2021 AICPA Auditing Newly Released MCQs

Question 1

1. MCQ-14864
   Each of the following is a required characteristic of a review engagement of management’s discussion and analysis (MD&A), except:
   A. It consists principally of applying tests of details through inspection, observation, and confirmation.
   B. The practitioner applies analytical procedures.
   C. An objective is to report if any information came to the practitioner’s attention that the MD&A is not reasonably presented.
   D. The practitioner makes inquiries of individuals responsible for financial matters.

Answer 1

Choice “A” is correct. Analytical procedures are required in a review but testing or audit procedures are not required in a review. Tests of details consisting of inspection, observation, or confirmation are typically performed in an audit.
Choice “B” is incorrect. Analytical procedures are a performance requirement of a review. Analytical
procedures may be performed at the financial statement level or the account level.
Choice “C” is incorrect. In a review engagement, the accountant’s objective requires the accountant to
report whether he or she is aware of any material modifications that should be made to the financial
statements for the accountant to be in accordance with the applicable financial reporting framework.
Therefore, if any information came to the auditor’s attention that the MD&A is not reasonably presented,
the accountant must report such information.
Choice “D” is incorrect. Inquiries are a requirement in performing a review. Inquiries should be directed to
members of management with financial and accounting responsibilities to assure that adequate
responses are obtained.

Question 2

2. MCQ-14865
   Banister, a CPA, is approached by Wagner, a client. Wagner requests that Banister return the records
   provided to Banister by Wagner during an audit. Wagner still owes Banister the fees associated with the
   audit. According to the AICPA Code of Professional Conduct, what should Banister do?
   A. Banister should return the records to Wagner.
   B. Banister should return the records to Wagner only after the fee has been paid.
   C. Banister should not return the records to Wagner because the records now belong to Banister.
   D. Banister should not return the records to Wagner without a court order.

Answer 2

ANSWER:
Choice “A” is correct. Under the AICPA Code of Professional Conduct, Banister should return the records
to Wagner. When a client requests that records be returned, the accountant must return the records.
Choice “B” is incorrect. Withholding the records after a client has requested them is an act discreditable to
the profession under the AICPA Code of Professional Conduct.
Choice “C” is incorrect. Banister does not have ownership over Wagner’s records; therefore, Bannister is
under professional obligation to return all records received in the course of the audit to Wagner.
Choice “D” is incorrect. A court order is not necessary for a client, even those with unpaid fees, to request
the client’s records from the auditor. Wagner, the auditor, does not have any ownership of the records
provided by Banister.

Question 3

3. MCQ-14866
   An accountant’s working papers for an engagement to review the financial statements of a nonpublic
   entity would be least likely to include which of the following forms of documentation?
   A. Study and evaluation of internal control.
   B. Explanation of analytical procedures performed.
   C. A copy of the engagement letter.
   D. Copies of representation letters from client management.

Answer 3

ANSWER:
Choice “A” is correct. For a review engagement, the accountant is not required to obtain an
understanding of internal control or to assess control risk. The accountant should possess an
understanding of the client’s business and the accounting principles and practices used by the client, but
an understanding of internal control or testing of controls is not required in a review.
Choice “B” is incorrect. The accountant is required to perform analytical procedures in a review
engagement. The procedures should be designed to detect relationships and individual items that appear
to be unusual or that may indicate material misstatement.
Choice “C” is incorrect. The engagement letter is created to establish an understanding with management
regarding the services to be performed. Since both the accountant and management (or those charged
with governance) sign the engagement letter, it is documentation that both the accountant and
management agreed to the services to be performed in the review.
Choice “D” is incorrect. The accountant is required to obtain a representation letter from management for
all financial statements and periods covered by the review report. The letter is addressed to the
accountant and signed by the members of management responsible for and knowledgeable about the
matters in the letter.

Question 4

4. MCQ-14867
   If differences of opinion arise between the engagement partner and the engagement quality control
   reviewer, then the engagement partner should:
   A. Follow the firm’s policies and procedures for resolving differences of opinion.
   B. Issue a disclaimer of opinion and report the issue to the entity’s audit committee.
   C. Discuss the differences of opinion with the entity’s management and issue a modified auditor’s
   report.
   D. Withdraw from the engagement when permissible under law or regulation.

Answer 4

ANSWER:
Choice “A” is correct. A difference of opinion between the engagement partner and engagement quality
control partner would not be a basis to modify the opinion or withdraw from the engagement. One of the
policies and procedures that a firm should establish under a system of quality control is a means to
resolve differences of opinion; therefore, the engagement team should follow the firm’s policies and
procedures for resolving those differences.
Choice “B” is incorrect. A disclaimer of opinion is issued when the engagement team is not able to obtain
sufficient appropriate audit evidence and the issue is material and pervasive. A difference of opinion
between the engagement partner and engagement quality control reviewer may not be indicative of either
of those issues, and the engagement team should try to resolve the differences internally first by following
the firm’s policies and procedures.
Choice “C” is incorrect. Prior to raising the matter to the audit committee, the accountant should attempt
to resolve the differences using the firm’s policies and procedures. The accountant would likely also
discuss the difference with management prior to those charged with governance. The type of modified
auditor’s report would then depend on the materiality of the differences and pervasiveness of the issue.
Choice “D” is incorrect. Withdrawing from the engagement would be the last step the accountant would
perform after exhausting all other attempts to resolve the differences. The engagement team would follow
the firm’s policies and procedures for resolving differences first.

Question 5

5. MCQ-014868
   An accountant is reviewing the financial statements of a nonpublic entity in accordance with Statements
   on Standards for Accounting and Review Services (SSARS). The accountant most likely would perform
   which of the following procedures?
   A. Obtain an understanding of the internal control structure.
   B. Make inquiries about subsequent events.
   C. Send bank account confirmations.
   D. Perform limited tests of controls.

Answer 5

ANSWER:
Choice “B” is correct. When the accountant becomes aware of information or evidence about subsequent
events that require adjustment of, or disclosure in, the financial statements, the accountant should
request that management consider whether the event is appropriately reflected in the financial
statements.
Choice “A” is incorrect. In a SSARS engagement, the design, implementation, and maintenance of
internal control is the responsibility of management. The accountant does not have an obligation to obtain
an understanding of the internal control structure for a SSARS review.
Choice “C” is incorrect. Sending bank confirmations is an example of a substantive audit procedure. In a
review engagement, the accountant is not expected to perform substantive procedures.
Choice “D” is incorrect. In a review engagement, the accountant is not required to perform tests of
controls. The accountant does not have an obligation to assess control risk.

Question 6

6. MCQ-14869
   Which of the following factors would an auditor most likely consider in evaluating the control environment
   for an audit client?
   A. Monthly bank reconciliations with supervisor sign-offs.
   B. The ethical values demonstrated by management.
   C. Organizational structure used for tax purposes.
   D. The number of employees in each department.

Answer 6

ANSWER:
Choice “B” is correct. The control environment can be described as the overall tone of the organization.
That tone begins with and is generated by management and those charged with governance. Therefore,
when evaluating the control environment, the auditor would focus on, among other things, the ethical
values demonstrated by management.
Choice “A” is incorrect. Monthly bank reconciliations with sign-offs is an example of a control activity.
Control activities are impacted by the control environment but are not specifically part of the control
environment, which sets the overall tone of the organization.
Choice “C” is incorrect. The organizational structure of the whole organization would be something an
auditor would consider when evaluating the control environment. However, the organizational structure
for tax purposes may have differences from the overall organizational structure and, therefore, would not
be part of the auditor’s overall evaluation of the organization’s control environment.
Choice “D” is incorrect. The number of employees in each department may provide the auditor some
helpful insight to understand size and to perform some relevant analytical procedures. However, the
number of employees in each department does not affect the overall tone of the organization, which is
what the control environment provides.

Question 7

7. MCQ-014870
   Which of the following factors represents an inherent limitation of internal control?
   A. Absence of segregation of duties.
   B. Failure to perform required tasks.
   C. Mistakes resulting from human error.
   D. Inadequate provisions to safeguard assets

Answer 7

ANSWER:
Choice “C” is correct. Human error, which may include errors in the design or use of automated controls,
is an inherent limitation in internal control. Internal control cannot provide absolute assurance regarding
the achievement of objectives due to several inherent limitations of internal control.
Choice “A” is incorrect. Segregation of duties is the concept of having more than one person complete a
task or part of a process. It is management’s responsibility to design processes and controls where
segregation of duties is present. If there is a lack of segregation of duties, controls may not be effectively
designed.
Choice “B” is incorrect. A failure to perform required tasks indicates that the control may be effectively
designed, but the individual(s) responsible for performing the control are not executing the activities as
designed. Individuals not performing their tasks is not an inherent limitation of control.
Choice “D” is incorrect. Inadequate provisions to safeguard assets would mean that some controls over
the assets are not designed appropriately. If a control is not effectively designed, it will not be tested for
operating effectiveness, and the auditor will not be concerned with the inherent limitations of internal
control.

Question 8

8. MCQ-14871
   When conducting a review engagement of a nonissuer, each of the following is considered an analytical
   procedure, except a comparison of the current-year’s financial information to:
   A. Expectations developed by the accountant.
   B. Financial statements of a comparable prior period.
   C. Supporting documentation.
   D. Industry benchmarks.

Answer 8

ANSWER:
Choice “C” is correct. Comparing the current year’s financial information to supporting documentation is
part of performing substantive audit procedures, not analytical procedures.
Choice “A” is incorrect. Comparing the current year’s financial information to expectations developed by
the accountant is an analytical procedure that could be used in a review. Analytical procedures involve
developing an expectation and comparing the results with that expectation.
Choice “B” is incorrect. Comparing the current financial statements with prior period financial statements
is an example of an analytical procedure that may be performed in a review. The analytical procedure can
be at the financial statement level or detailed account level, or for specific comparable months or the
whole period under review.
Choice “D” is incorrect. Comparing the current year’s financial information to industry benchmarks could
be an analytical procedure performed during a review. The industry analytical procedure could use ratios
or account balances.

Question 9

9. MCQ-14872
   As part of risk assessment procedures for an audit of a nonissuer, an auditor would most likely perform
   which of the following procedures concerning related party transactions?
   A. Evaluate the entity’s procedures for identifying related party transactions.
   B. Confirm related party transaction amounts and terms with the other party.
   C. Perform a direct test of related party account balances.
   D. Examine receiving and shipping records between the client and its affiliates.

Answer 9

ANSWER:
Choice “A” is correct. During risk assessment, the auditor would inquire of management to obtain an
understanding and evaluate the company’s process (including controls) for identifying related parties,
authorizing and approving transactions with related parties, and accounting for and disclosing
relationships and transactions.
Choice “B” is incorrect. Confirming related party transaction amounts and terms with the other party may
be a procedure performed by the auditor when performing substantive test work. This would be
completed after the auditor had an understanding of how the related party transactions had been
identified.
Choice “C” is incorrect. The auditor may perform a direct test of related party account balances, but that
would be completed after the risk assessment procedures had been performed. Prior to testing the
balances, the auditor must obtain an understanding and evaluate the company’s process for identifying
related parties.
Choice “D” is incorrect. In order to examine receiving and shipping records between the client and its
affiliates, the auditor must have an understanding of the company’s process for identifying related parties.
Therefore, this would not happen until after many risk assessment procedures had been performed.

Question 10

10. MCQ-14873
    Which of the following applications of sampling to test controls is most appropriate?
    A. Testing a sample of customer orders for evidence of credit approval.
    B. Testing a sample of controls to determine segregation of duties between inventory control and
    sales processing duties.
    C. Testing a sample of accounts receivable confirmations.
    D. Testing a sample of the budget center directors’ allocation of annual budget to sales units.

Answer 10

ANSWER:
Choice “A” is correct. An auditor may sample orders and inspect those orders for evidence of credit
approval. The auditor would select a sample consistent with various factors to determine the extent of the
testwork.
Choice “B” is incorrect. Segregation-of-duties controls may not have easily accessible documentation,
making them difficult to sample for test work. For such controls, the auditor would likely rely on inquiry or
observation to test the operating effectiveness.
Choice “C” is incorrect. Accounts receivable confirmations are completed during substantive test work.
The auditor would not test a sample of these confirmations for control testwork.
Choice “D” is incorrect. Testing the budget center directors’ allocation of annual budget to sales units
would be done as a substantive procedure. The sample would be selected based on various factors to
determine the sample size.

Question 11

11. MCQ-014874
    When evaluating the impact of potential litigation, an auditor of a nonissuer should obtain audit evidence
    about each of the following, except:
    A. The period in which the underlying cause for legal action occurred.
    B. The probability of an unfavorable outcome.
    C. The probability that the matter will require a trial in court.
    D. The amount or range of potential loss.

Answer 11

ANSWER:
Choice “C” is correct. Whether a potential litigation will require a trial is not relevant to the auditor.
Instead, the auditor should obtain audit evidence relevant to the period in which the underlying cause for
legal action occurred, the probability of an unfavorable outcome, and the amount or range of potential
loss.
Choice “A” is incorrect. The auditor should obtain audit evidence regarding the period in which the
underlying cause for legal action occurred. This will help the auditor to confirm the appropriate accounting
and disclosure of the potential litigation.
Choice “B” is incorrect. The probability of an unfavorable outcome for actual or potential litigation is a
matter about which the auditor should obtain audit evidence.
Choice “D” is incorrect. The auditor will obtain audit evidence relevant to the amount or range of potential
loss for actual or potential litigation. The auditor will use this to confirm management’s accounting and
disclosure of the litigation.

Question 12

12. MCQ-14875
    If a subsequent event occurs after the report date but prior to the release date of an audit report, resulting
    in management’s revision of the financial statements of a nonissuer, then the auditor may do any of the
    following, except:
    A. Maintain the original date of the report and state that the opinion is limited to the financial
    statements as they existed prior to the subsequent event.
    B. Perform audit procedures necessary to obtain assurance about the revised financial statements.
    C. Include an additional date in the audit report that is limited to the revision to the financial
    statements.
    D. Revise the date of the audit report to reflect the necessity of additional audit procedures

Answer 12

ANSWER:
Choice “A” is correct. If management of a nonissuer revises the financial statements, management must
disclose the dates through which subsequent events have been evaluated in its revised financial
statements. Therefore, the auditor has an obligation to perform procedures and change date(s) on the
audit report.
Choice “B” is incorrect. If management of a nonissuer deems a subsequent event material enough to
revise the financial statements, the auditor would determine what additional audit procedures may be
necessary to obtain assurance about the revised financial statements.
Choice “C” is incorrect. For a nonissuer that revises its financial statements, the auditor may keep the
original report date and also include an additional date in the audit report that is specific to the revision
made to the financial statements.
Choice “D” is incorrect. If a nonissuer revises its financial statements, the auditor may revise the date of
the audit report to reflect that additional audit procedures were performed to that date.

Question 13

13. MCQ-14876
    A client holds a debt security that is actively traded in the market. Which of the following indicators would
    be the preferable guide to the security’s fair market value?
    A. Published price quotations in the market.
    B. The price at which the debt security was purchased.
    C. The cash flow model using discounted future cash flows.
    D. Matrix pricing, in which published price quotations of similar debt securities are used to compute the
    fair market value.

Answer 13

ANSWER:
Choice “A” is correct. If a debt security is actively traded in the market, the most preferable method to
measure fair value is to use the observable, quoted prices in the active market. If a quoted market price is
available, this should be the method used to determine the fair value of the investment.
Choice “B” is incorrect. The price at which the debt security was purchased is the historical value, but the
marketable security should be valued at fair market value.
Choice “C” is incorrect. The cash flow model using discounted future cash flows would only be used if
there were no observable quoted prices in active markets or there were no observable inputs other than
quoted market prices for identical assets.
Choice “D” is incorrect. Matrix pricing, or the published price quotations of similar debt securities, would
only be used if there were no observable quoted prices in active markets for the security.

Question 14

14. MCQ-14877
    Which of the following most likely would be considered a mitigating condition concerning an entity’s ability
    to continue as a going concern?
    A. Plans to increase ownership equity.
    B. Recent strong showing of the stock market.
    C. Positive comments about the company from industry analysts.
    D. A decreasing unemployment rate in the entity’s industry.

Answer 14

ANSWER:
Choice “A” is correct. Increasing ownership equity may be a mitigating factor that the auditor may
consider when determining whether the entity has an ability to continue as a going concern. Management
must show the intent to increase ownership equity and the ability to do so.
Choice “B” is incorrect. Strong showings of the stock market are not within the control or intent of the
company, so they do not demonstrate management’s plans to deal with the conditions that led to the
auditor’s belief that there is substantial doubt.
Choice “C” is incorrect. Although positive comments about the company from industry analysts may be
viewed as positive, any mitigating factors must address the auditor’s belief that there is substantial doubt.
The analyst’s comments are also not actionable steps that the company can take.
Choice “D” is incorrect. Decreasing unemployment in the entity’s industry is not a plan that management
can have to deal with the conditions or events that led to the auditor’s belief that there is substantial doubt
about the entity’s ability to continue as a going concern. The mitigating factor must include both
management’s intent and ability to carry out the plans.

Question 15

15. MCQ-14878
    Whose signatures should be included in the management representation letter to the auditor?
    A. President and chief financial officer
    B. Chairman of the audit committee and chief operating officer
    C. Corporate secretary and treasurer
    D. Chief information officer and chief operating officer

Answer 15

ANSWER:
Choice “A” is correct. The members of management with overall responsibility for financial and operating
matters should sign the letter. Typically, this is the CEO/president and CFO. Other officers and
employees may be asked to sign the representation letter.
Choice “B” is incorrect. Although the chief operating officer typically signs the management representation
letter, the chairman of the audit committee does not. The audit committee is not company management,
and the purpose of the management representation letter is to confirm the representations given to the
auditor over the course of the audit.
Choice “C” is incorrect. Although the corporate secretary and/or treasurer may be asked to sign the
management representation letter, their signatures are not typically included. Those who sign the letter
are responsible for and knowledgeable about the items in the letter. The corporate secretary and
treasurer typically would not be responsible for many items included in the letter.
Choice “D” is incorrect. Although the chief financial officer would sign the management representation
letter, the chief information officer likely would not. The chief information officer would not typically be
expected to have responsibility for, and knowledge of, the items included in the letter.

Question 16

16. MCQ-14879
    An accountant who is engaged to issue a compilation report on one or more specified elements,
    accounts, or items of a financial statement:
    A. Must adhere to the compilation performance requirements contained in the Statements on
    Standards for Attestation Engagements.
    B. Should attest whether such compiled elements, accounts, or items of a financial statement are free
    of material errors.
    C. Should not describe the basis on which the accounts are presented if that basis is other than
    generally accepted accounting principles.
    D. Can issue the report for an entity of which the accountant is not independent.

Answer 16

ANSWER:
Choice “D” is correct. An accountant issuing a compilation report is not required to be independent.
However, in this case, the accountant should disclose this lack of independence in the report.
Choice “A” is incorrect. In the compilation report, the accountant will indicate that he or she has performed
the compilation engagement in accordance with Statements on Standards for Accounting and Review
Services (SSARS).
Choice “B” is incorrect. A compilation engagement is not an assurance engagement, and a compilation
does not require the accountant to verify the accuracy or completeness of the information provided by
management.
Choice “C” is incorrect. If financial statements are prepared in accordance with a special purpose
framework, the compilation report should include an additional paragraph that indicates that the
information is presented in accordance with the applicable special purpose framework.

Question 17

17. MCQ-14880
    Which of the following is a correct statement regarding reporting on reviewed financial statements for a
    nonissuer?
    A. An accountant who is not independent is allowed to issue a review report as long as the accountant
    discloses the lack of independence in the review report.
    B. The date of the accountant’s review report should be the day the accountant discusses the draft
    report with management.
    C. Reviewed financial statements must be prepared in accordance with generally accepted accounting
    principles.
    D. An accountant is allowed to issue a review report on the balance sheet only and not on the other
    related financial statements as long as the scope of inquiry and analytical procedures were not
    restricted.

Answer 17

ANSWER:
Choice “D” is correct. An accountant may issue a review report for one or more financial statements if the
scope of inquiry and analytical procedures have not been restricted. This is true for both issuers and
nonissuers.
Choice “A” is incorrect. An accountant must be independent of the client to issue a review report on the
financial statements of the client. Each page of the statements should be marked “see Independent
Accountant’s Review Report.”
Choice “B” is incorrect. The date of the accountant’s review report should be the date of the completion of
the review.
Choice “C” is incorrect. Management may prepare financial statements using a special purpose
framework. The accountant should modify the review report when the accountant becomes aware of the
special purpose framework and describe how that framework differs from generally accepted accounting
principles.

Question 18

18. MCQ-14881
    Under which of the following circumstances would an auditor most likely issue either a qualified or a
    disclaimer of opinion?
    A. The financial statements contain an immaterial departure from generally accepted accounting
    principles (GAAP).
    B. The auditor performed alternative substantive procedures to provide adequate assurance due to
    missing documentation.
    C. There is substantial doubt about the entity’s ability to continue as a going concern.
    D. The client’s attorney refused to respond to the letter of audit inquiry.

Answer 18

ANSWER:
Choice “D” is correct. The refusal of a client’s attorney to respond to an audit inquiry letter is an example
of a scope limitation. The auditor must use professional judgment in determining whether that scope
limitation warrants a qualified opinion or a disclaimer of opinion.
Choice “A” is incorrect. If the financial statements contain an immaterial departure from GAAP, an
unmodified opinion still may be used. When the issue reaches a material level, the auditor would consider
using a different opinion such as qualified, adverse, or a disclaimer.
Choice “B” is incorrect. One of the auditor’s responsibilities is to determine whether sufficient, appropriate
audit evidence has been obtained. If the auditor performed alternative or additional substantive
procedures to obtain adequate assurance, that is not a basis for modifying the auditor’s report on the
entity’s financial statements.
Choice “C” is incorrect. If there is substantial doubt about the entity’s ability to continue as a going
concern, the auditor would issue a report with an additional paragraph. The paragraph is called an
emphasis-of-matter paragraph for a nonissuer and an explanatory paragraph for an issuer.

Question 19

19. MCQ-14882
    Each of the following is normally performed while conducting a review of interim financial information,
    except:
    A. Comparing disaggregated revenue data.
    B. Making inquiries of financial management.
    C. Reading minutes of the meetings of the board of directors.
    D. Obtaining litigation updates from external legal counsel.

Answer 19

ANSWER:
Choice “D” is correct. Inquiry of the entity’s lawyer regarding litigation, claims, and assessments generally
is not required during a review of interim financial information but may be appropriate in certain
circumstances.
Choice “A” is incorrect. Analytical procedures, including the comparison of disaggregated revenue data,
should be performed while conducting a review of interim financial information to provide a basis for
inquiry of management regarding unusual items.
Choice “B” is incorrect. Inquiries should be directed to members of management with responsibility for
financial and accounting matters during a review of interim financial information.
Choice “C” is incorrect. Other procedures, such as the review of the minutes of board of directors’
meetings, should be used to address significant accounting and disclosure matters relating to interim
financial information.

Question 20

20. MCQ-14883
    According to the SEC, which of the following best describes a non-audit service that, when jointly
    provided with the audit of an issuer, would result in the accountant’s loss of independence?
    A. Preparing the client’s tax returns based on information prepared by management.
    B. Providing a comfort letter in regard to the client’s meeting the debt covenant requirements.
    C. Issuing a report on management’s assessment of the client’s internal controls.
    D. Preparing the client’s footnote disclosure of significant accounting policies.

Answer 20

ANSWER:
Choice “D” is correct. Auditor independence is impaired if certain non-audit services are provided during
the audit including bookkeeping and other services related to the accounting records or financial
statements of the audit client. This would include the preparation of the client’s footnote disclosures,
which are a part of the overall financial statements of the client.
Choice “A” is incorrect. Auditor independence would not be impaired if permissible non-audit services,
such as tax compliance, are preapproved by the audit committee pursuant to established policies and
procedures.
Choice “B” is incorrect. Auditor independence would not be impaired if permissible non-audit services,
such as comfort letters, are preapproved by the audit committee pursuant to established policies and
procedures.
Choice “C” is incorrect. Auditors of issuers are required to perform an integrated audit, which includes
auditing both the financial statements and management’s assessment of the effectiveness of internal
control over financial reporting. This would not result in the loss of independence.

Question 21

21. MCQ-14884
    In connection with an audit of a nonissuer, the auditor would ordinarily use an engagement letter to:
    A. Mutually agree upon contingent fees between the company and the auditor.
    B. Assert that a properly planned audit will detect and identify all material misstatements.
    C. Specify any arrangements concerning the involvement of the company’s internal auditors on the
    audit.
    D. Determine which of the company’s financial statement notes will be compiled by the auditor during
    the audit.

Answer 21

ANSWER:
Choice “C” is correct. Content of an engagement letter would ordinarily include, among other items,
information regarding the involvement of other auditors, specialists, internal auditors, or other staff of the
entity.
Choice “A” is incorrect. Contingent fees between the company and the auditor would cause a loss of
independence and are therefore not allowable in connection with an audit.
Choice “B” is incorrect. Due to the inherent limitations of an audit together with the inherent limitations of
internal controls, an unavoidable risk exists that some material misstatements may not be detected. The
engagement letter should include a statement regarding such limitations.
Choice “D” is incorrect. Financial statement notes may not be compiled by the auditor because it would
cause a loss of independence. The performance by the auditor of certain non-audit services such as
bookkeeping and other services related to the accounting records or financial statements of the audit
client are not allowable.

Question 22

22. MCQ-14885
    Which of the following correctly identifies the deadline for the completion of audit documentation of a
    nonissuer?
    A. Within 60 days after the report release date.
    B. Within 45 days after the report release date.
    C. Within 90 days after the last day of fieldwork.
    D. Within 45 days after the last day of fieldwork.

Answer 22

ANSWER:
Choice “A” is correct. Statements on Auditing Standards (SAS) require the final audit documentation file
to be assembled by the auditor within 60 days following the report release date.
Choice “B” is incorrect. An auditor of a nonissuer must follow the SAS rules regarding final audit
documentation. The PCAOB rules, which apply to issuers only, require that audit documentation be
complete within 45 days following the report release date.
Choice “C” is incorrect. The documentation completion date for an auditor is based on the report release
date and not the date that the audit fieldwork was completed.
Choice “D” is incorrect. The documentation completion date for an auditor is based on the report release
date and not the date that the audit fieldwork was completed.

Question 23

23. MCQ-14886
    An accountant has a work program that consists entirely of the following steps:
24. Obtain knowledge of the accounting principles and practices of the client’s industry.
25. Obtain knowledge of the client.
26. Make inquiries of the client’s management about accounting procedures, the consistent
    application of generally accepted accounting principles (GAAP) in the preparation of the financial
    statements, and actions taken at meetings of stockholders and the board of directors.
27. Perform analytical procedures.
28. Obtain a letter of representation from management.
    Which of the following types of engagements is the CPA performing?
    A. Attestation
    B. Audit
    C. Compilation
    D. Review

Answer 23

ANSWER:
Choice “D” is correct. All the steps included in the work program of the CPA are required when performing
a review engagement. A review engagement is based on inquiry and analytical procedures performed by
the auditor.
Choice “A” is incorrect. In an attestation engagement, the auditor and management must agree up the
subject matter of the engagement and in most cases, a written assertion is generally obtained from
management.
Choice “B” is incorrect. An audit engagement would include all the steps in the work program but must
also include audit procedures such as confirmation with external parties and vouching transactions from
the financial statements back to supporting documentation.
Choice “C” is incorrect. A compilation engagement does not require inquiries of client’s management,
analytical procedures, or obtaining a management representation letter.

Question 24

24. MCQ-14887
    Which of the following is usually considered a monitoring activity?
    A. Segregating duties of employees.
    B. Processing entity transactions.
    C. Analyzing new information systems.
    D. Using information from customer complaints.

Answer 24

ANSWER:
Choice “D” is correct. Monitoring is the process that assesses the quality of internal control performance
over time. Monitoring may include, among other things, the evaluation of communications from external
parties such as customers, regulatory agencies, and external auditors.
Choice “A” is incorrect. Segregation of duties is an example of a control activity. Control activities are the
policies and procedures that help ensure that management directives are carried out and that necessary
steps to address risk are taken.
Choice “B” is incorrect. The processing of entity transactions is not a monitoring activity. An auditor
should obtain an understanding of the accounting processing as a part of the understanding of the
information and communication systems and may identify related monitoring activities built into the normal
recurring or supervisory activities.
Choice “C” is incorrect. Analyzing new information systems is not a monitoring activity. An auditor should
analyze new information systems as a part of the understanding of the information and communication
systems and may identify related monitoring activities built into the normal recurring or supervisory
activities.

Question 25

25. MCQ-14888
    In an integrated audit of a nonissuer, each of the following identifies an inherent limitation to internal
    control, except:
    A. Breakdowns in internal control because of employee mistakes.
    B. Collusion involving two or more employees.
    C. Faulty decision making by employees.
    D. An override of internal controls by a low-level employee.

Answer 25

ANSWER:
Choice “D” is correct. Internal controls provide reasonable, but not absolute, assurance regarding the
achievement of objectives due to three inherent limitations, including management override, human error,
and deliberate circumvention of controls by collusion of two or more people. Controls should be designed
so that a low-level employee would not have the ability to override internal controls without management
identifying the override through the performance of existing control activities.
Choice “A” is incorrect. Employee mistakes are an example of human error, which is one of the three
inherent limitations of internal controls.
Choice “B” is incorrect. Collusion is an example of deliberate circumvention of controls by two or more
people, which is one of the three inherent limitations of internal controls.
Choice “C” is incorrect. Faulty decision making is an example of human error, which is one of the three
inherent limitations of internal controls.

Question 26

26. MCQ-14889
    For which of the following assertions related to accounts receivable would an auditor’s initial assessment
    of risk of material misstatement of a nonissuer be increased if the auditor discovers that client
    management does not regularly review the collectibility of accounts receivable balances?
    A. Valuation
    B. Existence
    C. Rights and obligations
    D. Completeness

Answer 26

ANSWER:
Choice “A” is correct. The valuation assertion includes ensuring that assets, liabilities, and equity interests
are recorded fairly and at appropriate amounts, and any valuation adjustments are appropriately
recorded. In this example, testing the collectibility of accounts receivable would ensure that the receivable
and any necessary allowance adjustment are appropriately reflected in the financial statements. The
absence of such review of collectibility would result in an increase to the risk of material misstatement of
the accounts receivable balance.
Choice “B” is incorrect. Existence of a receivable would be tested by procedures such as confirmation or
vouching. A receivable may exist, but unless collectibility is reviewed, it may not be recorded fairly and at
the appropriate amount.
Choice “C” is incorrect. Rights and obligations related to a receivable may be tested by performing
procedures such as a contract review. A nonissuer may have the right to a receivable, but unless
collectibility is reviewed, it may not be recorded fairly and at the appropriate amount.
Choice “D” is incorrect. A review of collectibility would help to ensure that the accounts receivable balance
is recorded at the appropriate amount (valuation) and would not test the completeness of the balance. As
the risk of understatement of accounts receivable is less than the risk of overstatement, generally audit
procedures would be designed accordingly and would include procedures to address existence and
valuation rather than completeness.

Question 27

27. MCQ-14890
    In response to an increased level of assessed risk of material misstatement, an auditor of a nonissuer
    would generally:
    A. Not make changes to the nature, timing, or extent of further audit procedures.
    B. Increase the emphasis on professional skepticism when gathering and evaluating audit evidence
    with the audit team.
    C. Perform more substantive audit procedures at an interim date instead of at period end.
    D. Perform additional tests of controls at an interim date to eliminate the need for substantive tests at
    period end

Answer 27

ANSWER:
Choice “B” is correct. An increased emphasis on professional skepticism is an appropriate response to an
increased level of assessed risk of material misstatement. Evaluating audit evidence with a higher level of
scrutiny will help reduce audit risk to an acceptably low level.
Choice “A” is incorrect. When there is an increase to the assessed risk of material misstatement, an
auditor should update the nature, timing, and/or extent of further audit procedures to reduce audit risk to
an acceptably low level.
Choice “C” is incorrect. It would be appropriate to shift audit procedures closer to the period end rather
than performing more procedures at an interim date when there is an increased level of assessed risk of
material misstatement.
Choice “D” is incorrect. It would be appropriate to shift audit procedures closer to the period end rather
than performing more procedures at an interim date and to increase the extent of substantive testing
when there is an increased level of assessed risk of material misstatement.

Question 28

28. MCQ-14891
    Which of the following conditions necessitates a larger sample size?
    A. A high level of detection risk.
    B. A low frequency of misstatement.
    C. A low level of tolerable misstatement.
    D. A low assessed level of control risk.

Answer 28

ANSWER:
Choice “C” is correct. The sample size used by the auditor has an inverse relationship with the tolerable
misstatement. As the tolerable misstatement decreases, the sample size must increase.
Choice “A” is incorrect. A high level of detection risk indicates that the risk of material misstatement is low
and therefore a larger sample size would not be necessary when analyzing the overall audit risk.
Choice “B” is incorrect. A low frequency of misstatement indicates that the risk of material misstatement is
low and therefore a larger sample size would not be necessary when analyzing the overall audit risk.
Choice “D” is incorrect. A low assessed level of control risk indicates that the risk of material
misstatement is low and therefore a larger sample size would not be necessary when analyzing the
overall audit risk.

Question 29

29. MCQ-14892
    Which of the following procedures best addresses the adequacy of presentation and disclosure for
    inventory of a nonissuer?
    A. Obtaining confirmation of inventories that are pledged under loan agreements.
    B. Observing the company’s physical inventory-taking procedures.
    C. Tracing the test counts during the physical inventory to the final inventory listing.
    D. Examining the inventory turnover ratio and determining whether it is in line with similar companies
    in the industry.

Answer 29

ANSWER:
Choice “A” is correct. In addressing the adequacy of presentation and disclosure for inventory, the auditor
should determine that inventory-related obligations, such as inventory pledged under loan agreements,
have been properly disclosed.
Choice “B” is incorrect. Observing the physical inventory-taking procedures would better support the
existence of the inventory account balance.
Choice “C” is incorrect. Tracing the test counts to the final inventory listing would better support the
completeness of the inventory account balance.
Choice “D” is incorrect. Examining and comparing the inventory turnover ratio may be used by an auditor
to better understand the performance of a company, but it would not address the adequacy of the
presentation and disclosure of inventory.

Question 30

30. MCQ-014893
    The auditor of a nonissuer would most appropriately use reperformance to obtain audit evidence for
    which of the following purposes?
    A. To test the operating effectiveness of a bank reconciliation control.
    B. To test whether the amount of FICA tax withheld from an employee’s paycheck is appropriate.
    C. To determine whether the aging categories on the aged accounts payable trial balance are
    accurate.
    D. To determine the mathematical accuracy of the extended cost amount shown on an invoice sent to
    a customer.

Answer 30

ANSWER:
Choice “A” is correct. Reperformance occurs when an auditor independently performs procedures or
controls to ensure that they were performed appropriately. This would be an effective procedure in testing
the operating effectiveness of controls over bank reconciliations to ensure that the auditor reaches the
same results and conclusions when reperforming the process.
Choice “B” is incorrect. Recalculation, rather than reperformance, would be more appropriate for testing
the accuracy of the amount of tax withheld from an employee’s paycheck.
Choice “C” is incorrect. Vouching or inspection, rather than reperformance, would be more appropriate for
testing the accuracy of the aging categories on the aged accounts payable trial balance.
Choice “D” is incorrect. Recalculation, rather than reperformance, would be more appropriate for
determining the mathematical accuracy of the extended cost amount shown on an invoice.

Question 31

31. MCQ-14894
    In planning an audit, an auditor established materiality at $40,000. The auditor received an attorney’s
    letter indicating that it was probable that each of three lawsuits would be settled for $30,000. Which of the
    following actions should the auditor take?
    A. Add a separate paragraph to the audit report disclosing the contingencies and their amounts.
    B. Ask the client to disclose the contingencies in the notes to the financial statements.
    C. Ask the client to record the liability for the three contingencies.
    D. Add a paragraph to the auditor’s opinion disclosing a scope limitation.

Answer 31

ANSWER:
Choice “C” is correct. Management should record legal liability amounts if they are considered probable
and reasonably estimable. As the claims are considered probable and can be estimated at $30,000 each,
management should have recorded the impact in the financial statements. As this would be considered a
misstatement, the auditor must consider the aggregate impact to the financial statements. As the impact,
in aggregate, exceeds the established materiality, the auditor must ask the client to record the liability for
the contingencies.
Choice “A” is incorrect. A separate paragraph within the audit report is used to emphasize a matter that is
appropriately presented or disclosed in the financial statements. As the legal contingencies are not
appropriately reflected in the financial statements as a liability, adding such a paragraph would not be the
appropriate action.
Choice “B” is incorrect. Management would disclose the contingencies in the notes to the financial
statements if the contingencies were probable but not reasonably estimable or reasonably possible
instead of probable. As the contingencies are both probable and reasonably estimable, recording the
liabilities in the financial statements, rather than disclosure, is the appropriate action.
Choice “D” is incorrect. A scope limitation may occur if the auditor is unable to complete the audit due to
certain circumstances, such as the refusal of the client’s attorney to respond to inquiry. In this example,
the attorney has responded, and evidence exists that the liability should be recorded in the financial
statements. Adding a paragraph disclosing a scope limitation would not be appropriate, as a scope
limitation does not exist.

Question 32

32. MCQ-14895
    Which of the following is least appropriately considered a condition or event that indicates that there could
    be substantial doubt about an entity’s ability to continue as a going concern?
    A. Issuance of bonds at the prevailing interest rate.
    B. Uneconomic long-term commitments.
    C. Arrearages in dividends.
    D. An uninsured or underinsured catastrophe.

Answer 32

ANSWER:
Choice “A” is correct. Issuance of bonds at the prevailing interest rate is not indicative of financial
difficulties as the bonds are consistent with the current market conditions.
Choice “B” is incorrect. Uneconomic long-term commitments are an example of internal matters that may
indicate substantial doubt about an entity’s ability to continue as a going concern. The acronym used to
describe these factors is FINE. F (Financial difficulties), I (Internal matters), N (Negative trends), and E
(External matters).
Choice “C” is incorrect. Arrearages in dividends are an example of an indicator of financial difficulty and
may indicate substantial doubt about an entity’s ability to continue as a going concern. The acronym used
to describe these factors is FINE. F (Financial difficulties), I (Internal matters), N (Negative trends), and E
(External matters).
Choice “D” is incorrect. Uninsured or underinsured catastrophe is an example of an external matter that
may indicate substantial doubt about an entity’s ability to continue as a going concern. The acronym used
to describe these factors is FINE. F (Financial difficulties), I (Internal matters), N (Negative trends), and E
(External matters).

Question 33

33. MCQ-14896
    An auditor of a nonissuer should request that management provide written representations regarding
    uncorrected misstatements in the financial statements that state:
    A. The individual and cumulative differences between the auditor’s point estimates and the recorded
    amounts for uncorrected misstatements.
    B. Management’s acceptance of responsibility for the auditor’s opinion, if modified due to the
    uncorrected misstatements.
    C. Whether management believes that the effects of uncorrected misstatements are immaterial,
    individually and in the aggregate, to the financial statements as a whole.
    D. Management’s rationale for not correcting misstatements noted during the course of the audit.

Answer 33

ANSWER:
Choice “C” is correct. The management representation letter must include a statement that management
believes the effects of uncorrected misstatements are immaterial to the financial statements as a whole
and a summary of the uncorrected misstatements should be included.
Choice “A” is incorrect. With respect to uncorrected misstatements, management is only required to state
that the effects of uncorrected misstatements are immaterial to the financial statements as a whole.
Information regarding the support for the uncorrected misstatements is not required.
Choice “B” is incorrect. Management would not accept responsibility for the auditor’s opinion as the
opinion is the responsibility of the auditor.
Choice “D” is incorrect. With respect to uncorrected misstatements, management is only required to state
that the effects of uncorrected misstatements are immaterial to the financial statements as a whole.

Question 34

34. MCQ-14897
    The opinion paragraph in an auditor’s report for a nonissuer should include a statement that:
    A. Includes the word independent to clearly indicate that the report is from an independent auditor.
    B. Describes the auditor’s responsibility for expressing an opinion on the financial statements.
    C. Identifies the applicable financial reporting framework and its origin.
    D. Indicates that management is responsible for the fair presentation of the financial statements

Answer 34

ANSWER:
Choice “C” is correct. The opinion paragraph in an auditor’s report should include a statement regarding
the auditor’s opinion and an indication of the applicable financial reporting framework and its origin.
Choice “A” is incorrect. The word independent should be included in the report title, and not the opinion
paragraph in an auditor’s report.
Choice “B” is incorrect. A description of the auditor’s responsibility would be included in a separate
paragraph stating the auditor’s responsibility rather than in the opinion paragraph.
Choice “D” is incorrect. An indication of management’s responsibility for the fair presentation of the
financial statements should be included in a separate paragraph explaining management’s responsibility
rather than in the opinion paragraph.

Question 35

35. MCQ-14898
    When an accountant is engaged to prepare financial statements, each of the following requirements
    applies, except:
    A. The accountant should verify the completeness of information provided by management for the
    financial statements.
    B. The engagement documentation should include the engagement letter and a copy of the prepared
    financial statements.
    C. The agreed-upon terms of the engagement should include identification of the applicable financial
    framework to be used.
    D. The accountant should include a statement on each page of the financial statements indicating that
    no assurance is provided.

Answer 35

ANSWER:
Choice “A” is correct. For a preparation engagement, management takes responsibility for the
completeness of information. Accountants are not required, but may, make inquiries to verify the
completeness of the information provided by the client.
Choice “B” is incorrect. Documentation in a preparation engagement should include the engagement
letter, a copy of the financial statements prepared by the accountant, and any significant issues or
findings.
Choice “C” is incorrect. The accountant should include a description of the financial reporting framework
on the face of the financial statements or in a note to the financial statements in a preparation
engagement.
Choice “D” is incorrect. Each page of the financial statements should include an indication that no
assurance is provided in a preparation engagement.

Question 36

36. MCQ-14899
    Which of the following should a predecessor auditor perform before reissuing a report on financial
    statements when those financial statements are to be presented on a comparative basis with financial
    statements audited by another auditor?
    A. Obtain representation letters from management of the former client and the successor auditor.
    B. Change the date of the reissued report to match the date on which additional procedures were
    performed.
    C. Request attorney’s responses to identify any significant litigation subsequent to the original date of
    the report.
    D. Review minutes of board meetings held since the original date of the audit report

Answer 36

ANSWER:
Choice “A” is correct. A predecessor auditor should obtain representations from both management and
the successor auditor before reissuing a report. The successor auditor representation letter should state
whether any audit matters were revealed that may have a material impact on the statements reported on
by the predecessor auditor. Management’s representation letter should state whether management
believes that any of the previous representations made by management need to be modified and whether
any subsequent events requiring adjustment or disclosure in the reissued financial statements have
occurred.
Choice “B” is incorrect. The date of the report should either be unrevised or dual dated. The date of the
report should not be changed to match the date of any additional procedures.
Choice “C” is incorrect. The predecessor auditor is not required to obtain an attorney letter to identify any
significant litigation that occurs after the original report date. Management is responsible for providing
information on any subsequent events that may require adjustment to the reissued financial statements.
Choice “D” is incorrect. The predecessor auditor is not required to review minutes of board meetings held
since the original date of the audit report. Management is responsible for providing information on any
subsequent events that may require adjustment to the reissued financial statements.