AICPA CPA-Auditing CPA Exam Practice Test Instant Access

Question 1

In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to:

ADetermine whether the control activities have been implemented.

BPerform procedures to understand the design of internal control.

CDocument the understanding of the entity's internal control components.

DSearch for significant deficiencies in the operation of internal control.

Answer : D

Choice 'd' is correct. When obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to search for significant deficiencies in the operation of internal control.

Choice 'a' is incorrect. In order to determine the nature, timing and extent of tests to be performed, an auditor must determine whether the control activities have been implemented.

Choice 'b' is incorrect. An auditor is required to perform procedures to confirm his/her understanding of the internal control systems' design, and to determine whether relevant controls have been implemented.

Choice 'c' is incorrect. An auditor is required to document his or her understanding of the entity's internal control components, even if he or she intends to use a substantive approach.

Question 2

Which of the following matters is an auditor required to communicate to those charged with governance?

AOption A

BOption B

COption C

DOption D

Answer : A

Choice 'a' is correct. Yes - Yes. Unless all of those charged with governance are also involved with managing the entity, the auditor is required to communicate significant audit adjustments. The auditor is always required to communicate changes in significant accounting policies.

Choices 'b', 'c', and 'd' are incorrect, based on the above Explanation: .

Question 3

A limitation on the scope of an auditor's examination sufficient to preclude an unqualified opinion will always result when management:

AEngages the auditor after the year-end physical inventory count is completed.

BFails to correct a material internal control weakness that had been identified during the prior year's audit.

CRefuses to furnish a management representation letter to the auditor.

DPrevents the auditor from reviewing the audit documentation of the predecessor auditor.

Answer : C

Choice 'c' is correct. Management's refusal to furnish a written representation letter constitutes a limitation on the scope sufficient to preclude an unqualified opinion.

Choice 'a' is incorrect. Engaging the auditor after the year-end physical count is completed need not preclude an unqualified opinion if the auditor can apply satisfactory alternative audit procedures.

Choice 'b' is incorrect. Failure to correct a material internal accounting control weakness that had been identified during the prior year's audit need not preclude an unqualified opinion, although it may require the auditor to apply extended auditing procedures.

Choice 'd' is incorrect. Inability to review the predecessor's prior year audit documentation may cause the successor auditor more work but need not preclude an unqualified opinion in the current year.

Question 4

A written client representation letter most likely would be an auditor's best source of corroborative information of a client's plans to:

ATerminate an employee pension plan.

BMake a public offering of its common stock.

CSettle an outstanding lawsuit for an amount less than the accrued loss contingency.

DDiscontinue a line of business.

Answer : D

Choice 'd' is correct. A written client representation letter should include representations regarding matters that may affect recognition, measurement, and disclosure. Management's plans to discontinue a line of business may affect financial statement disclosure, since the results of operations of a component classified as 'held for sale' would be reported separately in the income statement under 'discontinued operations.'

Choice 'a' is incorrect. A client's plan to terminate an employee pension plan would not affect recognition, measurement, or disclosure in the current period financial statements.

Choice 'b' is incorrect. A client's plans to make a public offering of its common stock would not affect recognition, measurement, or disclosure in the current period financial statements.

Choice 'c' is incorrect. A letter from the client's attorney most likely would be an auditor's best source of corroborative information of a client's plans to settle an outstanding lawsuit for an amount less than the accrued loss contingency.

Question 5

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?

A'Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion.'

B'There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed.'

C'We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.'

D'No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements.'

Answer : A

Choice 'a' is correct. The sufficiency of audit evidence and the type of opinion to be rendered are determined by the auditor, who applies professional judgment in making such determinations.

Management representations are not necessary for the auditor to make such judgments, but rather would be used to confirm representations given to the auditor regarding the financial statements, completeness of information, recognition, measurement, and disclosure, and subsequent events.

Choice 'b' is incorrect. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that there are no unasserted claims or assessments that the entity's lawyer has advised are probable of assertion and must be disclosed.

Choice 'c' is incorrect. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that management has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.

Choice 'd' is incorrect. The management representation letter should include information on subsequent events, and will generally state that no events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements.

Question 6

To which of the following matters would materiality limits not apply in obtaining written management representations?

AThe availability of minutes of stockholders' and directors' meetings.

BLosses from purchase commitments at prices in excess of market value.

CThe disclosure of compensating balance arrangements involving related parties.

DReductions of obsolete inventory to net realizable value.

Answer : A

Choice 'a' is correct. Management's representations may be limited to matters that are considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding of the limits of materiality for this purpose. Such limitations would not apply to those representations that are not directly related to amounts included in the financial statements, such as management's acknowledgment of its responsibility for the financial statements, availability of financial records, and completeness and availability of minutes.

Choice 'b' is incorrect. Losses from purchase commitments are directly related to amounts in the financial statements and thus are subject to materiality limits.

Choice 'c' is incorrect. The disclosure of compensating balances is directly related to amounts in the financial statements and thus is subject to materiality limits.

Choice 'd' is incorrect. The reduction of obsolete inventory to net realizable value is directly related to amounts in the financial statements and thus is subject to materiality limits.

Question 7

Which of the following should be included as a written representation from management?

AThe belief that misstatements identified by the auditor and not corrected are immaterial.

BThe belief that misstatements identified by the auditor and corrected are material.

CThe belief that the auditor is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles.

DThe belief that the financial statements are completely accurate in all respects.

Answer : A

Choice 'a' is correct. The representation letter should include management's belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

Choice 'b' is incorrect. If the misstatements have been corrected, there is no need for management to make representations regarding their materiality.

Choice 'c' is incorrect. Management (and not the auditor) is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles.

Choice 'd' is incorrect. Management states its belief that the financial statements are fairly presented in conformity with GAAP. Fair presentation does not mean that the financial statements are completely accurate in all respects, but that they are accurate in all material respects.

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