AICPA CPA-Auditing CPA Exam Questions Instant Access

Question 1

In an audit of contingent liabilities, which of the following procedures would be least effective?

AReviewing a bank confirmation letter.

BExamining customer confirmation replies.

CExamining invoices for professional services.

DReading the minutes of the board of directors.

Answer : B

Choice 'b' is correct. Customer confirmations relate to receivables, and would not be likely to disclose a contingent liability.

Choice 'a' is incorrect. A standard bank confirmation will most likely identify contingent liabilities because it contains confirmation of discounted drafts and/or guarantees of notes and/or other open letters of credit.

Choice 'c' is incorrect. Examining professional invoices may disclose a contingent liability. For example, invoices from attorneys may provide information regarding litigation, claims, and assessments.

Choice 'd' is incorrect. Reviewing the board minutes may identify a contingent liability. For example, the board may discuss contingencies during one of its meetings.

Other procedures that may be effective in an audit of contingent liabilities include:

Discussing long-term purchase commitments with the purchasing agent.

Reviewing long-term leases.

Obtaining a client representation letter.

Question 2

As the acceptable level of detection risk decreases, the assurance directly provided from:

ASubstantive tests should increase.

BSubstantive tests should decrease.

CTests of controls should increase.

DTests of controls should decrease.
Explanation
Choice 'a' is correct. As the acceptable level of detection risk (the risk that an auditor will not detect a material misstatement that exists in an assertion) decreases, the assurance directly provided from substantive tests should increase. The level of detection risk will decline as the benefit of direct tests increases.
Choice 'b' is incorrect. If the assurance directly provided from substantive tests decreased, detection risk would increase because the direct tests have become less beneficial.
Choices 'c' and 'd' are incorrect. Changing the extent of tests of controls does not affect the level of detection risk.

Answer : A

Question 3

An auditor is reporting on condensed financial statements for an annual period that are derived from the audited financial statements of a publicly-held entity. The auditor's opinion should indicate whether the information in the condensed financial statements is fairly stated in all material respects:

AIn conformity with accounting principles generally accepted in the United States of America.

BIn relation to the complete financial statements.

CIn conformity with an other comprehensive basis of accounting.

DIn relation to supplementary filings under federal security statutes.

Answer : B

Choice 'b' is correct. The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived.

Choice 'a' is incorrect. Condensed financial statements do not include all of the disclosures required by GAAP, and therefore would not typically be presented in conformity with GAAP.

Choice 'c' is incorrect. Condensed financial statements are presented in less detail than complete financial statements, but the fact pattern gives no indication that any comprehensive basis of accounting other than GAAP has been used.

Choice 'd' is incorrect. The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived, not in relation to supplementary filings under federal security statutes.

Question 4

For a nonissuer, a control deficiency would be considered a significant deficiency when the likelihood and magnitude of potential financial statement misstatements are:

AOption A

BOption B

COption C

DOption D

Answer : C

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 5

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?

AOption A

BOption B

COption C

DOption D

Answer : C

Choice 'c' is correct. An increase in tolerable misstatement results in a smaller sample size. An increase in the assessed level of control risk leads to an increase in sample size.

Choices 'a', 'b', and 'd' are incorrect, per the above Explanation: .

Question 6

Which of the following statements would least likely appear in an auditor's engagement letter?

AFees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses.

BDuring the course of our audit we may observe opportunities for economy in, or improved controls over, your operations.

COur engagement is subject to the risk that material errors or fraud, including defalcations, if they exist, will not be detected.

DAfter performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.
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.

Answer : D

Question 7

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:

ARestriction on the use of the report.

BDescription of tests performed to search for material weaknesses.

CStatement of compliance with applicable laws and regulations.

DParagraph describing management's evaluation of the effectiveness of internal control.

Answer : A

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.

AICPA CPA Auditing and Attestation CPA-Auditing CPA Exam Questions