AICPA CPA-Auditing CPA Exam Practice Test Instant Access

Question 1

In an attest engagement, use of the accountant's report should be restricted to specified parties in all of the following situations, except:

AWhen the criteria used to evaluate the subject matter are appropriate for only a limited number of parties.

BWhen reporting on an assertion about the subject matter instead of reporting directly on the subject matter.

CWhen reporting directly on the subject matter and a written assertion has not been provided.

DWhen reporting on an agreed-upon procedures engagement.

Answer : B

Choice 'b' is correct. There is no requirement that the accountant's report be restricted to specified parties when reporting on an assertion about the subject matter instead of reporting directly on the subject matter.

Choice 'a' is incorrect, since use of the accountant's report should be restricted to specified parties when the criteria used to evaluate the subject matter are appropriate for only a limited number of parties.

Choice 'c' is incorrect, since use of the accountant's report should be restricted to specified parties when reporting directly on the subject matter and a written assertion has not been provided.

Choice 'd' is incorrect, since use of the accountant's report should be restricted to specified parties when reporting on an agreed-upon procedures engagement.

Question 2

Which of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process?

AComparing control totals for shipping documents with corresponding totals for sales invoices.

BUsing computer programmed controls on the pricing and mathematical accuracy of sales invoices.

CMatching shipping documents with approved sales orders before invoice preparation.

DReconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

Answer : D

Choice 'd' is correct. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger would probably not reduce the risk of errors in the billing process, since any errors in billing would likely be included in both the sales and accounts receivable balances.

Choice 'a' is incorrect. Comparing control totals for shipping documents with corresponding totals for sales invoices is a procedure designed to determine that all shipments have been billed.

Choice 'b' is incorrect. Using computer-programmed controls on sales invoices would reduce the risk of errors in the billing process.

Choice 'c' is incorrect. Matching shipping documents with approved sales orders before invoice preparation provides assurance that the quantity and terms of the invoice are correct.

Question 3

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?

AManagement places little emphasis on meeting earnings projections.

BThe board of directors makes all major financing decisions.

CSignificant deficiencies in internal control previously communicated to management are not corrected.

DTransactions selected for testing are not supported by proper documentation.
Explanation
Choice 'd' is correct. Vouching recorded transactions to supporting documentation provides support for the occurrence assertion. The lack of supporting documentation calls into question the occurrence of the transactions under examination.
Choice 'a' is incorrect. Little emphasis on meeting earnings projections would be considered a positive factor in preventing material misstatements from occurring.
Choice 'b' is incorrect. As the representatives of shareholder interests, an active board of directors is considered a positive control.
Choice 'c' is incorrect. The existence of significant deficiencies in internal control may represent a conscious decision by management to accept that degree of risk because of cost or other considerations.
Therefore, although failure to correct such deficiencies is considered a fraud risk factor, the auditor is more likely to be concerned about transactions that are not supported by proper documentation.

Answer : D

Question 4

Which of the following expressions most likely would be included in a management representation letter?

ANo events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.

BThere are no significant deficiencies in internal control identified during the prior-year's audit of which those charged with governance are unaware.

CWe do not intend to provide any information that may be construed to constitute a waiver of the attorney-client privilege.

DCertain computer files and other required audit evidence may exist only for a short period of time and only in computer-readable form.

Answer : A

Choice 'a' is correct. It is appropriate for the representation letter to contain a statement regarding subsequent events.

Choice 'b' is incorrect. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events.

The communication of significant deficiencies in internal control does not fall within these categories.

Choice 'c' is incorrect. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events.

A waiver of attorney-client privilege does not fall within these categories.

Choice 'd' is incorrect. While this may be an accurate statement, it is not something that would be included in the management representation letter. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events.

Question 5

"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a (an):

AClient engagement letter.

BReport on compliance with laws and regulations.

CManagement representation letter.

DAttestation report on internal control.

Answer : C

Choice 'c' is correct. The written representation obtained by the auditor from management will ordinarily include information regarding any violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.

Choice 'a' is incorrect. A client engagement letter is used to document the understanding between the client and the auditor. The letter is generally sent from the auditor to the client, although the client may be requested to sign it. The statement, 'There are no violations or possible violations of laws or regulations...' should come from management. It would not be appropriate to include this in an engagement letter, which is often sent before the year has even ended.

Choice 'b' is incorrect. An auditor would prepare a report on compliance with laws and regulations. The statement, 'There are no violations or possible violations of laws or regulations...' should come from management.

Choice 'd' is incorrect. An auditor would prepare an attestation report on internal control. The statement, 'There are no violations or possible violations of laws or regulations...' should come from management.

Question 6

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

ALarge amounts of liquid assets that are easily convertible into cash.

BLow growth and profitability as compared to other entities in the same industry.

CFinancial management's participation in the initial selection of accounting principles.

DAn overly complex organizational structure involving unusual lines of authority.
Explanation
Choice 'd' is correct. The auditor identifies factors indicative of potential fraud ('fraud risk factors') as part of assessing the risk of material misstatement. An overly complex organization structure involving unusual lines of authority provides an opportunity for fraudulent financial reporting that would heighten the auditor's concern.
Choice 'a' is incorrect. Large amounts of liquid assets that are easily convertible into cash would heighten an auditor's concern about misappropriation of assets, not about fraudulent financial reporting.
Choice 'b' is incorrect. Low growth and profitability might heighten an auditor's concern if it became severe or if management faced excessive pressure to meet financial expectations, but would not necessarily in and of itself heighten an auditor's concern.
Choice 'c' is incorrect. Nonfinancial management's participation in the selection of accounting principles might heighten the auditor's concern; financial management is expected to participate in such activities.

Answer : D

Question 7

Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a:

AQualified opinion.

BStandard three paragraph report with reference to footnote disclosure.

CDisclaimer of opinion.

DSpecial report.

Answer : D

Choice 'd' is correct. A 'special report' (unqualified) would be issued in an audit of financial statements prepared on an accounting basis prescribed by a regulatory agency solely for filing with that agency.

Special reports are also issued for:

1. Financial statements that are prepared in accordance with a comprehensive basis of accounting other than GAAP.

2. Specified elements, accounts or items of a financial statement.

3. Compliance with contractual or regulatory requirements related to audited financial statements.

4. Financial information presented in prescribed forms, or schedules that require a prescribed form of auditor's report.

Choices 'a' and 'c' are incorrect. The special report would be unqualified since Green concluded that the financial statements were fairly presented on the prescribed basis.

Choice 'b' is incorrect. The wording of the special report varies slightly from the auditor's standard three paragraph report, and includes an additional explanatory paragraph.

AICPA CPA Auditing and Attestation CPA-Auditing CPA Exam Practice Test