Question 1

This question presents independent factual situations an auditor might encounter in conducting an audit. List B represents the report modifications (if any) that would be necessary. Select as the best answer for each item, the action the auditor normally would take. The report modifications in List B may be selected once, more than once, or not at all. Assume: - The auditor is independent. - The auditor previously expressed an unqualified opinion on the prior year's financial statements. - Only single-year (not comparative) statements are presented for the current year. - The conditions for an unqualified opinion exist unless contradicted in the factual situations. - The conditions stated in the factual situations are material. - No report modifications are to be made except in response to the factual situation. Item to Be Answered An entity issues financial statements that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe the statement of cash flows to be a useful financial statement. List B Report Modifications

Accepted Answer

Choice "C" is the correct modification. The circumstances should be described in an explanatory paragraph preceding the opinion paragraph and the opinion paragraph should be modified.

Question 2

Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a whole, but the auditor's report included a statement that the current asset portion of the entity's balance sheet was fairly stated. The inclusion of this statement is:

Accepted Answer

Choice "A" is correct. Piecemeal opinions (opinions on parts of the financial statements, when those parts constitute a major portion of the financial statements) are not appropriate if the auditor has disclaimed an opinion or issued an adverse opinion, because they may overshadow the auditor's opinion on the financial statements taken as a whole. An opinion on specified elements that does not constitute a piecemeal opinion may be expressed, but should not accompany the disclaimer of opinion or the adverse opinion. Choice "B" is incorrect. The auditor may express an opinion on one financial statement, even if the auditor must issue a disclaimer on the financial statements taken as a whole. Choice "C" is incorrect. Even with adequate description in the scope paragraph, an opinion on the current asset portion of the balance sheet cannot be included in a disclaimer of opinion, as it might overshadow the disclaimer. Choice "D" is incorrect. It is not appropriate to include an opinion on the current asset portion of the balance sheet in a disclaimer of opinion, as it might overshadow the disclaimer.

Question 3

This question presents independent factual situations an auditor might encounter in conducting an audit. List B represents the report modifications (if any) that would be necessary. Select as the best answer for each item, the action the auditor normally would take. The report modifications in List B may be selected once, more than once, or not at all. Assume: - The auditor is independent. - The auditor previously expressed an unqualified opinion on the prior year's financial statements. - Only single-year (not comparative) statements are presented for the current year. - The conditions for an unqualified opinion exist unless contradicted in the factual situations. - The conditions stated in the factual situations are material. - No report modifications are to be made except in response to the factual situation. Item to Be Answered An entity discloses in the notes to the financial statements certain lease obligations. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles. List B Report Modifications

Accepted Answer

Choice "C" is the correct modification. The circumstances should be described in an explanatory paragraph preceding the opinion paragraph and the opinion paragraph should be modified.

Question 4

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to:

Accepted Answer

Choice "C" is correct. Policies and procedures should be established for deciding whether to accept or continue a client in order to minimize the likelihood of association with a client whose management lacks integrity. Choice "A" is incorrect. Suggesting that there should be procedures to decide whether to accept a client does not imply that a firm vouches for the integrity or reliability of a client. Choice "B" is incorrect. Suggesting that there should be procedures to decide whether to accept a client does not imply that a firm has a duty to anyone but itself with respect to the acceptance, rejection, or retention of clients. Choice "D" is incorrect. The decision to express an unqualified opinion should be made after the completion of the audit, not upon client acceptance.

Question 5

Which of the following is true about management representations obtained during an engagement to review the financial statements of a nonissuer?

Accepted Answer

Choice "A" is correct. Written representations from the current management are required for all periods being reported on. Choice "B" is incorrect. Written representations from the current management are required for all periods being reported on, even if the current management was not present during all such periods. Choice "C" is incorrect. Written representations should be addressed to the accountant. The letter should be signed by members of management whom the accountant believes are responsible for and knowledgeable about the matters covered in the representation letter. Choice "D" is incorrect. Written representations should include information concerning subsequent events.

Question 6

After fieldwork audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up review of the audit documentation. This second review usually focuses on:

Accepted Answer

Choice "A" is correct. The primary purpose of a second partner review is to ensure that the financial statements are presented in accordance with GAAP. Choice "B" is incorrect. A search for fraud is typically not part of a second partner review. Choice "C" is incorrect. The materiality of adjusting entries proposed by the audit staff may be reviewed by a second partner, but they are not the primary focus of such a review. Choice "D" is incorrect. The communication of internal control weaknesses to those charged with governance is not a primary focus of a second partner review.

Question 7

Which of the following situations would not result in restricted use language being included in an auditor's special report?

Accepted Answer

Choice "D" is correct. A report on an incomplete financial presentation that is otherwise prepared in conformity with GAAP generally would contain restricted use language; however, an exception occurs when the presentation and the report are filed with a regulatory agency and included in a document distributed to the general public. Choice "A" is incorrect. A report on a specified element in a financial statement, where that element is prepared in accordance with the terms specified in a related contract, would contain restricted use language. Choice "B" is incorrect. A report on a client's compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements, would contain restricted use language. Choice "C" is incorrect. An "OCBOA" report on financial statements prepared in conformity with requirements established by a regulatory agency should contain restrictive use language. This is appropriate even though law or regulation may make the auditor's report is a matter of public record.

Question 8

A CPA is permitted to accept a separate engagement (not in conjunction with an audit of financial statements) to audit an entity's:

Accepted Answer

Choice "A" is correct. An independent auditor may express an opinion on one or more specified elements, accounts, or items of a financial statement as a special engagement, not in conjunction with an audit. Choices "B", "C", and "D" are incorrect, per above Explanation.

Question 9

The nature and extent of a CPA firm's quality control policies and procedures depend on:

Accepted Answer

Choice "A" is correct. The nature and extent of a CPA firm's quality controls depend on a number of factors, such as its size, the degree of operating autonomy allowed its personnel and its practice offices, the nature of its practice, its organization, and appropriate cost-benefit considerations. Choices "B", "C", and "D" are incorrect, based on the above Explanation.

Question 10

This question presents independent factual situations an auditor might encounter in conducting an audit. List A represents the types of opinions the auditor ordinarily would issue. Select as the best answer for this item, the action the auditor normally would take. The types of opinions in List A may be selected once, more than once, or not at all. Assume: - The auditor is independent. - The auditor previously expressed an unqualified opinion on the prior year's financial statements. - Only single-year (not comparative) statements are presented for the current year. - The conditions for an unqualified opinion exist unless contradicted in the factual situations. - The conditions stated in the factual situations are material. - No report modifications are to be made except in response to the factual situation. Item to Be Answered An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However, the ultimate outcome of the litigation cannot be reasonably estimated by management. The auditor believes there is a reasonable possibility of a significantly material loss, but the lawsuit is adequately disclosed in the notes to the financial statements. List A Types of Options

Accepted Answer

Choice "B" is the correct opinion. Since the uncertainty is adequately disclosed, an unqualified opinion should be issued.

Question 11

In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard review report for which of the following matters?

Accepted Answer

Choice "D" is correct. Modifications are made to the standard review report only when there is a departure from generally accepted accounting principles. Neither an inability to assess risk nor a discovery of internal control deficiencies constitutes a departure from GAAP, and therefore neither would result in a modified review report. Note that assessing the risk of material misstatement due to fraud is a requirement of an audit, not a review. Also, note that testing of internal control is not required in a review of financial statements of a nonissuer. Choices "A", "B", and "C" are incorrect, based on the above Explanation.

Question 12

Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should:

Accepted Answer

Choice "A" is correct. Financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require a qualified opinion with an explanatory paragraph. Choice "B" is incorrect. The financial statements are not suitably titled. The auditor does not need any advice from the insurance commission as to how the statements should be titled or as to how to handle the situation. Choice "C" is incorrect. The auditor would not disclaim an opinion unless there is a scope limitation or independence problem. Choice "D" is incorrect. The notes to the financial statements are communications from management, not from the auditor.

Question 13

Which of the following are true regarding communication requirements an auditor must follow when providing tax services to an audit client who is an issuer under the Sarbanes-Oxley Act of 2002?

Accepted Answer

Choice "c" is correct. The auditor must communicate to the audit committee, in writing, regarding the proposed tax services and related fees, and must discuss with the audit committee the potential effects of the proposed tax services on the firm's independence. Tax services related to contingent fee arrangements, confidential tax transactions, and certain aggressive tax transactions are expressly prohibited. Choices "A", "B", and "D" are incorrect, based on the above Explanation. Other Engagements, Reports, and Accounting Services

Question 14

The primary purpose of establishing quality control policies and procedures for deciding whether to accept new clients is to:

Accepted Answer

Choice "A" is correct. Policies and procedures should be established for deciding whether to accept a new client in order to minimize the likelihood of association with a client whose management lacks integrity. Choice "B" is incorrect. Policies and procedures established for deciding whether to accept a new client would not aid in monitoring internal control deficiencies. A review of internal control would not occur until after a new client was accepted. Choice "C" is incorrect. Policies and procedures established for deciding whether to accept a new client would not aid in identifying noncompliance with contractual agreements. Reviewing the terms of contractual agreements would not occur until after a new client was accepted. Choice "D" is incorrect. Policies and procedures established for deciding whether to accept a new client would not aid in the adequate training of personnel. Personnel management policies would be used to ensure that training needs are met.

Question 15

Jackson & Company, CPAs, plan to audit the financial statements of Perigee Technologies, an issuer as defined under the Sarbanes-Oxley Act of 2002. Which of the following situations would impair Jackson's independence?

Accepted Answer

Choice "B" is correct. The provision of services involving contingent fee arrangements impairs the auditor's independence. Choice "A" is incorrect. Personal tax services provided to employees do not impair the auditor's independence; however, personal tax services provided to corporate officers or their families would impair independence. Choice "C" is incorrect. Independence is not impaired by the performance of an audit of Perigee's internal control; in fact, such services are required by PCAOB Auditing Standard No. 5 (covered in a later class). Choice "D" is incorrect. The prohibition against auditing companies whose corporate officers worked for the auditing firm only applies if those officers worked on the audit during the preceding year.

Question 16

Would the following factors ordinarily be considered in planning an audit engagement's personnel requirements?

Accepted Answer

Choice "a" is correct. When assigning personnel to an engagement, the firm should consider the following factors in achieving a balance of engagement manpower requirements, personnel skills, and individual development and utilization: 1) engagement size and complexity, 2) personnel availability, 3) special expertise required, 4) timing of the work to be performed, 5) continuity and periodic rotation of personnel, and 6) opportunities for on-the-job training. Choices "B", "C", and "D" are incorrect, based on the above Explanation.

Question 17

This question presents independent factual situations an auditor might encounter in conducting an audit. List A represents the types of opinions the auditor ordinarily would issue. Select as the best answer for this item, the action the auditor normally would take. The types of opinions in List A may be selected once, more than once, or not at all. Assume: - The auditor is independent. - The auditor previously expressed an unqualified opinion on the prior year's financial statements. - Only single-year (not comparative) statements are presented for the current year. - The conditions for an unqualified opinion exist unless contradicted in the factual situations. - The conditions stated in the factual situations are material. - No report modifications are to be made except in response to the factual situation. Item to Be Answered An entity changes its depreciation method for production equipment from the straight-line to a units-of production method based on hours of utilization. The auditor concurs with the change although it has a material effect on the comparability of the entity's financial statements. List A Types of Options

Accepted Answer

Choice "B" is the correct opinion. When an accounting change is properly accounted for, an unqualified opinion should be issued.

Question 18

This question presents independent factual situations an auditor might encounter in conducting an audit. List A represents the types of opinions the auditor ordinarily would issue. Select as the best answer for this item, the action the auditor normally would take. The types of opinions in List A may be selected once, more than once, or not at all. Assume: - The auditor is independent. - The auditor previously expressed an unqualified opinion on the prior year's financial statements. - Only single-year (not comparative) statements are presented for the current year. - The conditions for an unqualified opinion exist unless contradicted in the factual situations. - The conditions stated in the factual situations are material. - No report modifications are to be made except in response to the factual situation. Item to Be Answered An entity issues financial statements that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe the statement of cash flows to be a useful financial statement. List A Types of Options

Accepted Answer

Choice "A" is the correct opinion. Failure to include a statement of cash flows is a GAAP violation that requires an "except for" qualified opinion to be issued.

Question 19

An auditor's report would be designated a special report when it is issued in connection with:

Accepted Answer

Choice "B" is correct. An auditor's report would be designated a special report when it is issued in connection with compliance with aspects of regulatory requirements related to audited financial statements. Choice "A" is incorrect. A "review report" (not a "special report") should be issued in connection with a limited review of interim financial information of a publicly held company. Choice "C" is incorrect. Special reports are not issued in connection with the application of accounting principles to specified transactions. Choice "D" is incorrect. An auditor may compile, examine, or apply agreed-upon procedures to limited use prospective financial statements (PFS) such as a financial projection, but this would not constitute a special report.

Question 20

When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should:

Accepted Answer

Choice "C" is correct. A report on other comprehensive basis of accounting ("OCBOA") financial statements should include an explanatory paragraph stating the basis, referring to the footnote that describes it, and indicating that it is a non-GAAP basis. Choice "A" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements does not include an evaluation of the usefulness of the basis of accounting. Choice "B" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements makes reference to the note in the financial statements that describes the accounting basis, not to a note describing management's responsibility. Choice "D" is incorrect. The separate explanatory paragraph states the basis, refers to the footnote describing it, and indicates that it is a non-GAAP basis. It does not discuss the justification for the non-GAAP basis, nor does the CPA indicate concurrence.

Exam 1: CPA Auditing and Attestation Exam