Certified Public Accountant CPA Questions + Answers Part 43

[answerhappygod]

QUESTION 289
When companies use information technology (IT) extensively, evidence may be available only in electronic form. What is an auditor's best course of action in such situations?
A. Assessthecontrolriskashigh.
B. Useauditsoftwaretoperformanalyticalprocedures.
C. Use generalized audit software to extract evidence from client databases. D. Perform limited tests of controls over electronic data.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When companies use information technology (IT) extensively and evidence is available only in electronic form, generalized audit software packages generate the programs necessary to interrogate the files and extract and analyze the data. Choice "a" is incorrect. The use of information technology does not automatically imply that control risk is high. The auditor would need to evaluate the client's controls to make this determination. Choice "b" is incorrect. Although audit software might be used to perform analytical procedures, the data would first need to be extracted from the client's system. A generalized audit software package is the best way to do this.
Choice "d" is incorrect. If information technology is used extensively, the auditor would likely perform more than limited tests of controls over electronic data. Internal Control Communications
QUESTION 290
Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency?
A. Thelikelihoodthatacontrolwillfailtopreventordetectamisstatement.
II. The magnitude of the misstatement that could result from the deficiency.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation

Explanation/Reference:
Explanation:
Choice "c" is correct. When evaluating whether a control deficiency is a significant deficiency or a material weakness, the auditor should consider both the likelihood and magnitude of any potential misstatement.
Choices "a", "b", and "d" are incorrect, based on the Explanation: above.
QUESTION 291
Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer?
A. Anauditorisrequiredtosearchforsignificantdeficienciesduringanaudit.
B. Allsignificantdeficienciesarealsoconsideredtobematerialweaknesses.
C. An auditor may communicate significant deficiencies during an audit or after the audit's completion. D. Anauditormayreportthatnosignificantdeficiencieswerenotedduringanaudit.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Because timely communication may be important, the auditor may choose to communicate significant deficiencies during the course of the audit rather than after the audit is concluded.
Choice "a" is incorrect. The auditor is not obligated to search for significant deficiencies. Choice "b" is incorrect. All material weaknesses are significant deficiencies, but not all significant deficiencies are material weaknesses.
Choice "d" is incorrect. Because of the potential for misinterpretation, the auditor should not issue a written report representing that no significant deficiencies were noted during the audit.
QUESTION 292
Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's management and those charged with governance because they represent:
A. Disclosuresofinformationthatsignificantlycontradicttheauditor'sgoingconcernassumption.
B. Materialfraudorillegalactsperpetratedbyhigh-levelmanagement.
C. Deficiencies in the design or operation of internal control that could reasonably be expected to cause a non-inconsequential misstatement in the financial statements.
D. Manipulation or falsification of accounting records or documents from which financial statements are prepared.

Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Significant deficiencies in the design or operation of internal control should be communicated to management and those charged with governance because there is more than a remote likelihood that they will result in a financial statement misstatement that is more than inconsequential. Choice "a" is incorrect. Information that significantly contradicts the auditor's going concern assumption is not considered a significant deficiency. Choice "b" is incorrect. Fraud perpetrated by high-level managers should be reported to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control.
Choice "d" is incorrect. Fraud should be reported to an appropriate level of management, and sometimes to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control.
QUESTION 293
Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance?
A. Management'sfailuretorenegotiateunfavorablelong-termpurchasecommitments. B. Recurringoperatinglossesthatmayindicategoingconcernproblems.
C. Evidence of a lack of objectivity by those responsible for accounting decisions.
D. Management's current plans to reduce its ownership equity in the entity.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A lack of objectivity by those responsible for accounting decisions represents a significant internal control deficiency because it may result in financial statements that are biased rather than being presented fairly.
Choice "a" is incorrect. Management's failure to renegotiate unfavorable long-term purchase commitments does not represent a significant deficiency in internal control. Choice "b" is incorrect. Going concern problems do not represent a significant deficiency in internal control.
Choice "d" is incorrect. Management's plan to reduce its ownership equity in the entity does not represent a significant deficiency in internal control.
QUESTION 294
A report on a nonissuer's internal control should include a statement limiting the use of the report when: A. Management'sassertionispresentedinaseparatereportthatwillaccompanytheCPA'sreport.

B. Management'sassertionispresentedasarepresentationlettertotheCPA.
C. Management's assertion is presented based upon criteria that are available to specific parties. D. Management's assertion is not presented.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When management's assertion is presented based on criteria that are only appropriate for or available to specific parties, the report should contain a statement limiting its use. Examples include reports based on criteria specified by a regulatory agency and reports based on criteria agreed to by management and some other specified party. Choice "a" is incorrect. There is no requirement to limit the use of the report when management's assertion accompanies the CPA's report.
Choice "b" is incorrect. When management's assertion is presented as a representation letter to the CPA, the report should include a statement of management's assertion, but there is no requirement to limit the use of the report.
Choice "d" is incorrect. Management is required to present its written assertion about the effectiveness of the entity's internal control as a condition of engagement performance.
QUESTION 295
When management's assertion about the effectiveness of a nonissuer's internal control is presented in a representation letter that will not accompany the CPA's report:
A. Useofthereportisrestrictedtomanagementandtheboardofdirectors.
B. Thereportshouldcontainastatementofmanagement'sassertion.
C. The CPA should not accept the engagement.
D. The report should include a negative assurance with respect to the effectiveness of the entity's internal control.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When management's assertion does not accompany the CPA's report, the first paragraph of the report should contain a statement of management's assertion. Choice "a" is incorrect. There is no requirement to limit the use of the report, but the report must include a statement of management's assertion.
Choice "c" is incorrect. The CPA may accept such an engagement but is required to include management's assertion in the report.
Choice "d" is incorrect. Negative assurance is prohibited with respect to a report on the effectiveness of an entity's internal control.

QUESTION 296
Which of the following conditions is necessary for a practitioner to accept an attest engagement to examine and report on a nonissuer's internal control over financial reporting?
A. Thepractitioneranticipatesrelyingontheentity'sinternalcontrolinafinancialstatementaudit.
B. Managementpresentsitswrittenassertionabouttheeffectivenessofinternalcontrol.
C. The practitioner is a continuing auditor who previously has audited the entity's financial statements.
D. Management agrees not to present the practitioner's report in a general-use document to stockholders.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In order for a practitioner to examine and report on management's assertion about the effectiveness of an entity's internal control, management must present its written assertion about the effectiveness of internal control.
Choice "a" is incorrect. The examination may be made separately from or in conjunction with an audit, and there is no requirement that the practitioner rely on internal control. Choice "c" is incorrect. No requirement for previous engagement experience exists in order to report on a client's internal control.
Choice "d" is incorrect. The practitioner's report is considered appropriate for general distribution.
QUESTION 297
Which of the following statements is correct concerning an auditor's required communication of significant deficiencies in internal control noted during an audit of a nonissuer?
A. Asignificantdeficiencypreviouslycommunicatedduringtheprioryear'sauditthatremainsuncorrectedcausesascopelimitation. B. Anauditorshouldperformtestsofcontrolsonsignificantdeficienciesbeforecommunicatingthemtotheclient.
C. An auditor's report on significant deficiencies should include a restriction on the distribution of the report.
D. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The report should state that the communication is intended solely for the use of management, those charged with governance, and others

within the organization. Choice "a" is incorrect. Significant deficiencies may represent a conscious decision by management to accept that degree of risk because of cost or other considerations. The auditor may elect to use a primarily substantive approach to test balances, so internal control deficiencies do not necessarily constitute a scope limitation.
Choice "b" is incorrect. No requirement to perform tests of controls exists. Significant deficiencies may be identified through the consideration of internal control, the application of audit procedures to balances or transactions, or otherwise during the course of the audit. Choice "d" is incorrect. Significant deficiencies may be communicated during or after the audit.
QUESTION 298
Snow, CPA, was engaged by Master Co., a nonissuer, to examine and report on management's written assertion about the effectiveness of Master's internal control over financial reporting. Snow's report should state that:
A. Becauseofinherentlimitationsofanyinternalcontrol,errorsorfraudmayoccurandnotbedetected.
B. Management'sassertionisbasedoncriteriaestablishedbytheAmericanInstituteofCertifiedPublicAccountants.
C. The results of Snow's tests will form the basis for Snow's opinion on the fairness of Master's financial statements in conformity with GAAP. D. The purpose of the engagement is to enable Snow to plan an audit and determine the nature, timing, and extent of tests to be performed.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The practitioner's report should include a paragraph stating that because of the inherent limitations of any internal control, errors and fraud may occur and not be detected. Choice "b" is incorrect. The examination is performed in accordance with standards established by the AICPA, but management's assertion may be based on criteria established by some other recognized body.
Choice "c" is incorrect. An examination (an attestation engagement) of management's assertion on the effectiveness of an entity's internal control over financial reporting does not provide a sufficient basis for an opinion on the fairness of the financial statements. Choice "d" is incorrect. An examination of management's assertion on the effectiveness of an entity's internal control over financial reporting is performed solely to report on that assertion, and not to plan an audit.
QUESTION 299
Which of the following best describes a CPA's engagement to report on a nonissuer's internal control over financial reporting?
A. Anattestationengagementtoexamineandreportonmanagement'swrittenassertionsabouttheeffectivenessofitsinternalcontrol.
B. Anauditengagementtorenderanopinionontheentity'sinternalcontrol.
C. A prospective engagement to project, for a period of time not to exceed one year, and report on the expected benefits of the entity's internal control. D. A consulting engagement to provide constructive advice to the entity on its internal control.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E)

Explanation Explanation/Reference:
Explanation:
Choice "a" is correct. An engagement to report on an entity's internal control is best described as an attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control.
Choice "b" is incorrect. An audit involves expressing (or disclaiming) an opinion on historical financial statements. An engagement to report on internal control is an attestation engagement and not an audit. Thus, the engagement is covered under the attestation standards rather than GAAS. Choice "c" is incorrect. A prospective engagement is not appropriate for a report on internal control. In fact, the CPA's report includes an "inherent limitations" paragraph stating that projections of the internal control evaluation to the future are risky, since conditions or the degree of compliance may change.
Choice "d" is incorrect. In a consulting engagement, the practitioner develops findings, conclusions, and recommendations, but does not report on an assertion that is the responsibility of another party. When a CPA reports on an entity's internal control, he or she is in effect reporting on management's assertion.
QUESTION 300
A letter issued on significant deficiencies relating to an entity's internal control observed during an audit of the financial statements of a nonissuer should include a:
A. Restrictionontheuseofthereport.
B. Descriptionoftestsperformedtosearchformaterialweaknesses.
C. Statement of compliance with applicable laws and regulations.
D. Paragraph describing management's evaluation of the effectiveness of internal control.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Any report issued on significant deficiencies noted during an audit should (1) indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control, (2) include the definition of significant deficiencies, and (3) include a restriction on the use of the report.
Choice "b" is incorrect. Because the auditor does not search for material weaknesses, a description of tests performed in this regard would not be included in a written report. Choice "c" is incorrect. There is no required statement of compliance with applicable laws and regulations in a letter issued on significant deficiencies. Choice "d" is incorrect. There is no paragraph describing management's evaluation in a letter issued on significant deficiencies.
QUESTION 301
How do the scope, procedures, and purpose of an engagement to express a separate opinion on a nonissuer's internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit?

A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In an engagement to express a separate opinion on an entity's internal control, the scope is extensive, and the purpose is directed primarily toward the internal control report. In an audit, the scope is less extensive, and the purpose is to determine the nature, timing, and extent of auditing procedures. Similar procedures generally would be used in both types of engagements. Choices "a", "b", and "c" are incorrect, based on the above Explanation: .
QUESTION 302
Rachel, CPA, is conducting an audit of Eaton Enterprises, a nonissuer. Rachel has conducted her audit in accordance with generally accepted auditing standards, and she wishes to emphasize in her report that such standards do not require the same level of testing and reporting on internal control as is required for audits of issuers under the Sarbanes-Oxley Act. Which report modification would be most appropriate in this situation?
A. Onlythescopeparagraphshouldbemodified.
B. Anexplanatoryparagraphshouldbeaddedfollowingtheopinionparagraph.
C. Anexplanatoryparagraphshouldbeaddedprecedingtheopinionparagraph,andtheopinionparagraphshouldstate,"Exceptforthematterdiscussedinthe preceding paragraph..."
D. No report modification should be made in this scenario.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:

Explanation:
Choice "a" is correct. The auditor may expand the scope paragraph to state that internal control was considered as a basis for designing appropriate audit procedures, but not for the purpose of expressing an opinion on the effectiveness of internal control. This serves to emphasize that the extended level of testing and reporting on internal control required by the Sarbanes-Oxley Act did not apply in this case. Choice "b" is incorrect. The auditor should modify the scope paragraph, not add an additional explanatory paragraph.
Choice "c" is incorrect. An "except for" qualified opinion would not be appropriate in this case. Choice "d" is incorrect. Although a report modification is not required, the question states that Rachel wishes to emphasize the scope of her work on internal control. In such situations, the scope paragraph should be modified.
QUESTION 303
Hannah, CPA, has been engaged to perform financial statement audits for three different clients. The first two clients, McCormick Surf Shop and Kleinpeter Technologies, are both nonissuers, while the third client, Bender Industries, is an issuer. Hannah is required to follow PCAOB standards in her audit of Bender Industries. She has also been asked to conduct the Kleinpeter audit in accordance with both generally accepted auditing standards and the auditing standards of the PCAOB. Regarding the McCormick engagement, Hannah has decided to follow only generally accepted auditing standards, and not the standards of the PCAOB. Which of the following best describes the scope of Hannah's work related to internal control in these three engagements?
A. Hannahmustexpressanopinionontheeffectivenessofinternalcontrolinallthreeengagements.
B. HannahmustexpressanopinionontheeffectivenessofinternalcontrolinboththeBenderandKleinpeterengagements,butisnotrequiredtoexpresssuchan opinion in the McCormick engagement.
C. Hannah must express an opinion on the effectiveness of internal control in the Bender engagement, but is not required to express such an opinion in the Kleinpeter and McCormick engagements.
D. Hannah is not required to express an opinion on the effectiveness of internal control in any of the three engagements, since she was hired to perform a financial statement audit and not to report on internal control.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Be careful! While it is true that Hannah is following PCAOB standards in both the Bender and Kleinpeter engagements, PCAOB standards do not require expanded testing and reporting on internal control for nonissuers. Therefore, only in the Bender engagement would Hannah be required to express an opinion on the effectiveness of internal control. Choice "a" is incorrect. Hannah is not required to express an opinion on internal control in either the Kleinpeter engagement (because PCAOB standards do not require such an opinion for financial statement audits of nonissuers) or the McCormick engagement (because generally accepted auditing standards do not require such an opinion for financial statement audits). Choice "b" is incorrect. Hannah is not required to express an opinion on internal control in the Kleinpeter engagement because PCAOB standards do not require such an opinion for financial statement audits of nonissuers. Choice "d" is incorrect. Hannah is required to express an opinion on internal control in the Bender engagement. PCAOB standards require the auditor to express such an opinion, in conjunction with financial statement audits of issuers.
QUESTION 304

Which of the following is true regarding significant deficiencies in internal control?
A. Auditorsmustsearchforthem.
B. Auditorsmustcommunicatethemtomanagementandtothosechargedwithgovernance. C. They must be included in the financial statements.
D. They must be disclosed in footnotes.
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 management and to those charged with governance (the audit committee) any significant deficiencies in internal control that the auditor observes.
Choice "a" is incorrect. The auditor is not obligated to search specifically for significant deficiencies in internal control.
Choice "c" is incorrect. Significant deficiencies in internal control are not typically included in the financial statements, as they relate to controls and not to the presentation and disclosure of financial information.
Choice "d" is incorrect. Significant deficiencies in internal control are not typically included in the footnotes to the financial statements, as they relate to controls and not to the presentation and disclosure of financial information.
QUESTION 305
Management of Eva Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated a material weakness previously noted in its assessment of internal control, and has hired Henna and Company, CPAs, to attest to the improvements in internal control. Which of the following is true of this engagement?
A. ItisrequiredbyPCAOBstandards.
B. ItisonlyrequiredifEvaIndustrieselectstohaveanauditinaccordancewithPCAOBstandards. C. Eva's management must provide a written report to accompany Henna and Company's report. D. It is required by generally accepted auditing standards.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Eva's management must provide a written report to accompany Henna and Company's report.

Choices "a" and "d" are incorrect. An engagement to report on whether a previously reported internal control weakness continues to exist is a voluntary engagement, not required by professional standards. Choice "b" is incorrect. An engagement to report on whether a previously reported internal control weakness continues to exist is a voluntary engagement, not required by professional standards. In addition, as an issuer, Eva must have an audit in accordance with PCAOB standards.
QUESTION 306
For a nonissuer, a control deficiency would be considered a significant deficiency when the likelihood and magnitude of potential financial statement misstatements are:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected.
Choices "a", "b", and "d" are incorrect, based on the Explanation: above.
QUESTION 307
For a nonissuer, a control deficiency would be considered a material weakness when the likelihood and magnitude of potential financial statement misstatements are:

A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the entity's financial statements will not be prevented or detected. Choices "b", "c", and "d" are incorrect, based on the Explanation: above.
QUESTION 308
In an audit of an issuer:
A. Managementmustassessandreportoninternalcontrol. II. The auditor must assess and report on internal control.
B. Ionly.
C. II only.
D. Either I or II.
E. BothIandII.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:

Choice "d" is correct. It is management's responsibility to assess and report on internal control, but the auditor is also required to assess and report on internal control. Choices "a", "b", and "c" are incorrect, based on the Explanation: above.
QUESTION 309
In an audit of an issuer, the auditor must provide an opinion on which of the following?
A. Thefinancialstatements.
II. The audit committee's oversight of financial reporting and internal control. III. The effectiveness of internal control.
B. IandIIIonly.
C. I, II, and III.
D. I and II only.
E. Ionly.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor provides an opinion on the entity's financial statements and on the effectiveness of internal control. The auditor is not required to provide an opinion on the audit committee's oversight (but is required to report to the board when such oversight is ineffective). Choices "b", "c", and "d" are incorrect, based on the Explanation: above.
QUESTION 310
Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an audit of a nonissuer?
A. Theauditormustcommunicatebothsignificantdeficienciesandmaterialweaknesses.
B. Theauditormustcommunicatematerialweaknesses,butneednotdisclosesignificantdeficiencies.
C. The auditor must communicate significant deficiencies, but need not separately identify material weaknesses. D. Neither significant deficiencies nor material weaknesses are required to be communicated.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:

Choice "a" is correct. In an audit of a nonissuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and those charged with governance. Choice "b" is incorrect. The auditor is required to communicate significant deficiencies. Choice "c" is incorrect. The auditor's report includes the definition of significant deficiencies and a list of such deficiencies noted, followed by the definition of material weaknesses and a list of such weaknesses noted.
Choice "d" is incorrect. Both significant deficiencies and material weaknesses are required to be communicated to management and those charged with governance.
QUESTION 311
Which of the following best describes the responsibility of the auditor with respect to significant deficiencies and material weaknesses in an audit of an issuer?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In an audit of an issuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and the audit committee, but only material weaknesses result in an adverse opinion on the effectiveness of internal control. Choice "a" is incorrect. In an audit of an issuer, significant deficiencies (that do not rise to the level of being material weaknesses) do not result in an adverse opinion on the effectiveness of internal control.

Choice "c" is incorrect. In an audit of an issuer, both significant deficiencies and material weaknesses must be communicated, in writing, to management and the audit committee. In addition, significant deficiencies (that do not rise to the level of being material weaknesses) do not result in an adverse opinion on the effectiveness of internal control.
Choice "d" is incorrect. In an audit of an issuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and the audit committee.
QUESTION 312
Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an attest engagement to examine the effectiveness of a nonissuer's internal control?
A. Theauditormustcommunicatebothsignificantdeficienciesandmaterialweaknesses.
B. Theauditormustcommunicatematerialweaknesses,butneednotdisclosesignificantdeficiencies.
C. The auditor must communicate significant deficiencies, but need not separately identify material weaknesses. D. Neither significant deficiencies nor material weaknesses are required to be communicated.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In an attest engagement to examine the effectiveness of an entity's internal control, the auditor must communicate both significant deficiencies and material weaknesses to management and those charged with governance.
Choice "b" is incorrect. The auditor is required to communicate significant deficiencies. Choices "c" and "d" are incorrect. Both significant deficiencies and material weaknesses are required to be communicated to management and those charged with governance.
QUESTION 313
Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?
A. Theauditorshoulddesignandapplytestsofcontrolstodiscoversignificantdeficienciesininternalcontrolthatcouldresultinmaterialmisstatements.
B. Theauditorneednotsearchforsignificantdeficienciesininternalcontrolunlessmanagementrequestsanattestationthat"nosignificantdeficienciesininternal control were noted in the audit."
C. The auditor should search for significant deficiencies in internal control if the auditor expects that controls are operating effectively (i.e., if the auditor plans to rely on controls).
D. The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation

Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor need not search for significant deficiencies in internal control, but should document and communicate any such deficiencies that are discovered. Choice "a" is incorrect. Tests of controls are designed and applied to evaluate the risk of financial statement misstatement, and to determine the nature, timing, and extent of substantive tests to be performed. They are not designed to discover significant deficiencies in internal control. Choice "b" is incorrect. Searching for significant deficiencies in internal control is not part of an audit, and it would be inappropriate for the auditor to state that no significant deficiencies in internal control were noted (even if management requested such a statement). Choice "c" is incorrect. Searching for significant deficiencies in internal control is not part of an audit even if the auditor expects that controls are operating effectively (i.e., expects to rely on controls).
QUESTION 314
For a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:
A. Onlyifthedeficiencyhasamaterialeffectontheauditor'sassessmentofcontrolrisk. B. Unlesstheentityacceptsthatdegreeofriskbecauseofcost-benefitconsiderations. C. Only if the deficiency is considered a material weakness.
D. In writing, during the current audit.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A previously communicated significant deficiency that has not been corrected ordinarily should be communicated again in writing, during the current audit. Choices "a" and "c" are incorrect. The auditor is required to communicate significant deficiencies each year, regardless of whether the deficiency has a material effect on the auditor's assessment of control risk or the deficiency is considered a material weakness. Choice "b" is incorrect. The auditor is required to communicate significant deficiencies each year, even if the entity accepts that degree of risk because of cost-benefit considerations.
QUESTION 315
Which of the following best describes an auditor's responsibility with respect to communicating internal control deficiencies of issuers?
A. Theauditorisrequiredtocommunicatealldeficienciesininternalcontroltomanagement,deficienciesthatconstituteasignificantdeficiencytotheaudit committee, and deficiencies that constitute a material weakness to the full board of directors.
B. Theauditorisrequiredtocommunicatealldeficienciesininternalcontroltomanagement,anddeficienciesthatconstituteasignificantdeficiencyoramaterial weakness to management and the audit committee.
C. The auditor is not required to communicate control deficiencies to management or the audit committee unless they constitute a significant deficiency or a material weakness.
D. The auditor is not required to communicate control deficiencies or significant deficiencies to management or the audit committee, but must communicate

material weaknesses to both management and the audit committee.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is deficiency or Choice "a" is Choice "c" is Choice "d" is
correct. The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant a material weakness to management and the audit committee.
incorrect. There is no requirement that material weaknesses be communicated to the full board of directors.
incorrect. The auditor is required to communicate all deficiencies in internal control to management.
QUESTION 316
incorrect. The auditor is also required to communicate significant deficiencies to management and the audit committee.
In which case might an auditor of an issuer render a qualified opinion on internal control?
A. Whenthereisascopelimitation.
B. Whenthereisamaterialweaknessininternalcontrol. C. Both "a" and "b".
D. Neither "a" nor "b".
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A scope limitation requires the auditor to disclaim an opinion or withdraw from the engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion.
Neither situation would result in a qualified opinion. Choice "a" is incorrect. A scope limitation requires the auditor to disclaim an opinion or withdraw from the engagement.
Choice "b" is incorrect. A material weakness in internal control requires the auditor to issue an adverse opinion.
Choice "c" is incorrect. A scope limitation requires the auditor to disclaim an opinion or withdraw from the engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion.
Neither situation would result in a qualified opinion.
QUESTION 317
Gail is auditing the financial statements of Hoefener Home Improvements, a publicly held company. Gail notes several deficiencies in internal control, and is trying

to determine whether each deficiency constitutes a significant deficiency or a material weakness. Which best describes the framework Gail should use in making this evaluation?
A. Asignificantdeficiencyexistsforweaknessesthatareimportantenoughtomerittheattentionofthoseresponsibleforfinancialreporting,andamaterial weakness exists when there is a reasonable possibility of material misstatement.
B. Asignificantdeficiencyexistswhenthereismorethanaremotechanceofamorethaninconsequentialmisstatement,andamaterialweaknessexistswhen there is more than a remote chance of a material misstatement.
C. A significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is a reasonable possibility of material misstatement.
D. A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is more than a remote chance of a material misstatement.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. For issuers, a significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement. Choice "b" is incorrect. For nonissuers, a significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is more than a remote chance of a material misstatement. However, Hoefener is an issuer, so different rules apply.
Choice "c" is incorrect. For issuers, a significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting. Choice "d" is incorrect. For issuers, a material weakness exists when there is a reasonable possibility of material misstatement.
Government Auditing
QUESTION 318
The auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book), is required to include:
A. Thescopeoftheauditor'stestingofinternalcontrols.
II. Uncorrected misstatements that were determined by management to be immaterial.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: A

Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book).
Choices "b" and "c" are incorrect. Immaterial uncorrected misstatements are not included in the auditor's report on internal controls and compliance with laws and regulations. Choice "d" is incorrect. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book).
QUESTION 319
In performing an audit in accordance with Generally Accepted Government Auditing Standards (the "Yellow Book"), the auditor:
A. AcceptslessresponsibilityinconductingfieldworkthanisacceptedinaGAASaudit,sincethespecificrequirementsoftheGenerallyAcceptedGovernment Auditing Standards reduce required professional judgment.
B. AcceptssharedresponsibilitywithFederalInspectorsGeneral,whoareequallyresponsibleforcomplianceevaluation,control,andreporting.
C. Accepts greater reporting responsibilities than accepted under a GAAS audit, since the auditor must report on compliance with laws, rules, and regulations, violations of which may affect financial statement amounts, and on the organization's internal control over financial reporting.
D. Accepts equal reporting responsibilities with that accepted under GAAS audits, since compliance evaluation and reporting have implied financial statement implications and require expanded treatment as a material contingency.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor's reporting requirements under Generally Accepted Government Auditing Standards (GAGAS or the Yellow Book) are expanded to include reports on the audited entity's compliance with laws, rules, and regulations that have a material impact on the financial statements and on internal controls over financial reporting. Rule: Reporting responsibilities under GAGAS are expanded to include:
1. Reports on compliance with laws, rules, and regulations, violations of which may affect financial statement amounts, and
2. Reports on internal control over financial reporting. Choice "a" is incorrect. Specific reporting requirements and other expanded audit standards associated with Yellow Book audits do not reduce professional judgment. Choice "b" is incorrect. Federal Inspectors General do not split their responsibilities with independent public accountants performing Yellow Book Audits.
Choice "d" is incorrect. Although Yellow Book requirements represent logical extensions of generally accepted auditing standards, the specific responsibilities undertaken in an audit that requires application of the Yellow Book would not surface as a result of an audit under generally accepted auditing standards.

QUESTION 320
Government Auditing Standards published by the Government Accountability Office:
A. Onlyapplytoauditsofgovernments.
B. Onlyapplytoauditsofgovernmentsreceivingfederalfinancialassistance.
C. Primarily apply to audits of federal financial assistance.
D. Only apply to audits of federal financial assistance programs operated by state and local governments.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Generally Accepted Government Auditing Standards primarily apply to audits of federal financial assistance but have been adopted by some states for audits of state financial assistance. Choice "a" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations. GAGAS may also extend to other financial assistance depending on whether those standards have been adopted by the state providing the assistance.
Choice "b" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations, not only to governments. Choice "d" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations, not only to governments.
QUESTION 321
Gearty & Duffy, certified public accountants, have been engaged to perform a single audit of Sleepy Knoll Township, a local government receiving substantial federal financial assistance for community development and housing assistance. A single audit represents:
A. Anauditofannualactivityofonlyfederalfinancialassistanceprogramsoverthecourseofthetown'sfiscalyear.
B. Aninceptiontodateauditofonlyfederalfinancialassistanceprogramsoverthecourseofthegrantyearspecifiedbythegrantaward.
C. An audit of the township's financial statements and of compliance with federal regulations relating to federal financial assistance as prescribed by the Single Audit Act and OMB Circular A-133.
D. An audit of the township's financial statements and the fair presentation of the revenues derived from federal financial assistance.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:

Choice "c" is correct. A single audit represents a combined audit of both an entity's financial statements and federal financial assistance programs. The single audit provides audited organizations with the opportunity to capitalize on the efficiency of satisfying their audit requirements with a single audit. Auditors are governed by the Single Audit Act and OMB Circular A-133. Choice "a" is incorrect. A single audit is not simply an audit of federal financial assistance. Choice "b" is incorrect. A single audit is not simply an audit of federal financial assistance. Choice "d" is incorrect. A single audit is not limited to expression of an opinion on the fair presentation of financial statements. It also is designed to report on compliance with laws, rules, and regulations.
QUESTION 322
An audit performed in accordance with OMB Circular A-133 will expand the auditor's responsibilities beyond generally accepted auditing standards. The auditor's expanded responsibilities include:
A. Performanceofadditionalprocedurestotestandreportoncompliancewithlaws,rules,regulationsandprovisionsofcontractsorgrantagreementsthathave any effect on federal award programs.
B. Performanceofadditionalprocedurestotestfornoncompliancewithlaws,rulesandregulationstargetedforreviewbytheOfficeoftheInspectorGeneral.
C. Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have a direct and material effect on major federal award programs.
D. Performance of additional procedures to test and report on achievement of program objectives.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. OMB Circular A-133 expands the auditor's responsibilities to include procedures designed to test and report on compliance matters having a direct and material effect on major federal award programs.
Choice "a" is incorrect. OMB Circular A-133 expands procedures to major programs as defined by the Circular, not to all programs.
Choice "b" is incorrect. OMB Circular A-133 audit objectives relate to management's assertions regarding compliance with laws, rules, and regulations, not to noncompliance issues identified by the Office of the Inspector General.
Choice "d" is incorrect. OMB Circular A-133 relates to the financial and compliance audits of major federal financial assistance programs, not to the achievement of program objectives.
QUESTION 323
Gearty & Duffy, certified public accountants, have been engaged to perform an audit of Sleepy Knoll Township in accordance with OMB Circular A-133. In connection with that engagement, Gearty & Duffy will determine major programs:
A. UsingalistofprogramsincludedintheworkplanoftheOfficeoftheInspectorGeneral.
B. Byapplyingonlyaspecificdollarthreshold,whereallprogramsexceedingthethresholdwouldbeconsideredmajor. C. By applying a risk-based approach.
D. By testing enough grants to achieve a single specific coverage percentage.

Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. OMB Circular A-133 allows auditors to use a risk-based approach to determine major grants.
Choice "a" is incorrect. The judgment of the Office of the Inspector General would not exclusively influence the selection of major programs.
Choice "b" is incorrect. Programs in excess of $300,000 are generally considered to be major grants; however, the dollar threshold is not the exclusive determinant of major programs. Choice "d" is incorrect. Risk-based auditing allows auditors to test as little as 25 percent of total federal programs or as much as 50 percent of total federal programs, depending on circumstances and on the auditor's judgment.
QUESTION 324
When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on:
A. Noteworthyaccomplishmentsoftheprogram.
II. The scope of the auditor's testing of internal controls.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor is required to report on the scope of the auditor's testing of internal control, but not on noteworthy accomplishments of the program. Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 325
When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on:
A. Recommendationsforactionstoimproveoperations.
II. The scope of the auditor's tests of compliance with laws and regulations.
B. Ionly.

C. II only.
D. Both I and II. E. NeitherInorII.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor is required to report on the scope of the auditor's testing of compliance with laws and regulations, but not on recommendations for actions to improve operations. Choices "a", "c", and "d" are incorrect based on the above Explanation: .