Question 1

In an audit of an issuer, the auditor must provide an opinion on which of the following?

Accepted Answer

Choice "A" is correct. The auditor provides an opinion on the entity's financial statements and on the effectiveness of internal control. The auditor is not required to provide an opinion on the audit committee's oversight (but is required to report to the board when such oversight is ineffective). Choices "B", "C", and "D" are incorrect, based on the above.

Question 2

Government Auditing Standards published by the Government Accountability Office:

Accepted Answer

Choice "C" is correct. Generally Accepted Government Auditing Standards primarily apply to audits of federal financial assistance but have been adopted by some states for audits of state financial assistance. Choice "A" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations. GAGAS may also extend to other financial assistance depending on whether those standards have been adopted by the state providing the assistance. Choice "B" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations, not only to governments. Choice "D" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations, not only to governments.

Question 3

How do the scope, procedures, and purpose of an engagement to express a separate opinion on a nonissuer's internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit?

Accepted Answer

Choice "d" is correct. In an engagement to express a separate opinion on an entity's internal control, the scope is extensive, and the purpose is directed primarily toward the internal control report. In an audit, the scope is less extensive, and the purpose is to determine the nature, timing, and extent of auditing procedures. Similar procedures generally would be used in both types of engagements. Choices "a", "b", and "c" are incorrect, based on the above Explanation.

Question 4

Which of the following statements is correct concerning an auditor's required communication of significant deficiencies in internal control noted during an audit of a nonissuer?

Accepted Answer

Choice "c" is correct. The report should state that the communication is intended solely for the use of management, those charged with governance, and others within the organization. Choice "a" is incorrect. Significant deficiencies may represent a conscious decision by management to accept that degree of risk because of cost or other considerations. The auditor may elect to use a primarily substantive approach to test balances, so internal control deficiencies do not necessarily constitute a scope limitation. Choice "b" is incorrect. No requirement to perform tests of controls exists. Significant deficiencies may be identified through the consideration of internal control, the application of audit procedures to balances or transactions, or otherwise during the course of the audit. Choice "d" is incorrect. Significant deficiencies may be communicated during or after the audit.

Question 5

The auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book), is required to include:

Accepted Answer

Choice "A" is correct. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book). Choices "B" and "C" are incorrect. Immaterial uncorrected misstatements are not included in the auditor's report on internal controls and compliance with laws and regulations. Choice "D" is incorrect. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book).

Question 6

Which of the following best describes the responsibility of the auditor with respect to significant deficiencies and material weaknesses in an audit of an issuer?

Accepted Answer

Choice "B" is correct. In an audit of an issuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and the audit committee, but only material weaknesses result in an adverse opinion on the effectiveness of internal control. Choice "A" is incorrect. In an audit of an issuer, significant deficiencies (that do not rise to the level of being material weaknesses) do not result in an adverse opinion on the effectiveness of internal control. Choice "C" is incorrect. In an audit of an issuer, both significant deficiencies and material weaknesses must be communicated, in writing, to management and the audit committee. In addition, significant deficiencies (that do not rise to the level of being material weaknesses) do not result in an adverse opinion on the effectiveness of internal control. Choice "D" is incorrect. In an audit of an issuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and the audit committee.

Question 7

A letter issued on significant deficiencies relating to an entity's internal control observed during an audit of the financial statements of a nonissuer should include a:

Accepted Answer

Choice "A" is correct. Any report issued on significant deficiencies noted during an audit should (1) indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control, (2) include the definition of significant deficiencies, and (3) include a restriction on the use of the report. Choice "B" is incorrect. Because the auditor does not search for material weaknesses, a description of tests performed in this regard would not be included in a written report. Choice "C" is incorrect. There is no required statement of compliance with applicable laws and regulations in a letter issued on significant deficiencies. Choice "D" is incorrect. There is no paragraph describing management's evaluation in a letter issued on significant deficiencies.

Question 8

Which of the following is true regarding significant deficiencies in internal control?

Accepted Answer

Choice "B" is correct. The auditor is required to communicate to management and to those charged with governance (the audit committee) any significant deficiencies in internal control that the auditor observes. Choice "A" is incorrect. The auditor is not obligated to search specifically for significant deficiencies in internal control. Choice "C" is incorrect. Significant deficiencies in internal control are not typically included in the financial statements, as they relate to controls and not to the presentation and disclosure of financial information. Choice "D" is incorrect. Significant deficiencies in internal control are not typically included in the footnotes to the financial statements, as they relate to controls and not to the presentation and disclosure of financial information.

Question 9

In an audit of an issuer:

Accepted Answer

Choice "D" is correct. It is management's responsibility to assess and report on internal control, but the auditor is also required to assess and report on internal control. Choices "A", "B", and "C" are incorrect, based on the above.

Question 10

Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance?

Accepted Answer

Choice "C" is correct. A lack of objectivity by those responsible for accounting decisions represents a significant internal control deficiency because it may result in financial statements that are biased rather than being presented fairly. Choice "A" is incorrect. Management's failure to renegotiate unfavorable long-term purchase commitments does not represent a significant deficiency in internal control. Choice "B" is incorrect. Going concern problems do not represent a significant deficiency in internal control. Choice "D" is incorrect. Management's plan to reduce its ownership equity in the entity does not represent a significant deficiency in internal control.

Question 11

Gail is auditing the financial statements of Hoefener Home Improvements, a publicly held company. Gail notes several deficiencies in internal control, and is trying to determine whether each deficiency constitutes a significant deficiency or a material weakness. Which best describes the framework Gail should use in making this evaluation?

Accepted Answer

Choice "A" is correct. For issuers, a significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement. Choice "B" is incorrect. For nonissuers, a significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is more than a remote chance of a material misstatement. However, Hoefener is an issuer, so different rules apply. Choice "C" is incorrect. For issuers, a significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting. Choice "D" is incorrect. For issuers, a material weakness exists when there is a reasonable possibility of material misstatement.

Question 12

Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer?

Accepted Answer

Choice "C" is correct. Because timely communication may be important, the auditor may choose to communicate significant deficiencies during the course of the audit rather than after the audit is concluded. Choice "A" is incorrect. The auditor is not obligated to search for significant deficiencies. Choice "B" is incorrect. All material weaknesses are significant deficiencies, but not all significant deficiencies are material weaknesses. Choice "D" is incorrect. Because of the potential for misinterpretation, the auditor should not issue a written report representing that no significant deficiencies were noted during the audit.

Question 13

930 Hannah, CPA, has been engaged to perform financial statement audits for three different clients. The first two clients, McCormick Surf Shop and Kleinpeter Technologies, are both nonissuers, while the third client, Bender Industries, is an issuer. Hannah is required to follow PCAOB standards in her audit of Bender Industries. She has also been asked to conduct the Kleinpeter audit in accordance with both generally accepted auditing standards and the auditing standards of the PCAOB. Regarding the McCormick engagement, Hannah has decided to follow only generally accepted auditing standards, and not the standards of the PCAOB. Which of the following best describes the scope of Hannah's work related to internal control in these three engagements?

Accepted Answer

Choice "C" is correct. Be careful! While it is true that Hannah is following PCAOB standards in both the Bender and Kleinpeter engagements, PCAOB standards do not require expanded testing and reporting on internal control for nonissuers. Therefore, only in the Bender engagement would Hannah be required to express an opinion on the effectiveness of internal control. Choice "A" is incorrect. Hannah is not required to express an opinion on internal control in either the Kleinpeter engagement (because PCAOB standards do not require such an opinion for financial statement audits of nonissuers) or the McCormick engagement (because generally accepted auditing standards do not require such an opinion for financial statement audits). Choice "B" is incorrect. Hannah is not required to express an opinion on internal control in the Kleinpeter engagement because PCAOB standards do not require such an opinion for financial statement audits of nonissuers. Choice "D" is incorrect. Hannah is required to express an opinion on internal control in the Bender engagement. PCAOB standards require the auditor to express such an opinion, in conjunction with financial statement audits of issuers.

Question 14

Gearty & Duffy, certified public accountants, have been engaged to perform an audit of Sleepy Knoll Township in accordance with OMB Circular A-133. In connection with that engagement, Gearty & Duffy will determine major programs:

Accepted Answer

Choice "C" is correct. OMB Circular A-133 allows auditors to use a risk-based approach to determine major grants. Choice "A" is incorrect. The judgment of the Office of the Inspector General would not exclusively influence the selection of major programs. Choice "B" is incorrect. Programs in excess of $300,000 are generally considered to be major grants; however, the dollar threshold is not the exclusive determinant of major programs. Choice "D" is incorrect. Risk-based auditing allows auditors to test as little as 25 percent of total federal programs or as much as 50 percent of total federal programs, depending on circumstances and on the auditor's judgment.

Question 15

For a nonissuer, a control deficiency would be considered a significant deficiency when the likelihood and magnitude of potential financial statement misstatements are:

Accepted Answer

Choice "C" is correct. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected. Choices "A", "B", and "D" are incorrect, based on the above.

Question 16

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's management and those charged with governance because they represent:

Accepted Answer

Choice "Cc" is correct. Significant deficiencies in the design or operation of internal control should be communicated to management and those charged with governance because there is more than a remote likelihood that they will result in a financial statement misstatement that is more than inconsequential. Choice "A" is incorrect. Information that significantly contradicts the auditor's going concern assumption is not considered a significant deficiency. Choice "B" is incorrect. Fraud perpetrated by high-level managers should be reported to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control. Choice "D" is incorrect. Fraud should be reported to an appropriate level of management, and sometimes to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control.

Question 17

In performing an audit in accordance with Generally Accepted Government Auditing Standards (the "Yellow Book"), the auditor:

Accepted Answer

Choice "C" is correct. An auditor's reporting requirements under Generally Accepted Government Auditing Standards (GAGAS or the Yellow Book) are expanded to include reports on the audited entity's compliance with laws, rules, and regulations that have a material impact on the financial statements and on internal controls over financial reporting. Rule: Reporting responsibilities under GAGAS are expanded to include: 1. Reports on compliance with laws, rules, and regulations, violations of which may affect financial statement amounts, and 2. Reports on internal control over financial reporting. Choice "A" is incorrect. Specific reporting requirements and other expanded audit standards associated with Yellow Book audits do not reduce professional judgment. Choice "B" is incorrect. Federal Inspectors General do not split their responsibilities with independent public accountants performing Yellow Book Audits. Choice "D" is incorrect. Although Yellow Book requirements represent logical extensions of generally accepted auditing standards, the specific responsibilities undertaken in an audit that requires application of the Yellow Book would not surface as a result of an audit under generally accepted auditing standards.

Question 18

For a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:

Accepted Answer

Choice "D" is correct. A previously communicated significant deficiency that has not been corrected ordinarily should be communicated again in writing, during the current audit. Choices "A" and "C" are incorrect. The auditor is required to communicate significant deficiencies each year, regardless of whether the deficiency has a material effect on the auditor's assessment of control risk or the deficiency is considered a material weakness. Choice "B" is incorrect. The auditor is required to communicate significant deficiencies each year, even if the entity accepts that degree of risk because of cost-benefit considerations.

Question 19

A report on a nonissuer's internal control should include a statement limiting the use of the report when:

Accepted Answer

Choice "C" is correct. When management's assertion is presented based on criteria that are only appropriate for or available to specific parties, the report should contain a statement limiting its use. Examples include reports based on criteria specified by a regulatory agency and reports based on criteria agreed to by management and some other specified party. Choice "A" is incorrect. There is no requirement to limit the use of the report when management's assertion accompanies the CPA's report. Choice "B" is incorrect. When management's assertion is presented as a representation letter to the CPA, the report should include a statement of management's assertion, but there is no requirement to limit the use of the report. Choice "D" is incorrect. Management is required to present its written assertion about the effectiveness of the entity's internal control as a condition of engagement performance.

Question 20

Gearty & Duffy, certified public accountants, have been engaged to perform a single audit of Sleepy Knoll Township, a local government receiving substantial federal financial assistance for community development and housing assistance. A single audit represents:

Accepted Answer

Choice "C" is correct. A single audit represents a combined audit of both an entity's financial statements and federal financial assistance programs. The single audit provides audited organizations with the opportunity to capitalize on the efficiency of satisfying their audit requirements with a single audit. Auditors are governed by the Single Audit Act and OMB Circular A-133. Choice "A" is incorrect. A single audit is not simply an audit of federal financial assistance. Choice "B" is incorrect. A single audit is not simply an audit of federal financial assistance. Choice "D" is incorrect. A single audit is not limited to expression of an opinion on the fair presentation of financial statements. It also is designed to report on compliance with laws, rules, and regulations.

Exam 1: CPA Auditing and Attestation Exam