Question 1

To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations?

Accepted Answer

Choice "D" is correct. When obtaining specific written client representations, an auditor would not apply materiality limits to fraud involving employees with significant roles in the internal control structure, because even fraud that causes an immaterial effect on the financial statements may have serious implications with respect to the integrity of the employees involved. Choice "A" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to disclosure of compensating balance arrangements involving restrictions on cash balances, because immaterial amounts need not be considered. Choice "B" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to information concerning related party transactions and related amounts receivable or payable, because immaterial amounts need not be considered. Choice "C" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to the absence of errors and unrecorded transactions in the financial statements, because immaterial amounts need not be considered.

Question 2

Which of the following matters is an auditor required to communicate to those charged with governance?

Accepted Answer

Choice "B" is correct. The auditor should ensure that those charged with governance are informed about the process used by management in formulating particularly sensitive accounting estimates and about the basis for the auditor's conclusions regarding the reasonableness of the estimates. Choices "A", "C", and "D" are incorrect. The basis for assessing control risk, preliminary judgments about materiality levels, and the justification for performing substantive procedures at interim dates are matters of auditor judgment that need not be shared with those charged with governance.

Question 3

Which of the following statements represents a quality control requirement under Government Auditing Standards?

Accepted Answer

Choice "B" is correct. Audit organizations seeking to enter into a contract to perform an audit in accordance with government auditing standards should provide their most recent external quality control review report to the party contracting for the audit. Choice "A" is incorrect. Each audit organization conducting audits in accordance with governmental auditing standards should have an appropriate internal quality control system in place and undergo an external quality control review. Choice "C" is incorrect. It is not necessary to review all government audits performed since the last external quality control review. Reviewers should select audits that provide a reasonable cross-section of engagements performed since the last review. Choice "D" is incorrect. It is recommended that the report be made available to the public.

Question 4

To which of the following matters would materiality limits not apply when obtaining written client representations?

Accepted Answer

Choice "C" is correct. Materiality limits would not apply when obtaining written client representations regarding irregularities involving management, because even immaterial instances of fraud may have serious implications with respect to management's integrity. Choices "A", "B", and "D" are incorrect. An auditor would apply materiality limits to matters that might affect recognition, measurement, and disclosure in the financial statements, including losses from sales commitments, unasserted claims and assessments, and noncompliance with contractual agreements.

Question 5

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?

Accepted Answer

Choice "A" is correct. The sufficiency of audit evidence and the type of opinion to be rendered are determined by the auditor, who applies professional judgment in making such determinations. Management representations are not necessary for the auditor to make such judgments, but rather would be used to confirm representations given to the auditor regarding the financial statements, completeness of information, recognition, measurement, and disclosure, and subsequent events. Choice "B" is incorrect. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that there are no unasserted claims or assessments that the entity's lawyer has advised are probable of assertion and must be disclosed. Choice "C" is incorrect. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that management has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities. Choice "D" is incorrect. The management representation letter should include information on subsequent events, and will generally state that no events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements.

Question 6

Which of the following matters is an auditor required to communicate to those charged with governance?

Accepted Answer

Choice "A" is correct. The auditor is required to communicate significant audit findings to those charged with governance. Significant audit findings include material, corrected misstatements brought to management's attention as a result of the audit. Unless all of those charged with governance are also involved with managing the entity, such findings should be communicated by the auditor. Choice "B" is incorrect. The auditor is not required to communicate with those charged with governance regarding his/her fraud risk assessment. Choice "C" is incorrect. The auditor is not required to communicate with those charged with governance regarding the results of specific audit procedures. Choice "D" is incorrect. The auditor is not required to communicate with those charged with governance regarding changes to his/her preliminary judgment about materiality.

Question 7

Which of the following matters is an auditor required to communicate to those charged with governance?

Accepted Answer

Choice "A" is correct. Yes - Yes. Unless all of those charged with governance are also involved with managing the entity, the auditor is required to communicate significant audit adjustments. The auditor is always required to communicate changes in significant accounting policies. Choices "A", "C", and "D" are incorrect, based on the above .

Question 8

To which of the following matters would materiality limits not apply in obtaining written management representations?

Accepted Answer

Choice "A" is correct. Management's representations may be limited to matters that are considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding of the limits of materiality for this purpose. Such limitations would not apply to those representations that are not directly related to amounts included in the financial statements, such as management's acknowledgment of its responsibility for the financial statements, availability of financial records, and completeness and availability of minutes. Choice "B" is incorrect. Losses from purchase commitments are directly related to amounts in the financial statements and thus are subject to materiality limits. Choice "C" is incorrect. The disclosure of compensating balances is directly related to amounts in the financial statements and thus is subject to materiality limits. Choice "D" is incorrect. The reduction of obsolete inventory to net realizable value is directly related to amounts in the financial statements and thus is subject to materiality limits.

Question 9

In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor's report:

Accepted Answer

Choice "B" is correct. Only material instances of fraud and illegal acts discovered need to be communicated in the auditor's report on compliance. If applicable, the report should state that other instances of noncompliance were communicated to management in a separate letter. Choice "A" is incorrect. The report would state that consideration of internal control over compliance would not necessarily disclose all significant deficiencies (reportable conditions). Not only would there be no assurance that all controls were tested, the auditor would assert the exact opposite. Choice "C" is incorrect. The auditor would not disclose the materiality criteria used in considering whether instances of noncompliance were significant. Choice "D" is incorrect. The auditor does not express an opinion on whether the compliance affected the entity's goals and objectives.

Question 10

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?

Accepted Answer

Choice "D" is correct. The auditor should obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion. Choice "A" is incorrect. The auditor should examine documents in the client's possession concerning litigation, claims, and assessments, including correspondence and invoices from lawyers. The auditor does not generally examine documents held by the client's lawyer. Choice "B" is incorrect. If the lawyer has indicated that there is a high probability of a litigation, claim, or assessment being resolved unfavorably, the auditor would use this information, together with an estimate of the range of potential loss (if available), to evaluate management's financial statement presentation. The auditor would not generally discuss with the client's lawyer its defense philosophy regarding such matters. Choice "C" is incorrect. It is the auditor's responsibility (not the lawyer's) to determine whether litigation, claims, and assessments have been adequately recorded or disclosed in the financial statements.

Question 11

An auditor was engaged to conduct a performance audit of a governmental entity in accordance with Government Auditing Standards. These standards do not require, as part of this auditor's report:

Accepted Answer

Choice "D" is correct. A concurrent opinion on the financial statements taken as a whole is not a required part of the auditor's report. Choice "A" is incorrect. A statement of the audit objectives and a description of the audit scope are required parts of the auditor's report. Choice "B" is incorrect. The auditor would provide indications of illegal acts discovered during the audit. Choice "C" is incorrect. The pertinent views of the entity's responsible officials concerning the auditor's findings are generally part of the auditor's report.

Question 12

A limitation on the scope of an auditor's examination sufficient to preclude an unqualified opinion will always result when management:

Accepted Answer

Choice "C" is correct. Management's refusal to furnish a written representation letter constitutes a limitation on the scope sufficient to preclude an unqualified opinion. Choice "A" is incorrect. Engaging the auditor after the year-end physical count is completed need not preclude an unqualified opinion if the auditor can apply satisfactory alternative audit procedures. Choice "B" is incorrect. Failure to correct a material internal accounting control weakness that had been identified during the prior year's audit need not preclude an unqualified opinion, although it may require the auditor to apply extended auditing procedures. Choice "D" is incorrect. Inability to review the predecessor's prior year audit documentation may cause the successor auditor more work but need not preclude an unqualified opinion in the current year.

Question 13

An auditor's communication with those charged with governance is required to include the:

Accepted Answer

Choice "C" is correct. The auditor should discuss with those charged with governance any significant disagreements with management, whether or not satisfactorily resolved, about matters that are significant to the financial statements or to the auditor's report. Choices "A" and "B" are incorrect. There is no requirement that the auditor's communication with those charged with governance include a justification for any of the judgments made in conducting the audit. Choice "D" is incorrect. An auditor of an SEC client is required to discuss his or her judgment about the quality of the entity's accounting principles and estimates, not the quality of the entity's earnings. Note too that this requirement does not apply to non-SEC clients, and that no comparison to prior year is required.

Question 14

For an entity that does financial statements generally would not refer to:

Accepted Answer

Choice "D" is correct. The auditor's standard report does not refer to the entity's internal control. Choice "A" is incorrect. The auditor's standard report refers to "significant estimates made by management" in the scope paragraph. Choice "B" is incorrect. The auditor's standard report refers to "assessments of the entity's accounting principles" in the scope paragraph. Choice "C" is incorrect. The auditor's standard report states management's responsibility for the financial statements in the introductory paragraph.

Question 15

Which of the following matters most likely would be included in a management representation letter?

Accepted Answer

Choice "C" is correct. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that the company has complied with all aspects of contractual agreements that may materially affect the financial statements. Choice "A" is incorrect. As part of planning the audit, the auditor must assess the risk that misappropriation of assets may occur, and may cause a material misstatement in the financial statements. While management may also assess this risk for its own purposes, the auditor would not be able to rely on management's assessment, and therefore would not typically request a representation regarding this matter. Choice "B" is incorrect. The auditor will typically request that the client's attorney evaluate pending litigation, as the attorney is more knowledgeable in such areas than is management. Choice "D" is incorrect. The management representation letter typically includes information regarding the financial statements, the completeness of information, recognition, measurement, and disclosure, and subsequent events. Representations regarding internal control are not typically included in a management representation letter.

Question 16

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:

Accepted Answer

Choice "B" is correct. In a management (client) representation letter, the client will generally confirm that there have been no communications from regulatory agencies concerning matters that could have a material effect on the financial statements. Choice "A" is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a special report. Choice "C" is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a letter for an underwriter (i.e., a comfort letter). Choice "D" is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a report on internal controls.

Question 17

Which of the following factors most likely would cause an auditor to question the integrity of management?

Accepted Answer

Choice "B" is correct. Management is required to disclose all material matters to the independent auditor, including information concerning material fraud. This disclosure is so important that it is included in writing, in the management representation letter. Failure of management to disclose material fraud to the auditor would cause the auditor to question management's integrity and perhaps even to withdraw from the engagement. Choice "A" is incorrect. While management's aggressive attitude certainly constitutes a fraud risk, this alone would not necessarily cause the auditor to question management's integrity. It is possible for management to be both aggressive and ethical. Choice "C" is incorrect. While the domination of management by a stockholder certainly constitutes a fraud risk, this alone would not necessarily cause the auditor to question management's integrity. It is possible for management to be an ethical shareholder. Choice "D" is incorrect. Failure to correct a known weakness in internal control may be a conscious decision based on the cost and benefit involved with making the correction. Such decisions do not imply that management lacks integrity.

Question 18

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:

Accepted Answer

Choice "C" is correct. The statement concerning communications with regulatory agencies is made by management to the auditor as written confirmation of a matter for which corroborating evidence can only be obtained from inquiry of management. The statement would appear in the management representation letter. Choice "A" is incorrect. As a representation of management, the statement concerning communications with regulatory agencies would not appear in the auditor's report on internal control. Choice "B" is incorrect. As a representation of management, the statement concerning communications with regulatory agencies would not appear in the auditor's special report. Choice "D" is incorrect. A statement concerning communications with regulatory agencies generally would not appear in an auditor's letter for underwriters.

Question 19

Should an auditor communicate the following matters to those charged with governance of a public entity?

Accepted Answer

Choice "A" is correct. Unless all of those charged with governance are also involved with managing the entity, significant audit adjustments and significant matters relating to consultation with other accountants should be communicated to those charged with governance. Choices "B", "C", and "D" are incorrect, based on the above Explanation.

Question 20

To which of the following matters would materiality limits not apply when obtaining written client representations?

Accepted Answer

Choice "D" is correct. Materiality limits do not apply to client representations involving management fraud. The management representation letter generally indicates that "there has been no fraud involving management" (without reference to materiality). The only mention of material fraud relates to situations involving parties other than management. Choice "A" is incorrect. Materiality limits do apply to violations of state labor regulations. The management representation letter generally indicates that there are no violations of regulations "whose effects should be considered for financial statement disclosure"--and only material effects would typically be considered for disclosure. Choice "B" is incorrect. Since GAAP requires disclosure of material line-of-credit arrangements, materiality limits do apply to representations about such matters. Choice "C" is incorrect. Since GAAP requires disclosure of material related party transactions, materiality limits do apply to representations about such matters.

Exam 1: CPA Auditing and Attestation Exam

To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations?

Which of the following matters is an auditor required to communicate to those charged with governance?

Which of the following statements represents a quality control requirement under Government Auditing Standards?

To which of the following matters would materiality limits not apply when obtaining written client representations?

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?

Which of the following matters is an auditor required to communicate to those charged with governance?

Which of the following matters is an auditor required to communicate to those charged with governance?

To which of the following matters would materiality limits not apply in obtaining written management representations?

In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor's report:

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?

An auditor was engaged to conduct a performance audit of a governmental entity in accordance with Government Auditing Standards. These standards do not require, as part of this auditor's report:

A limitation on the scope of an auditor's examination sufficient to preclude an unqualified opinion will always result when management:

An auditor's communication with those charged with governance is required to include the:

For an entity that does financial statements generally would not refer to:

Which of the following matters most likely would be included in a management representation letter?

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:

Which of the following factors most likely would cause an auditor to question the integrity of management?

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:

Should an auditor communicate the following matters to those charged with governance of a public entity?

To which of the following matters would materiality limits not apply when obtaining written client representations?