procedures indicate unusual fluctuations, the auditor would employ more persuasive, substantive tests of details. Choice "A" is incorrect. A substantial amount of accrued payroll expense would not necessarily cause the auditor to perform substantive tests of details on payroll transactions, since the balance may be effectively tested using analytical procedures. Choice "B" is incorrect. When the assessed level of control risk relative to payroll is low, the auditor would probably perform only analytical procedures to test the related balances. If control risk rose to a high level, then substantive tests of details would probably be utilized. Choice "D" is incorrect. Unpaid commissions may be tested effectively with analytical procedures.

Question 14

In testing the existence assertion for an asset, an auditor ordinarily works from the:

Accepted Answer

Choice "C" is correct. In testing the existence assertion for an asset, an auditor ordinarily works from the accounting records to the supporting evidence. Choice "A" is incorrect. If the auditor works from the financial statements, all items selected will have been recorded (i.e., because they are included in the financial statements). Therefore, starting with the financial statements will not lead to any unrecorded items. Choice "B" is incorrect. Tracing potentially unrecorded items to the financial statements tests for completeness, not existence. Choice "D" is incorrect. Tracing from supporting evidence to the accounting records tests for completeness, not existence.

Question 15

Which of the following parties should request inquiry of a client's lawyer?

Accepted Answer

Choice "C" is correct. The letter of inquiry to the client's attorneys is a request made by client management. Due to attorney-client privilege, the attorney would not be able to respond to such a request made by any other party. Note that management would request the attorney to respond directly to the auditor. Choice "A" is incorrect. The auditor may request that the client include certain matters in the letter, but technically speaking, the request itself comes from client management. Choice "B" is incorrect. The stockholders would not have any involvement in the letter of audit inquiry. Choice "D" is incorrect. The auditor's attorney would not have any involvement in the letter of audit inquiry related to specific client engagements.

Question 16

Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?

Accepted Answer

Choice "A" is correct. In order to verify management's assertion of completeness, an auditor would most likely compare a sample of shipping documents to related sales invoices to determine that all goods shipped were properly included in sales. Choice "B" is incorrect. Observing the client's distribution of payroll checks would test management's assertion regarding existence of employees. Choice "C" is incorrect. Confirming a sample of recorded receivables by direct communication with the debtors (i.e., sending accounts receivable confirmations) would verify management's assertion of existence of the accounts receivable. Choice "D" is incorrect. Reviewing standard bank confirmations does not provide evidence of kiting. Kiting involves interbank transfers, and bank confirmations only show year-end balances, not transfers between banks.

Question 17

An auditor would be most likely to identify a contingent liability by obtaining a (an):

Accepted Answer

Choice "C" is correct. An auditor would be most likely to identify a contingent liability by obtaining a standard bank confirmation, which has an "exceptions and comments" box that specifically discloses contingent liabilities as endorser of loans, for open letters of credit, etc. Choice "A" is incorrect. Confirmations of accounts payable relate to existing liabilities, not to contingent liabilities. They are not always performed and rarely disclose contingencies. Choice "B" is incorrect. Transfer agent confirmations relate to purchase and sale of securities. They are not always used and rarely disclose contingencies. Choice "D" is incorrect. Confirmations of related party transactions relate to transactions that have already occurred. They are not always used and rarely disclose contingencies.

Question 18

Which of the following events most likely would indicate the existence of related parties?

Accepted Answer

Choice "D" is correct. Transactions based on terms that are significantly different from those that would be expected in an arm's length transaction, such as selling real estate at a price significantly different from appraised value, may be indicative of related party involvement. Choice "A" is incorrect. Executives are considered to be related parties regardless of whether or not stock options at favorable prices are granted. Choice "B" is incorrect. High turnover of management and/or board members may be caused by any number of circumstances, but is unlikely to be related to the existence of related parties. Choice "C" is incorrect. Failure to correct internal control weaknesses on a timely basis is a management decision that is unlikely to be related to the existence of related parties.

Question 19

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Accepted Answer

Choice "D" is correct. When an auditor does not receive replies to second requests on year-end accounts receivable confirmations, the auditor would most likely perform alternate procedures to support the existence of the receivables. These procedures include inspection of the shipping records to determine that the merchandise was actually sold to the debtors. Choice "A" is incorrect. Alternate procedures would also include reviewing the cash receipts journal for the months subsequent to year-end. Reviewing the cash receipts journal for the month prior to year-end would provide no evidence regarding the existence of a year-end receivable, which obviously had not been paid by year-end. Choice "B" is incorrect. Intensifying the study of the internal control structure concerning the revenue cycle would provide no additional evidence related to the specific accounts receivable confirmations that were not returned. Choice "C" is incorrect. Increasing the assessed level of detection risk for the existence assertion would provide no additional evidence related to the specific accounts receivable confirmations that were not returned by the customer. (By sending out confirmations, the auditor is already performing substantive tests).

Question 20

In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of:

Accepted Answer

Choice "B" is correct. By examining the assets listed as new additions on an analysis of plant and equipment, an auditor obtains evidence concerning management's assertion of existence. Choice "A" is incorrect. Examining new additions that are already listed on the analysis does not provide evidence of completeness. The assertion of completeness relating to fixed assets might be tested by reviewing large repair and maintenance charges to determine if the cost should more properly have been capitalized (i.e., to evaluate whether fixed asset additions are complete). Choice "C" is incorrect. Understandability and classification deals with whether the components of the financial statements are properly presented, described, and disclosed. Examination of new assets does not provide evidence regarding this assertion. Choice "D" is incorrect. Valuation and allocation pertains to presentation of balances at their proper amounts. Examination of new assets does not provide evidence regarding this assertion.

Exam 1: CPA Auditing and Attestation Exam