Certified Public Accountant CPA Questions + Answers Part 44

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QUESTION 326
Which of the following statements represents a quality control requirement under Government Auditing Standards?
A. ACPAwhoconductsgovernmentauditsisrequiredtoundergoanannualexternalqualitycontrolreviewwhenanappropriateinternalqualitycontrolsystemis not in place.
B. ACPAseekingtoenterintoacontracttoperformanauditshouldprovidetheCPA'smostrecentexternalqualitycontrolreviewreporttothepartycontracting for the audit.
C. AnexternalqualitycontrolreviewofaCPA'spracticeshouldincludeareviewoftheauditdocumentationforeachgovernmentauditperformedsincetheprior external quality control review.
D. A CPA who conducts government audits may not make the CPA's external quality control review report available to the public.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
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 327
An auditor most likely would be responsible for communicating significant deficiencies in the design of internal control:
A. TotheSecuritiesandExchangeCommissionwhentheclientisapublicly-heldentity.
B. TospecificlegislativeandregulatorybodieswhenreportingunderGovernmentAuditingStandards.
C. To a court-appointed creditors' committee when the client is operating under Chapter 11 of the Federal Bankruptcy Code.
D. To shareholders with significant influence (more than 20% equity ownership) when the significant deficiencies (reportable conditions) are deemed to be material weaknesses.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When reporting under Government Auditing Standards, the auditor should consider whether any noted deficiencies in such internal controls should be reported to specific legislative and regulatory bodies.
Choice "a" is incorrect. The auditor would report significant deficiencies to the audit committee. The auditor is prohibited from disclosing confidential client information to the SEC by the Code of Professional Conduct.
Choice "c" is incorrect. When there is no audit committee, the auditor would report significant deficiencies in the design of the client's internal control to an otherwise formally designated committee with oversight over the financial reporting process, not necessarily to a court-appointed creditors' committee. Choice "d" is incorrect. The auditor would report significant deficiencies to the audit committee. The auditor is prohibited from disclosing confidential client information to significant shareholders by the Code of Professional Conduct.
QUESTION 328
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:
A. Astatementofassurancethatallcontrolsoverfraudandillegalactsweretested.
B. Materialinstancesoffraudandillegalactsthatwerediscovered.
C. The materiality criteria used by the auditor in considering whether instances of noncompliance were significant. D. An opinion on whether compliance with laws and regulations affected the entity's goals and objectives.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:

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 329
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. Astatementoftheauditobjectivesandadescriptionoftheauditscope.
B. Indicationsorinstancesofillegalactsthatcouldresultincriminalprosecutiondiscoveredduringtheaudit. C. The pertinent views of the entity's responsible officials concerning the auditor's findings.
D. A concurrent opinion on the financial statements taken as a whole.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
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 330
For an entity that does financial statements generally would not refer to:
A. Significantestimatesmadebymanagement.
B. Anassessmentoftheentity'saccountingprinciples.
C. Management's responsibility for the financial statements. D. The entity's internal control.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation

Explanation/Reference:
Explanation:
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 331
Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has:
A. Identifiedanddisclosedalllawsandregulationsthathaveadirectandmaterialeffectonitsfinancialstatements.
B. Implementedinternalcontrolsdesignedtodetectallillegalacts.
C. Expressed both positive and negative assurance to the auditor that the entity complied with all laws and regulations.
D. Employed internal auditors who can report their findings, opinions, and conclusions objectively without fear of political repercussion.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor should obtain written representation that management has disclosed all laws and regulations that have a direct and material effect on its financial statements. Choice "b" is incorrect. Management need not acknowledge that it has implemented internal control activities to detect all illegal acts. Choice "c" is incorrect. Management should state that it is responsible for compliance with all laws and regulations.
Choice "d" is incorrect. Management need not employ internal auditors.
QUESTION 332
Which of the following is a documentation requirement that an auditor should follow when auditing in accordance with Government Auditing Standards?
A. Theauditorshouldobtainwrittenrepresentationsfrommanagementacknowledgingresponsibilityforcorrectinginstancesoffraud,abuse,andwaste.
B. AuditdocumentationshouldcontainsufficientinformationsothatsupplementaryoralExplanation: s are not required.
C. The auditor should document the procedures that assure discovery of all illegal acts and contingent liabilities resulting from noncompliance. D. Audit documentation should contain a caveat that all instances of material errors and fraud may not be identified.
Correct Answer: B

Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Per Government Auditing Standards, audit documentation should contain sufficient information so that supplementary oral Explanation: s are not required. Choice "a" is incorrect. The auditor should obtain written representation from management acknowledging responsibility for "violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." Choice "c" is incorrect. The auditor should document procedures performed to evaluate compliance with laws and regulations that have a direct and material effect on the determination of financial statement amounts.
Choice "d" is incorrect. There is no such requirement that audit documentation contain this caveat.
QUESTION 333
When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor should prepare a written report on the auditor's:
A. Identificationofthecausesofperformanceproblemsandrecommendationsforactionstoimproveoperations. B. Understandingofinternalcontrolandassessmentofcontrolrisk.
C. Field work and procedures that substantiated the auditor's specific findings and conclusions.
D. Opinion on the entity's attainment of the goals and objectives specified by applicable laws and regulations.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Government Auditing Standards require that the auditor issue a written report on internal control in all audits. As part of this reporting requirement, the auditor must describe the scope of the auditor's work in obtaining an understanding of internal control and his or her assessment of control risk. Choice "a" is incorrect. In the report, the auditor would identify significant deficiencies (reportable conditions) and material weaknesses (not performance problems) found in the examination of the entity's internal control.
Choice "c" is incorrect. A report on fieldwork and procedures that substantiated the auditor's specific findings and conclusions would not be prepared as part of a GAGAS audit. Choice "d" is incorrect. The objective of the audit of the financial statements is to provide an opinion on the financial statements, not on the entity's attainment of goals and objectives.
QUESTION 334
In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity's compliance with laws and regulations. This report should:
A. Statethattestsofcompliancewithlawsandregulationsthathaveadirectandmaterialeffectonthefinancialstatementsispartofobtainingreasonable

assurance that the financial statements are free of material misstatement.
B. Describethelawsandregulationsthattheentitymustcomplywith.
C. Provide an opinion on overall compliance with laws and regulations.
D. Indicate that the auditor does not possess legal skills and cannot make legal judgments.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Basic elements of a report on compliance include a statement that tests of compliance with laws, regulations, contracts, and grants that have a direct and material effect on the financial statements is part of obtaining reasonable assurance that the financial statements are free of material misstatement. Choice "b" is incorrect. It is not necessary to describe the laws and regulations with which the entity must comply.
Choice "c" is incorrect. The objective of the audit of the financial statements is not to provide an opinion on overall compliance with laws and regulations. Choice "d" is incorrect. While the auditor does not possess legal skills and cannot make legal judgments, it is not necessary to disclose this in the report.
QUESTION 335
Reporting on internal control under Government Auditing Standards differs from reporting under generally accepted auditing standards in that Government Auditing Standards requires a:
A. Writtenreportdescribingtheentity'sinternalcontrolsspecificallydesignedtopreventfraud,abuse,andillegalacts.
B. Reportdescribingthescopeoftheauditor'stestingofcomplianceandofinternalcontrol.
C. Statement of negative assurance that internal controls not tested have an immaterial effect on the entity's financial statements. D. Statement of positive assurance that internal controls designed to detect material errors and fraud were tested.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Government Auditing Standards require a description of the scope of the auditor's testing of compliance and of internal control. This is not required under generally accepted auditing standards.
Choice "a" is incorrect. Although a written report on internal control is required, the auditor does not have to identify procedures specifically designed to prevent fraud, abuse, and illegal acts. Choice "c" is incorrect. Government Auditing Standards require tests of compliance with applicable laws and regulations governing a particular grant, because the grant money received can only be spent for certain purposes. However, neither GAGAS nor GAAS requires that negative assurance be given with respect to internal controls.
Choice "d" is incorrect. Although Government Auditing Standards require tests of compliance with applicable laws and regulations governing a particular grant (the

grant money received can only be spent for certain purposes), auditors are not required to give positive assurance that internal controls designed to detect material errors and fraud were tested under either GAGAS or GAAS.
QUESTION 336
The scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies. Which of the following elements do these audits have in common?
A. Theauditorisrequiredtodiscloseallsituationsandtransactionsthatcouldbeindicativeoffraud,abuse,andillegalactstothefederalinspectorgeneral. B. Thematerialitylevelsarehigherandaredeterminedbythegovernmententitiesthatprovidethefederalfinancialassistancetotherecipients.
C. The auditor is required to document an understanding of internal control established to ensure compliance with the applicable laws and regulations.
D. The accounts should be 100% verified by substantive tests because certain statistical sampling applications are not permitted.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Auditors engaged to perform audits of federal financial assistance (generally under the provisions of the Single Audit Act) must perform procedures to obtain an understanding of internal control pertaining to compliance, and should document this understanding of internal control. Choice "a" is incorrect. The auditor is required to disclose actual instances of fraud and illegal acts, not all situations that could be indicative of fraud, abuse, or illegal acts. Choice "b" is incorrect. Materiality levels of organizations receiving federal financial assistance are set by the auditor, not the government. Materiality levels depend upon auditor judgment and will not fall or rise purely as a result of federal participation.
Choice "d" is incorrect. Statistical sampling applications are permitted, and 100% verification of accounts is not required.
QUESTION 337
An enterprise engaged a CPA to audit its financial statements in accordance with Government Auditing Standards (the Yellow Book) because of the provisions of government grant funding agreements. Under these circumstances, the CPA is required to report on the enterprise's internal controls either in the report on the financial statements or in:
A. Thereportontheperformanceaudit.
B. Thenotestothefinancialstatements.
C. A letter to the government funding agency. D. A separate report.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation

Explanation/Reference:
Explanation:
Choice "d" is correct. The report on the audit of the financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and should either present the results of those tests or refer to a separate report containing that information.
Choice "a" is incorrect. The CPA was engaged to audit financial statements in accordance with the Yellow Book, not to perform a performance audit.
Choice "b" is incorrect. The notes to the financial statements are a management representation and would not be used by the CPA to comply with requirements to either report or opine in conformity with Yellow Book requirements.
Choice "c" is incorrect. Governmental Auditing Standards require that the auditor describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting and present the results of those tests as part of their report or in a separate report, not simply in a letter to the funding agency.
QUESTION 338
Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to:
A. Providepositiveassurancethatcontrolactivitiesregardingsegregationofdutiesareconsistentwiththeentity'scontrolobjectives. B. Presenttheresultsoftheauditor'stestsofcontrols.
C. Provide negative assurance that the auditor discovered no evidence of intentional override of internal controls.
D. Describe the scope of the auditor's principal substantive tests.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and present the results of those tests.
Choice "a" is incorrect. The auditor's report on internal controls indicates whether or not material weaknesses were found, but it does not provide assurance that specific internal control activities are consistent with the entity's objectives.
Choice "c" is incorrect. The auditor is not required to provide negative assurance regarding the override of internal control, although the audit report will provide negative assurances regarding internal control over financial reporting and its operations that may involve a material weakness. Choice "d" is incorrect. There is no requirement that the auditor describe the scope of substantive tests. However, under Government Auditing Standards, the report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting.
Communication with Those Charged with Governance
QUESTION 339
Which of the following matters would an auditor most likely communicate to those charged with governance?

A. Alistofnegativetrendsthatmayleadtoworkingcapitaldeficienciesandadversefinancialratios.
B. Thelevelofresponsibilityassumedbymanagementforthepreparationofthefinancialstatements.
C. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables.
D. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor should communicate the initial selection of, and changes in, significant accounting policies to those charged with governance. Choice "a" is incorrect. Negative trends and adverse financial ratios are evaluated by an auditor when considering an entity's ability to continue as a going concern. These trends and ratios are not required to be communicated to those charged with governance.
Choice "b" is incorrect. The auditor's communications to those charged with governance include the level of responsibility that the auditor is assuming regarding matters of interest to those charged with governance, not the level of responsibility assumed by management. Choice "c" is incorrect. The auditor is required to inform the audit committee about difficulties encountered with management during the audit. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables generally would not be communicated to those charged with governance, since such difficulties are not related to management.
QUESTION 340
In identifying matters for communication with those charged with governance, an auditor most likely would ask management whether:
A. Theturnoverintheaccountingdepartmentwasunusuallyhigh.
B. ItconsultedwithanotherCPAfirmaboutaccountingmatters.
C. There were any subsequent events of which the auditor was unaware. D. It agreed with the auditor's assessed level of control risk.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor is required to communicate to those charged with governance regarding certain matters, including management consultation with other auditors. Consequently, the auditor must ask management about this matter.
Choice "a" is incorrect. Unusually high turnover in the accounting department is a negative factor in assessing control risk, but it is not a matter that needs to be communicated to those charged with governance.

Choice "c" is incorrect. Inquiry of management concerning any subsequent events of which the auditor is unaware is a required audit procedure, which would also be confirmed as part of the management representation letter, but it is not a matter that needs to be communicated to those charged with governance. (They should already know!)
Choice "d" is incorrect. The auditor alone has responsibility for judgments regarding the assessed level of control risk, and the auditor would not generally discuss this assessment with management.
QUESTION 341
An auditor would least likely initiate a discussion with those charged with governance concerning:
A. Themethodsusedtoaccountforsignificantunusualtransactions.
B. Themaximumdollaramountofmisstatementsthatcouldexistwithoutcausingthefinancialstatementstobemateriallymisstated. C. Indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor.
D. Disagreements with management as to accounting principles that were resolved during the current year's audit.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. Materiality assessments are not typically discussed with those charged with governance.
Choice "a" is incorrect. The auditor should communicate with those charged with governance about the appropriateness of significant accounting policies, such as the methods used to account for significant unusual transactions.
Choice "c" is incorrect. The auditor should inform those charged with governance of illegal acts that come to the auditor's attention during the course of the audit. Fraud involving senior management should also be reported directly to those charged with governance. Choice "d" is incorrect. The auditor should discuss with those charged with governance any disagreements with management, whether or not they were satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity's financial statements or the auditor's report.
QUESTION 342
Which of the following statements is correct concerning an auditor's required communication with those charged with governance?
A. Thiscommunicationisrequiredtooccurbeforetheauditor'sreportonthefinancialstatementsisissued.
B. Thiscommunicationshouldincludemanagementchangesintheapplicationofsignificantaccountingpolicies.
C. Anysignificantmattercommunicatedtothosechargedwithgovernancealsoshouldbecommunicatedtomanagement.
D. Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E)

Explanation Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor should determine that those charged with governance are informed about the initial selection of and changes in significant accounting policies or their application. Choice "a" is incorrect. The communication is incidental to the audit; accordingly, it is not required to occur before the issuance of the auditor's report as long as the communication occurs on a timely basis. (Note, however, that for audits of issuers, the communication must be made before the auditor's report is filed with the SEC.)
Choice "c" is incorrect. Communication with management is not required. Choice "d" is incorrect. Unless all those charged with governance are also involved with managing the entity, the auditor should inform those charged with governance about adjustments that could, either individually or in the aggregate, have a significant effect on the entity's financial reporting process, regardless of whether the adjustment was recorded.
QUESTION 343
Which of the following matters is an auditor required to communicate to those charged with governance?
A. Thebasisforhisorherassessmentofcontrolrisk.
B. Theprocessusedbymanagementinformulatingsensitiveaccountingestimates. C. The auditor's preliminary judgments about materiality levels.
D. The justification for performing substantive procedures at interim dates.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
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 344
Which of the following matters is an auditor not required to communicate to those charged with governance?
A. Significantadjustmentsarisingfromtheauditthatwererecordedbymanagement.
B. Thebasisfortheauditor'sconclusionsaboutthereasonablenessofmanagement'ssensitiveaccountingestimates. C. The level of responsibility assumed by the auditor under generally accepted auditing standards.
D. The degree of reliance the auditor placed on the management representation letter.

Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor is not required to communicate to those charged with governance the degree of reliance placed on the management representation letter. Choice "a" is incorrect. Unless all those charged with governance are also involved with managing the entity, the auditor should inform those charged with governance about adjustments arising from the audit, regardless of whether or not management recorded them. Choice "b" is incorrect. The auditor should communicate qualitative aspects of the process used by management in formulating sensitive accounting estimates, which would likely include discussion of the basis for the auditor's conclusions regarding the reasonableness of those estimates. Choice "c" is incorrect. The auditor should communicate the level of responsibility that he/she is assuming under GAAS.
QUESTION 345
An auditor's communication with those charged with governance is required to include the:
A. Basisfortheauditor'spreliminaryjudgmentaboutmateriality.
B. Justificationfortheauditor'sselectionofsamplingmethods.
C. Discussion of disagreements with management about matters that significantly impact the entity's financial statements. D. Assessment of the quality of the entity's earnings as compared to the previous year.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
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 346
Which of the following matters is an auditor required to communicate to those charged with governance?
A. Adjustmentsthatweresuggestedbytheauditorandrecordedbymanagementthathaveasignificanteffectontheentity'sfinancialreportingprocess.

B. Theauditor'sconsiderationofriskfactorsinassessingtheriskofmaterialmisstatementarisingfromthemisappropriationofassets.
C. The results of the auditor's analytical procedures performed in the review stage of the engagement that indicate significant variances from expected amounts. D. Changes in the auditor's preliminary judgment about materiality that were caused by projecting the results of statistical sampling for tests of transactions.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
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.
Management Representations
QUESTION 347
Which of the following should be included as a written representation from management?
A. Thebeliefthatmisstatementsidentifiedbytheauditorandnotcorrectedareimmaterial.
B. Thebeliefthatmisstatementsidentifiedbytheauditorandcorrectedarematerial.
C. The belief that the auditor is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles. D. The belief that the financial statements are completely accurate in all respects.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The representation letter should include management's belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Choice "b" is incorrect. If the misstatements have been corrected, there is no need for management to make representations regarding their materiality.
Choice "c" is incorrect. Management (and not the auditor) is responsible for the fair presentation of the financial statements in conformity with generally accepted

accounting principles. Choice "d" is incorrect. Management states its belief that the financial statements are fairly presented in conformity with GAAP. Fair presentation does not mean that the financial statements are completely accurate in all respects, but that they are accurate in all material respects.
QUESTION 348
"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:
A. Reportoninternalcontrol.
B. Specialreport.
C. Management representation letter. D. Letter for underwriters.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
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 349
To which of the following matters would materiality limits not apply in obtaining written management representations?
A. Theavailabilityofminutesofstockholders'anddirectors'meetings.
B. Lossesfrompurchasecommitmentsatpricesinexcessofmarketvalue.
C. The disclosure of compensating balance arrangements involving related parties. D. Reductions of obsolete inventory to net realizable value.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:

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 350
The date of the management representation letter should coincide with the date of the:
A. Balancesheet.
B. Latestinterimfinancialinformation. C. Auditor's report.
D. Latest related party transaction.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Because the auditor is concerned with events occurring through the date of the audit report that may require adjustment to or disclosure in the financial statements, the management representation letter should be dated as of the date of the auditor's report. Choice "a" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is generally after the balance sheet date. Choice "b" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is unrelated to the date of the latest interim financial information. Choice "d" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is unrelated to the dates of related party transactions.
QUESTION 351
"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a (an):
A. Clientengagementletter.
B. Reportoncompliancewithlawsandregulations. C. Management representation letter.
D. Attestationreportoninternalcontrol.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E)

Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. The written representation obtained by the auditor from management will ordinarily include information regarding any violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency. Choice "a" is incorrect. A client engagement letter is used to document the understanding between the client and the auditor. The letter is generally sent from the auditor to the client, although the client may be requested to sign it. The statement, "There are no violations or possible violations of laws or regulations..." should come from management. It would not be appropriate to include this in an engagement letter, which is often sent before the year has even ended. Choice "b" is incorrect. An auditor would prepare a report on compliance with laws and regulations. The statement, "There are no violations or possible violations of laws or regulations..." should come from management.
Choice "d" is incorrect. An auditor would prepare an attestation report on internal control. The statement, "There are no violations or possible violations of laws or regulations..." should come from management.
QUESTION 352
Which of the following statements might be included among additional written client representations obtained by the auditor?
A. Compensatingbalancesandotherarrangementsinvolvingrestrictionsoncashbalanceshavebeendisclosed. B. Managementacknowledgesresponsibilityforillegalactionscommittedbyemployees.
C. Sufficient audit evidence has been made available to permit the issuance of an unqualified opinion.
D. Management acknowledges that there are no material weaknesses in internal control.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The purpose of the management representation letter is to confirm management's oral evidence supplied during the engagement. Specific written representations obtained by the auditor might include acknowledgment that all compensating balances or other restrictions on cash have been disclosed. Choice "b" is incorrect. Management acknowledges responsibility for the fair presentation of the financial statements, not for illegal actions committed by employees. Choice "c" is incorrect. The auditor must decide whether there is sufficient audit evidence available to permit the issuance of an unqualified opinion, and does not request management confirmation of this decision.
Choice "d" is incorrect. Management is responsible for the design and maintenance of internal control of the company, but it is the auditor who must determine whether material weaknesses in internal control exist.
QUESTION 353
Which of the following factors most likely would cause an auditor to question the integrity of management?

A. Managementhasanaggressiveattitudetowardfinancialreportingandmeetingprofitgoals.
B. Audittestsdetectmaterialfraudthatwasknowntomanagement,butnotdisclosedtotheauditor. C. Managerial decisions are dominated by one person who is also a stockholder.
D. Weaknesses in internal control reported to the audit committee are not corrected by management.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
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 354
Which of the following expressions most likely would be included in a management representation letter?
A. Noeventshaveoccurredsubsequenttothebalancesheetdatethatrequireadjustmentto,ordisclosurein,thefinancialstatements.
B. Therearenosignificantdeficienciesininternalcontrolidentifiedduringtheprior-year'sauditofwhichthosechargedwithgovernanceareunaware. C. We do not intend to provide any information that may be construed to constitute a waiver of the attorney-client privilege.
D. Certain computer files and other required audit evidence may exist only for a short period of time and only in computer-readable form.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. It is appropriate for the representation letter to contain a statement regarding subsequent events.
Choice "b" is incorrect. The representation letter typically includes information in four categories:
financial statements; completeness; recognition, measurement, and disclosure; and subsequent events. The communication of significant deficiencies in internal

control does not fall within these categories. Choice "c" is incorrect. The representation letter typically includes information in four categories:
financial statements; completeness; recognition, measurement, and disclosure; and subsequent events. A waiver of attorney-client privilege does not fall within these categories. Choice "d" is incorrect. While this may be an accurate statement, it is not something that would be included in the management representation letter. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events.
QUESTION 355
Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?
A. Inspectlegaldocumentsinthepossessionoftheclient'slawyerthatarerelevanttopendinglitigationandunassertedclaimsandassessments.
B. Discusswiththeclient'slawyeritsphilosophyofdefendinglitigation,claims,andassessmentsthathaveahighprobabilityofbeingresolvedunfavorably. C. Confirm directly with the client's lawyer that all litigation, claims, and assessments have been properly recorded in the financial statements.
D. Obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
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 356
Which of the following matters most likely would be included in a management representation letter?
A. Anassessmentoftheriskfactorsconcerningthemisappropriationofassets. B. Anevaluationofthelitigationthathasbeenfiledagainsttheentity.
C. A confirmation that the entity has complied with contractual agreements.
D. A statement that all material internal control weaknesses have been corrected.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E)

Explanation Explanation/Reference:
Explanation:
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 357
To which of the following matters would materiality limits not apply when obtaining written client representations?
A. Violationsofstatelaborregulations.
B. Disclosureofline-of-creditarrangements. C. Information about related party transactions. D. Instances of fraud involving management.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
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.
QUESTION 358
A written client representation letter most likely would be an auditor's best source of corroborative information of a client's plans to:

A. T erminate an employee pension plan.
B. Makeapublicofferingofitscommonstock.
C. Settle an outstanding lawsuit for an amount less than the accrued loss contingency.
D. Discontinue a line of business.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A written client representation letter should include representations regarding matters that may affect recognition, measurement, and disclosure. Management's plans to discontinue a line of business may affect financial statement disclosure, since the results of operations of a component classified as "held for sale" would be reported separately in the income statement under "discontinued operations."
Choice "a" is incorrect. A client's plan to terminate an employee pension plan would not affect recognition, measurement, or disclosure in the current period financial statements. Choice "b" is incorrect. A client's plans to make a public offering of its common stock would not affect recognition, measurement, or disclosure in the current period financial statements. Choice "c" is incorrect. A letter from the client's attorney most likely would be an auditor's best source of corroborative information of a client's plans to settle an outstanding lawsuit for an amount less than the accrued loss contingency.
QUESTION 359
A limitation on the scope of an auditor's examination sufficient to preclude an unqualified opinion will always result when management:
A. Engagestheauditoraftertheyear-endphysicalinventorycountiscompleted.
B. Failstocorrectamaterialinternalcontrolweaknessthathadbeenidentifiedduringtheprioryear'saudit. C. Refuses to furnish a management representation letter to the auditor.
D. Prevents the auditor from reviewing the audit documentation of the predecessor auditor.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
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.