Question 1

Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of controls. One of the techniques involved in this approach makes use of:

Accepted Answer

Choice "B" is correct. An integrated test facility runs test transactions through the "live" system and posts to simulated (dummy) files to provide an auditor with information about the operating effectiveness of controls. Choice "A" is incorrect. Controlled reprocessing of transactions is a less common term used for parallel processing where the auditor writes a program to "reprocess" some or all of the client's live data. It does not involve the use of simulated files. Choice "C" is incorrect. Input validation is a general description of any test that ensures that the input was accurate. It does not involve the use of simulated files. Choice "D" is incorrect. Program code checking is the review of the client's program source code by a qualified auditor/IT specialist. It does not involve the use of simulated files.

Question 2

An engagement to express an opinion on the internal control of a nonissuer will generally:

Accepted Answer

Choice "C" is correct. An engagement to express an opinion on internal control will generally be more extensive in scope than the assessment of control risk made during a financial statement audit of a nonissuer. This occurs because assessing control risk is the primary purpose of an engagement to express an opinion on internal control, whereas it is an incidental result of an audit of a nonissuer. Choice "A" is incorrect. Since the results of the audit may be considered in performing the engagement to express an opinion on internal control, it is unlikely that the auditor would duplicate those procedures already applied. Choice "B" is incorrect. It is unlikely that the reliability of the financial statements that have already been audited would be increased if an engagement to express an opinion on internal control is performed. Choice "D" is incorrect. An engagement to express an opinion on internal control is more extensive in scope than the control risk assessment performed during an audit of a nonissuer.

Question 3

With respect to the audit of a nonissuer, 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 "D" 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. Manipulation or falsification of accounting records may not represent an internal control deficiency (e.g., if such fraud occurs through collusion). Choice "B" is incorrect. Information indicative of a going concern problem is not an internal control deficiency. Choice "C" is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if such acts occur through collusion).

Question 4

In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be:

Accepted Answer

11ec2ce7_1b7f_2ea7_89bf_ff68995dab80_C1085_00 N/A = not applicable, as the actual difference of $2,000 is used when the recorded amount is larger than the sample interval. Choice "B" is correct. There is a $2,000 projected error in this PPS sample. Choices "A", "C", and "D" are incorrect, based on the above Explanation.

Question 5

In a computerized payroll system environment, an auditor would be least likely to use test data to test controls related to:

Accepted Answer

Choice "B" is correct. Proper approval of overtime by supervisors is least likely to be used by the auditor in a "test data" test of controls because it is information generally not recorded in the computer. Choices "A", "C", and "D" are incorrect. Test data is data (with a predetermined result) that is run through the client's computer system. The auditor creates one transaction of each type of valid and invalid conditions in which the auditor is interested and runs them through the client's processing system. The following are recorded in the computer and are likely candidates for "test data" tests of controls. A. Missing employee numbers. C. Time tickets with invalid job numbers. D. Agreement of hours per clock card with hours on time tickets.

Question 6

The two requirements crucial to achieving audit efficiency and effectiveness with a microcomputer are selecting:

Accepted Answer

Choice "A" is correct. In microcomputer audit applications, efficient and effective system usage requires: (1) identification of the appropriate audit tasks and (2) appropriate software to perform the selected audit tasks. Choice "B" is incorrect. Although microcomputer access to client data is desirable, it is not required. Choice "C" is incorrect. Although microcomputer access to client data is desirable, it is not required. Also, microcomputer audit applications need not be applicable to several clients to be efficient and effective. Choice "D" is incorrect. Microcomputer audit applications need not be applicable to several clients to be efficient and effective.

Question 7

When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements of a nonissuer, the auditor should include a:

Accepted Answer

Choice "D" is correct. When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements, the auditor should include a restriction on the use of the report. Choice "A" is incorrect. The auditor would not include a description of tests performed to search for material weaknesses since the auditor is not in fact obligated to search for them. Choices "B" and "C" are incorrect. An auditor would make a statement of positive assurance on internal control and include a paragraph describing the inherent limitations of internal control in conjunction with an engagement to report on internal control. These comments would not be made when reporting on an entity's internal control in conjunction with an audit of the financial statements of a nonissuer.

Question 8

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as:

Accepted Answer

Choice "A" is correct. The statistical concept of precision is used to describe the auditor's evaluation of sampling results by calculating the possible error in either direction. Choice "B" is incorrect. Reliability measures how frequently the procedure used will yield differences between the estimated value and the population value. Choice "C" is incorrect. Projected error is the auditor's best estimate of the error in the total population based upon evaluating the actual error rate in the sample results. The auditor then adds an allowance for sampling risk to develop a "precision interval" within which the population is expected to fall. Choice "D" is incorrect. Standard deviation is a measure of the variability of a frequency distribution about its mean.

Question 9

In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the:

Accepted Answer

Choice "A" is correct. In determining the number of sample items to select in a test of controls, the auditor would also consider the likely rate of deviations. The higher the expected rate, the greater the number of items selected. Choices "B", "C", and "D" are incorrect. The process of establishing the number of sample items to select in a test of controls would include the consideration of the allowable risk of assessing control risk too low, not too high.

Question 10

The management of Cain Company, a nonissuer, engaged Bell, CPA, to express an opinion on Cain's internal control. Bell's report described several material weaknesses and potential errors and irregularities that could occur. Subsequently, management included Bell's report in its annual report to the Board of Directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should:

Accepted Answer

Choice "A" is correct. The auditor should disclaim an opinion as to management's cost-benefit statement (i.e., "We do not express an opinion or any other form of assurance on management's cost-benefit statement."). Choice "B" is incorrect. The CPA should disclaim an opinion regarding management's representation. Choice "C" is incorrect. The CPA's report on internal control is not restricted as to use. Choice "D" is incorrect. The CPA does not need to withdraw the opinion as long as a disclaimer on management's cost-benefit statement is presented.

Exam 1: CPA Auditing and Attestation Exam