Certified Public Accountant CPA Questions + Answers Part 27

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Certified Public Accountant CPA Questions + Answers Part 27

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QUESTION 312
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.

Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
There should be a statement that no opinion is expressed on the current year's financial statements in the second (scope) paragraph.
A. Correct B. Incorrect
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Correct. Because the auditors do substantially less work in a review than in an audit, the auditors should state that they do not express an opinion.
QUESTION 313
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3

Supervisor's Review Notes
There should be a reference to "conformity with generally accepted accounting principles" in the third paragraph.
A. Correct B. Incorrect
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Correct. There should be reference to conformity with generally accepted accounting principles in the third paragraph.
QUESTION 314
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3

Supervisor's Review Notes
There should be no restriction on the use of the accountant's review report in the third paragraph.
A. Correct B. Incorrect
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Correct. There should be no restriction on use in a review report.
QUESTION 315
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes

There should be no reference to "material modifications" in the third paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Incorrect. There should be a reference to the fact that the auditors are not aware of any material modifications that should be made (limited assurance).
QUESTION 316
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
There should be an indication of the type of opinion expressed on the prior year's audited financial statements in the fourth (separate) paragraph.

A. Correct B. Incorrect
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Correct. An example of such a separate paragraph is the following: "The financial statements for the year ended December 31, 20X1 were audited by us and we expressed an unqualified opinion on them in our report dated March 1, 20X2 but we have not performed any auditing procedures since that date."
QUESTION 317
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
There should be an indication that no auditing procedures were performed after the date of the report on the prior year's financial statements in the fourth (separate) paragraph.

A. Correct B. Incorrect
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Correct. In the fourth paragraph, there should be an indication that the auditors performed no auditing procedures after the date of the report on the prior year's financial statements.
QUESTION 318
Which of the following is true about the term "likely misstatement?"
A. Itreferstomisstatementsthathavenotbeenspecificallyidentified,butwhicharelikelytoexistbasedontheauditor'sjudgment. B. Itreferstothecumulativeeffectofmisstatementsfromprioryearsonthecurrentyear'sfinancialstatements.
C. It refers to misstatements that have been specifically identified by the auditor.
D. It includes both identified misstatements and an estimate of unidentified misstatements.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. A "likely misstatement" is one that has not been specifically identified, but which is likely to exist based on the auditor's judgment. Choice "b" is incorrect. "Likely misstatement" does not refer to the cumulative effect of prior year errors.
It is a measure of misstatements the auditor considers likely to exist, that have not been specifically identified.
Choice "c" is incorrect. "Likely misstatement" is a measure of misstatements the auditor considers likely to exist, that have not been specifically identified. Choice "d" is incorrect. The term "likely misstatement" includes only an estimate of potential errors. It does not include specific misstatements identified during the audit.
QUESTION 319
A successor auditor ordinarily should request to review the predecessor's audit documentation relating to:

A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. A review of the predecessor's audit documentation related to matters of continuing accounting and auditing significance would be permitted. This would include documentation concerning contingencies and internal controls. Choice "b" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to internal controls.
Choice "c" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to contingencies as they may have an impact on the current year financial statements.
Choice "d" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to internal controls and contingencies.
QUESTION 320
An auditor's engagement letter most likely would include:
A. Management'sacknowledgmentofitsresponsibilityformaintainingeffectiveinternalcontrol.
B. Theauditor'spreliminaryassessmentoftheriskfactorsrelatingtomisstatementsarisingfromfraudulentfinancialreporting. C. A reminder that management is responsible for illegal acts committed by employees.
D. A request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and assessments.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation

Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. An understanding with the client should be established regarding management's responsibilities, which include establishing and maintaining effective internal control over financial reporting. This is generally documented in an engagement letter. Choice "b" is incorrect. During the planning process, the auditor must document evidence of the assessment of the risk of material misstatement due to fraud. This information would be included in the audit documentation, not in the engagement letter. Choice "c" is incorrect. Management is not responsible for illegal acts committed by employees, and therefore the engagement letter would not include such a statement. Choice "d" is incorrect. The auditor generally does not contact the client's lawyer directly; rather, a letter is sent from management to the lawyer requesting corroboration of information related to litigation, claims, and assessments. The engagement letter therefore would not include a request for permission to contact the attorney.
QUESTION 321
Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed?
A. Managementfailstomodifyprescribedinternalcontrolsforchangesininformationtechnology. B. Internalcontrolactivitiesrequiringsegregationofdutiesarerarelymonitoredbymanagement. C. Management is dominated by one person who is also the majority stockholder.
D. There is a substantial risk of intentional misapplication of accounting principles.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Intentional misapplication of accounting principles would indicate that management lacks integrity and as a result, the auditor might conclude that a financial statement audit cannot be performed.
Choice "a" is incorrect. Management's failure to modify prescribed internal controls for changes in information technology would preclude the auditor from relying on those controls but would not prevent the auditor from performing a financial statement audit. Choice "b" is incorrect. If management rarely monitors segregation of duties, the auditor would not rely on that particular control, but this would not prevent the auditor from performing a financial statement audit.
Choice "c" is incorrect. If management is dominated by one person who is also the majority stockholder, the risk of fraudulent financial reporting is increased, but this would not preclude the auditor from performing a financial statement audit.
QUESTION 322
Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?
A. Financialstatementaccountslikelytocontainamisstatement. II. Conditions that require extension of audit tests.
B. Ionly.

C. II only.
D. Both I and II. E. NeitherInorII.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. During the planning stage, the auditor assesses the risk of material misstatement in financial statement accounts. Based on this assessment, the auditor plans the audit procedures to provide reasonable assurance that material misstatements in the financial statements will be detected.
Additionally, during the planning stage, conditions may come to the auditor's attention that indicate a necessary extension of audit tests. The auditor would need to consider this factor in determining the time budget and staffing needs for the engagement. Choices "a", "b", and "d" are incorrect. The auditor would need to consider both factors (financial statement accounts likely to contain a misstatement and conditions that require an extension of audit tests) in planning the audit.
QUESTION 323
In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements most likely would consider the:
A. InternalauditingstandardsdevelopedbyTheInstituteofInternalAuditors.
B. Testsofinternalcontrolactivitiesthatcoulddetecterrorsandfraud.
C. Materiality of the accounts recently inspected by the internal auditors.
D. Results of the tests of transactions recently performed by the internal auditors.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Objectivity is reflected by the organizational level to which the internal auditor reports as well as by policies prohibiting audits of areas where the internal auditor lacks independence.
In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements considers information obtained from previous experience, from discussions with management, from external quality reviews (if performed), and from professional internal auditing standards (such as those developed by The Institute of Internal Auditors). Choice "b" is incorrect. Tests of internal control activities that could detect errors and fraud would not help the CPA assess the objectivity of the internal auditor. Choice "c" is incorrect. The materiality of the accounts recently inspected by the internal auditors would not help the CPA assess the objectivity of the internal auditor. Choice "d" is incorrect. Results of the tests of transactions recently performed by the internal auditor would aid the auditor in evaluating the internal auditor's competence rather than his or her objectivity.

QUESTION 324
Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
A. Theprospectiveclienthasalreadycompleteditsphysicalinventorycount.
B. TheCPAlacksanunderstandingoftheprospectiveclient'soperationsandindustry. C. The CPA is unable to review the predecessor auditor's audit documentation.
D. The prospective client is unwilling to make all financial records available to the CPA.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. An auditor must consider the availability and adequacy of the client's accounting records and the integrity of management in deciding whether or not to accept a new audit engagement. A prospective client that is unwilling to provide all financial records would give the auditor cause for concern about both of these issues. Choice "a" is incorrect. The auditor may apply acceptable alternative procedures to audit inventory.
Choice "b" is incorrect. The auditor can accept the engagement and obtain an understanding of the client's operations and industry after acceptance. Choice "c" is incorrect. Inability to review the predecessor's audit documentation means the auditor will expend greater effort auditing beginning balances. It does not mean the engagement should be declined.
QUESTION 325
A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements of a new financial accounting standarD. Which of the following information sources would the CPA most likely consult for this information?
A. AICPACodificationofStatementsonAuditingStandards. B. AICPAAccountingTrendsandTechniques.
C. SEC Quality Control Review.
D. SEC Statement 10-K Guide.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. The AICPA's Accounting Trends & Techniques is an annual survey of accounting practices followed in 600 stockholders' annual reports.

Choices "a", "c", and "d" are incorrect. These sources do not provide comparative information about accounting practices.
QUESTION 326
Before accepting an engagement to audit a new client, a CPA is required to obtain:
A. Anunderstandingoftheprospectiveclient'sindustryandbusiness.
B. Theprospectiveclient'ssignaturetotherepresentationletter.
C. A preliminary understanding of the prospective client's control environment.
D. The prospective client's consent to make inquiries of the predecessor auditor, if any.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Inquiry of the predecessor auditor is a required pre-acceptance procedure. However, consent of the prospective client must be obtained before a CPA can make such inquiries of the predecessor auditor.
Choice "a" is incorrect. Obtaining an understanding of the client's industry and business is a planning procedure performed after an engagement is accepted. Choice "b" is incorrect. A management representation letter is not obtained until the end of the audit.
Choice "c" is incorrect. Obtaining a preliminary understanding of the client's control environment is an audit procedure (required by the second standard of fieldwork) that would be performed after an engagement is accepted.
QUESTION 327
In assessing the objectivity of internal auditors, an independent auditor should:
A. Evaluatethequalitycontrolprogramineffectfortheinternalauditors.
B. Examinedocumentaryevidenceoftheworkperformedbytheinternalauditors.
C. Test a sample of the transactions and balances that the internal auditors examined. D. Determine the organizational level to which the internal auditors report.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. When assessing the internal auditors' objectivity, the auditor should obtain information about whether the internal auditor reports to an officer

of sufficient status to ensure broad audit coverage and adequate consideration of, and action on, the findings and recommendations of the internal auditors. Choice "a" is incorrect. A quality control program would impact the competence of the internal audit staff, not their objectivity.
Choice "b" is incorrect. Examining documentary evidence produced by the internal auditors would help the auditor evaluate the quality and effectiveness of the internal auditors' work, but would not help assess objectivity.
Choice "c" is incorrect. Testing a sample of transactions and balances examined by the internal auditors would help the auditor evaluate the quality and effectiveness of the internal auditors' work, but would not help assess objectivity.
QUESTION 328
Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted?
A. Theentityhasnoformalwrittencodeofconduct.
B. Theintegrityoftheentity'smanagementissuspect.
C. Procedures requiring segregation of duties are subject to management override. D. Management fails to modify prescribed controls for changes in conditions.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. Serious concerns about the integrity of management may indicate a risk of management misrepresentation in the financial statements that is so great that an audit cannot be conducted. If the integrity of management is suspect, there would be a presumption of dishonesty. The auditor would then need to question the genuineness of all records and documents obtained from the client and would require conclusive rather than persuasive evidence to corroborate all management representations. An audit conducted on these terms would be unreasonably costly and impractical.
Choice "a" is incorrect. A formal written code of conduct is generally considered a positive control, but the lack of one would not preclude an audit from being conducted. Choice "c" is incorrect. Management override of internal controls (such as segregation of duties) is an inherent limitation of any internal control and would not prevent an audit from being performed.
Choice "d" is incorrect. A failure by management to modify prescribed controls for changes in conditions may increase control risk, but since the auditor can generally compensate for weak internal controls with increased substantive testing, this would not preclude an audit.
QUESTION 329
The work of internal auditors may affect the independent auditor's:
A. Proceduresperformedinobtaininganunderstandingofinternalcontrol. II. Procedures performed in assessing the risk of material misstatement. III. Substantive procedures performed in gathering direct evidence.
B. IandIIonly.
C. I and III only.

D. II and Ill only. E. I,II,andIII.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The internal auditors' work may affect the nature, timing, and extent of the audit, including procedures the auditor performs when obtaining an understanding of the entity's internal control, when assessing risk, and when performing substantive procedures. Choice "a" is incorrect. It is likely that many procedures performed by internal auditors will affect the independent auditor's substantive testing, by providing direct evidence about material misstatements in assertions.
Choice "b" is incorrect. It is likely that the work of internal auditors will aid the independent auditor in assessing control risk, since so much of the internal auditors' function is involved with monitoring the control structure.
Choice "c" is incorrect. It is very likely that the work of internal auditors will affect the independent auditor's procedures for obtaining an understanding of internal control, because monitoring the control system is the primary responsibility of the internal auditors. Their flowcharts, narratives, and analyses of controls could be helpful to the independent auditor.
QUESTION 330
Which of the following statements is correct concerning an auditor's use of the work of a specialist?
A. Theauditorneednotobtainanunderstandingofthemethodsandassumptionsusedbythespecialist.
B. Theauditormaynotusetheworkofaspecialistinmattersmaterialtothefairpresentationofthefinancialstatements.
C. The reasonableness of the specialist's assumptions and their applications are strictly the auditor's responsibility.
D. The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The purpose of using the work of a specialist is to provide the auditor with specialized skill or knowledge the auditor may lack. The work of a specialist who has a relationship with a client may be acceptable under certain circumstances. If the specialist has a relationship with the client, the auditor should assess the risk that the specialist's objectivity might be impaired. If the auditor believes that the relationship might impair the specialist's objectivity, the auditor should perform additional procedures with respect to the specialist's assumptions, methods, or findings to determine that the findings are not unreasonable or should engage another specialist for that purpose.

Choice "a" is incorrect. Although the appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist, the auditor should obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements. Choice "b" is incorrect. The auditor may use, and in fact is encouraged to use, the work of a specialist in matters material to the fair presentation of the financial statements. Choice "c" is incorrect. The appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist; the auditor should, however, obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements.
QUESTION 331
The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:
A. Evidencetobegatheredtoprovideasufficientbasisfortheauditor'sopinion. B. Procedurestobeundertakentodiscoverlitigation,claims,andassessments. C. Pending legal matters to be included in the inquiry of the client's attorney.
D. Timing of inventory observation procedures to be performed.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. In order to observe the physical inventory count, the auditor would have to coordinate schedules with the client. This timing is usually agreed upon before implementation of the audit strategy.
Choice "a" is incorrect. It would not be appropriate for the client to be involved in determining the amount of evidence necessary to provide a basis for an opinion. Choice "b" is incorrect. It would not be appropriate for the client to be involved in determining the procedures necessary to obtain evidence about litigation, claims and assessments. Choice "c" is incorrect. Determination of the pending legal matters to be included in a letter to the client's attorney would not generally be made during the planning stage of the audit.
QUESTION 332
Which of the following statements would least likely appear in an auditor's engagement letter?
A. Feesforourservicesarebasedonourregularperdiemrates,plustravelandotherout-of-pocketexpenses.
B. Duringthecourseofourauditwemayobserveopportunitiesforeconomyin,orimprovedcontrolsover,youroperations.
C. Our engagement is subject to the risk that material errors or fraud, including defalcations, if they exist, will not be detected.
D. Afterperformingourpreliminaryanalyticalprocedureswewilldiscusswithyoutheotherproceduresweconsidernecessarytocompletetheengagement.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation

Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The auditor does not consult with the client about audit procedures that will be performed.
Choice "a" is incorrect. Since the engagement letter serves as a contract between the auditor and client, fee arrangements are typically disclosed in the letter. Choice "b" is incorrect. A discussion regarding possible auditor suggestions is appropriate for inclusion in an engagement letter.
Choice "c" is incorrect. The fact that audit risk exists and that an audit only provides reasonable assurance of the detection of errors and fraud is typically disclosed in an engagement letter.
QUESTION 333
Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
A. Inquiringoftheclient'slegalcounselconcerningpendinglitigation.
B. Comparingthefinancialstatementstoanticipatedresults.
C. Examining computer generated exception reports to verify the effectiveness of internal controls. D. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. A requirement during planning is to perform analytical procedures, which involve comparisons of recorded amounts to expectations. Choice "a" is incorrect. Inquiry of the client's legal counsel is typically performed near the end of fieldwork.
Choice "c" is incorrect. Tests of controls are performed after audit planning is complete. Choice "d" is incorrect. The search for unrecorded liabilities is generally performed at or after year-end.
QUESTION 334
The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants:
A. Thatfraudisnottobereportedtothosechargedwithgovernance.
B. Howtheresultsofvariousauditingproceduresperformedbytheassistantsshouldbeevaluated. C. What benefits may be attained by the assistants' adherence to established time budgets.
D. Why certain documents are being transferred from the current file to the permanent file.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B)

Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. Assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform. Part of the assistant's responsibility is to properly evaluate audit results, and the in-charge auditor would likely discuss this with them. Choice "a" is incorrect. Fraud that causes a material misstatement or involves senior management should be reported to those charged with governance. Choice "c" is incorrect. Preparation and maintenance of the time budget is related to planning rather than supervision.
Choice "d" is incorrect. The reasons for transferring documents from the permanent file to the current file need not be explained to the staff assistants.
QUESTION 335
Analytical procedures used in planning an audit should focus on:
A. Reducingthescopeoftestsofcontrolsandsubstantivetests.
B. Providingassurancethatpotentialmaterialmisstatementswillbeidentified. C. Enhancing the auditor's understanding of the client's business.
D. Assessingtheadequacyoftheavailableauditevidence.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Analytical procedures used in planning the audit should focus on enhancing the auditor's understanding of the client's business and the transactions and events that have occurred since the last audit date.
Choice "a" is incorrect. Analytical procedures used in planning do not reduce tests of controls or substantive tests.
Choice "b" is incorrect. Analytical procedures used in planning are not designed to identify material misstatements.
Choice "d" is incorrect. Audit evidence has not yet been gathered during the planning process, so its adequacy cannot be assessed.
QUESTION 336
Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?
A. Anillegalpaymenttoaforeignofficialthatwasnotrecorded.
B. Apieceofobsoleteofficeequipmentthatwasnotretired.
C. Apettycashfunddisbursementthatwasnotproperlyauthorized. D. An uncollectible account receivable that was not written off.

Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. An illegal payment of an otherwise immaterial amount could be material if there is a reasonable possibility that it could lead to a material contingent liability or a material loss of revenue.
Choice "b" is incorrect. Failure to retire a piece of obsolete office equipment is not likely to have ramifications beyond the immaterial misstatement that would result directly from it. Choice "c" is incorrect. Failure to properly authorize a petty cash fund disbursement is not likely to have ramifications beyond the immaterial misstatement that would result directly from it. Choice "d" is incorrect. Failure to write off a relatively small uncollectible account receivable is not likely to have ramifications beyond the immaterial misstatement that would result directly from it.
QUESTION 337
Which of the following risks may be assessed in nonquantitative terms?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Both the risk of material misstatement (including control risk and inherent risk) and detection risk may be assessed in quantitative terms such as percentages or in nonquantitative terms that range, for example, from a minimum to a maximum. Choices "a", "b", and "d" are incorrect, based on the above explanation.

QUESTION 338
Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?
A. Theanticipatedsamplesizeoftheplannedsubstantivetests. B. Theentity'sannualizedinterimfinancialstatements.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. The auditor's preliminary judgment about materiality is generally based on either annualized interim financial statements or annual financial statements from a prior period. Choice "a" is incorrect. The anticipated sample size for substantive tests is irrelevant in making a preliminary judgment about materiality.
Choice "c" is incorrect. The results of the internal control questionnaire would be relevant for making a preliminary assessment of control risk; however, these results are irrelevant for determining a preliminary level of materiality.
Choice "d" is incorrect. The management representation letter is obtained at the end of the audit and would not be available when preliminary assessments of materiality are made during planning.
QUESTION 339
An auditor should design the written audit plan so that:
A. Allmaterialtransactionswillbeselectedforsubstantivetesting.
B. Substantivetestspriortothebalancesheetdatewillbeminimized.
C. The audit procedures selected will achieve specific audit objectives.
D. Each account balance will be tested under either tests of controls or tests of transactions.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. An audit plan aids in instructing assistants in the work to be done. It should set forth in reasonable detail the audit procedures that the auditor

believes are necessary to accomplish the objectives of the audit.
Choice "a" is incorrect. Auditors make extensive use of sampling to perform audit tests. Tests of all material transactions would not be economically feasible. Choice "b" is incorrect. Assuming that incremental risk can be controlled, substantive tests can be performed prior to year-end.
Choice "d" is incorrect. An account balance does not necessarily have to have tests of controls or tests of transactions applied to it.
QUESTION 340
In auditing the financial statements of Star Corp., Land discovered information leading Land to believe that Star's prior year's financial statements, which were audited by Tell, require substantial revisions.
Under these circumstances, Land should:
A. NotifyStar'sauditcommitteeandstockholdersthattheprioryear'sfinancialstatementscannotbereliedon. B. RequestStartoreissuetheprioryear'sfinancialstatementswiththeappropriaterevisions.
C. Notify Tell about the information and make inquiries about the integrity of Star's management.
D. Request Star to arrange a meeting among the three parties to resolve the matter.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. If, during the audit, the successor auditor becomes aware of information indicating that the financial statements reported on by the predecessor auditor may require revision, he or she should request the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter. Choice "a" is incorrect. It is not the successor auditor's responsibility to inform readers that the financial statements, which were audited by another firm, cannot be relied upon. Choice "b" is incorrect. The prior year's financial statements should not be reissued until the two auditing firms and the client have an opportunity to discuss the matter. There is a reasonable likelihood that the successor firm is unaware of other information that supports the current condition of the prior year financial statements.
Choice "c" is incorrect. The successor firm should not notify the predecessor directly but should request that the client do so.
QUESTION 341
An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the:
A. Existenceofcontingencies.
B. Valuationofintangibleassets.
C. Existence of fixed asset additions.
D. Valuation of related party transactions.
Correct Answer: C

Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. In making judgments about the extent of the effect of the internal auditor's work on the auditor's procedures, the auditor considers the materiality of financial statement amounts, the risk of material misstatement of the assertions related to these financial statement amounts, and the degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions. As the degree of subjectivity increases, the need for the auditor to perform tests of the assertions increases.
Testing the existence of fixed asset additions involves very little subjectivity, and thus work performed by the internal auditor may reduce the auditor's testing in this area. Choice "a" is incorrect. Testing the existence of contingencies involves much subjectivity, and should, therefore, be performed by the auditor.
Choice "b" is incorrect. Testing the valuation of intangible assets involves much subjectivity, and should, therefore, be performed by the auditor.
Choice "d" is incorrect. Testing the valuation of related party transactions involves much subjectivity, and should, therefore, be performed by the auditor.
QUESTION 342
During an audit an internal auditor may provide direct assistance to an independent CPA in:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation: Explanation

Choice "d" is correct. Internal auditors may assist the auditor in obtaining an understanding of internal control and in performing tests of controls and substantive tests. Choices "a", "b", and "c" are incorrect, based on the above explanation.
QUESTION 343
Which of the following statements is correct concerning an auditor's use of the work of a specialist?
A. Theworkofaspecialistwhoisrelatedtotheclientmaybeacceptableundercertaincircumstances.
B. Ifanauditorbelievesthatthedeterminationsmadebyaspecialistareunreasonable,onlyaqualifiedopinionmaybeissued.
C. If there is a material difference between a specialist's findings and the assertions in the financial statements, only an adverse opinion may be issued. D. An auditor may not use a specialist in the determination of physical characteristics relating to inventories.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The work of a specialist who has a relationship with a client may be acceptable under certain circumstances. If the specialist is related to the client, the auditor should consider performing additional procedures with respect to the specialist's assumptions, methods, or findings to determine that the findings are not unreasonable, or should engage another specialist for that purpose.
Choice "b" is incorrect. If the auditor believes the findings are unreasonable, the auditor should apply additional procedures, which may include obtaining the opinion of another specialist. This does not imply that there is a problem with the financial statements, and therefore would not necessarily result in a qualified opinion.
Choice "c" is incorrect. If there is a material difference between a specialist's findings and the assertions in the financial statements, and if the specialist's findings are deemed reasonable, either a qualified or an adverse opinion may be issued. (Note that it is also possible that the specialist's findings turn out to be erroneous, in which case an unqualified opinion might be issued.)
Choice "d" is incorrect. A specialist may be used to determine the physical characteristics relating to inventory (e.g., quantity on hand or condition).
QUESTION 344
In using the work of a specialist, an auditor of a nonissuer may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor:
A. Becomesawareofconditionscausingsubstantialdoubtabouttheentity'sabilitytocontinueasagoingconcern. B. Desirestodisclosethespecialist'sfindings,whichimplythatamorethoroughauditwasperformed.
C. Is able to corroborate another specialist's earlier findings that were consistent with management's representations. D. Discovers significant deficiencies in the design of the entity's internal control that management does not correct.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation

Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The auditor may, as a result of the report or findings of the specialist, decide to add explanatory language to the auditor's standard report or depart from an unqualified opinion. Reference to and identification of the specialist may be made in the auditor's report if the auditor believes such reference will facilitate an understanding of the reason for the explanatory paragraph or the departure from the unqualified opinion. Choice "b" is incorrect. The auditor should not refer to the work or findings of the specialist unless the specialist's work results in a change to the auditor's report. Choice "c" is incorrect. The auditor should not refer to the work or findings of the specialist unless the specialist's work results in a change to the auditor's report. Choice "d" is incorrect. The identification of significant deficiencies in the design of the client's internal control would not result in a change to the auditor's report. The auditor should not refer to the work or findings of the specialist unless the specialist's work results in a change to the auditor's report.
QUESTION 345
Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
A. Obtainingawrittenrepresentationletterfromtheclient'smanagement.
B. Examiningdocumentstodetectillegalactshavingamaterialeffectonthefinancialstatements. C. Considering whether the client's accounting estimates are reasonable in the circumstances.
D. Determining the extent of involvement of the client's internal auditors.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The auditor considers several factors in planning the nature, timing and extent of auditing procedures. One of these factors is the extent of involvement of the client's internal auditors.
Choice "a" is incorrect. Representation letters are obtained by the auditor at the end of the audit. The representation letter should not be dated earlier than the date of the auditor's report. Choice "b" is incorrect. The auditor does not perform tests to detect illegal acts during the planning process.
Choice "c" is incorrect. The auditor does obtain and evaluate evidence to support significant accounting estimates, but this occurs subsequent to initial planning.
QUESTION 346
Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?
A. Thecomplexityoftheinformationsystemrelevanttofinancialreporting. B. Theexistenceofrelatedpartytransactions.
C. The adequacy of the accounting records.
D. The operating effectiveness of controls.

Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Inadequate financial records may preclude the auditor from obtaining sufficient appropriate audit evidence.
Choice "a" is incorrect. The complexity of the client's information system generally would not influence an auditor's determination of auditability, although it might indicate the need for an information technology expert.
Choice "b" is incorrect. The existence of related party transactions generally would not influence the auditor's determination of auditability.
Choice "d" is incorrect. The operating effectiveness of internal controls is determined long after the decision about auditability is made.
QUESTION 347
Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated.
Under these circumstances, which party should initiate the communications between Hill and Post?
A. Hill,thesuccessorauditor.
B. Post,thepredecessorauditor.
C. Monday's controller or CFO.
D. The chairman of Monday's board of directors.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The initiative to communicate with the predecessor auditor rests with the successor auditor. Note, however, that the successor auditor must first receive permission from the client.
Choice "b" is incorrect. The predecessor auditor should respond promptly and fully to reasonable inquiries. However, the predecessor is not responsible for initiating communications. Choice "c" is incorrect. The prospective client should authorize the predecessor to respond fully to the successor's inquiries. However, the client is not responsible for initiating communications. Choice "d" is incorrect. The prospective client should authorize the predecessor to respond fully to the successor's inquiries. However, the client is not responsible for initiating communications.
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