Appendix D (50 items)

Question 1

Which of the following statements correctly defines the term reasonable assurance?
a. A substantial level of assurance to allow an auditor to detect a material misstatement.
b. A significant level of assurance to allow an auditor to detect a material misstatement.
c. An absolute level of assurance to allow an auditor to detect a material misstatement.
d. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.

Answer 1

D

Question 2

A practitioner may perform an agreed-upon procedures engagement on prospective financial statements provided that which of the following is met?
a. Use of the agreed-upon procedures report is not restricted.
b. The practitioner sets the criteria to be used in the determination of findings.
c. The client agrees that the practitioner will decide appropriate procedures to be performed.
d. The prospective financial statements include a summary of significant assumptions.

Answer 2

D

Question 3

If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, what should the current auditor do?
a. Review the risk assessment of the opening balances of the financial statements.
b. Withdraw from the engagement.
c. Disclaim an opinion due to a scope limitation.
d. Discuss the matter with the client’s legal counsel.

Answer 3

A

Question 4

Analytical procedures used in planning an audit should focus on:
a. Identifying material weaknesses in internal control.
b. Enhancing the auditor’s understanding of the client’s
business.
c. Testing individual account balances that depend on
accounting estimates.
d. Evaluating the adequacy of the evidence gathered
concerning unusual balances.

Answer 4

B

Question 5

If an auditor is obtaining an understanding of an issuer’s information and communication component of internal control, which of the following factors should the auditor assess?
a. The integrity and ethical values of top management. b. The philosophy and operating style of management
to promote effective internal control over financial
reporting.
c. The classes of transactions in the issuer’s operations
that are significant to the issuer’s financial statements. d. The oversight responsibility over financial reporting and
internal control by the board or audit committee.

Answer 5

C

Question 6

Which of the following is not a role of the risk assessment in an integrated audit of a nonissuer?
a. Concluding on the effectiveness of a given control. b. Selecting controls to test.
c. Determining significant accounts and relevant
assertions.
d. Determining evidence necessary to conclude on the
effectiveness of a given control.

Answer 6

A

Question 7

Which of the following situations represents a limitation, rather than a failure, of internal control?
a. A jewelry store employee steals a small necklace from a display cabinet.
b. A bank teller embezzles several hundred dollars from the cash drawer.
c. A purchasing employee and an outside vendor participate in a kickback scheme.
d. A movie theater cashier sells reduced-price tickets to full-paying customers and pockets the difference.

Answer 7

C

Question 8

An audit client has substantial assets held in a trust that is managed by the trust department of a bank. Which of the following actions by the auditor is the most efficient way
to obtain information about the trust department’s internal controls?
a. Perform a review or compilation of the trust department.
b. Perform tests of controls on a sample of the client’s
transactions with the trust department.
c. Rely on the trust department’s audit report on internal
controls placed in operation and their operating
effectiveness.
d. Ask management of the trust department to complete
a questionnaire about internal controls and provide flowcharts for related processes.

Answer 8

C

Question 9

Which of the following levels would most likely address the risk of material misstatement by the auditor’s consideration of an entity’s control environment?
a. Financialstatements.
b. Disclosures.
c. Classes of transactions.
d. Specific account balances.

Answer 9

A

Question 10

In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan?
a. Procedures performed to assess independence and the ability to perform the engagement.
b. The understanding of the terms of the engagement, including scope, fees, and resource allocation.
c. Other audit procedures to be performed to comply with generally accepted auditing standards.
d. Issues with management integrity that could affect the decision to continue the audit engagement.

Answer 10

C

Question 11

An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statements. How should the audit team address the audit procedures to the increased risk?
a. Review the client’s control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year.
b. Review the client’s control procedures over the safeguarding of inventory, incorporate the use of substantive analytical procedures, and develop an expectation.
c. Review the client’s control procedures over the safeguarding of inventory, but do not modify substantive procedures over inventory.
d. Review the client’s control procedures over the safeguarding of inventory, and perform physical inventory counts throughout the current year.

Answer 11

A

Question 12

When planning an engagement to examine the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would least likely consider which of the following factors?
a. Preliminary judgments about the effectiveness of internal control.
b. The extent of recent changes in the entity and its operations.
c. The type of available evidential matter pertaining to the effectiveness of the entity’s internal control.
d. The evaluation of the operating effectiveness of the controls.

Answer 12

D

Question 13

In the audit of a nonissuer, which of the following statements is correct regarding the use of external confirmations to obtain audit evidence?
a. Management’s refusal to allow an auditor to perform external confirmation procedures is considered a departure from GAAP sufficient to qualify the opinion.
b. Negative confirmations provide more persuasive audit evidence than positive confirmations.
c. Negative confirmations should be used only if a very high exception rate is expected.
d. A factor for an auditor to consider when designing confirmation requests is the assertion being tested.

Answer 13

D

Question 14

After performing a compliance audit of an entity that received federal funds, what conclusion would the auditor draw if the entity does not have adequate documentation to support $5 million in operating expenses paid from federal program funds?
a. The entity spent $5 million in operating expenses that were not approved.
b. Questioned costs of $5 million for operating expenses have been identified.
c. The entity spent $5 million of government funds for services that were not required.
d. The entity submitted unauthorized invoices for expenses.

Answer 14

B

Question 15

An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it
a. Changes the company’s operating results from a net loss to a net income.
b. Arises from a transaction cycle with controls that were determined to be operating effectively.
c. Isthefirsttimeamisstatementhasarisenfromthe relevant transaction cycle.
d. Decreases management’s incentive compensation for the period.

Answer 15

A

Question 16

What is the maximum number of days in which a nonissuer’s auditor should complete the assembly of the final audit file following the report release date?
a. 30 days.
b. 45 days.
c. 60 days.
d. 75 days.

Answer 16

C

Question 17

In an integrated audit of a nonissuer, if an auditor concludes that a material weakness exists as of the date specified in management’s assertion, the auditor should take which of the following actions?
a. Obtain written representations from management relating to such matters.
b. Communicate, in writing, to the entity’s outside legal counsel that the material weakness exists.
c. Issue an adverse opinion.
d. Disclaim an opinion.

Answer 17

C

Question 18

A nonissuer requests that a CPA change an audit engagement to a review engagement. If the accountant agrees to the change, how, if at all, should the accountant’s review report be modified?
a. The accountant should issue the review report without mentioning the change in engagement.
b. The accountant should include in the review report a disclaimer of an audit opinion.
c. The accountant should include in the review report the circumstances that resulted in the change in engagement.
d. The accountant should include in the review report a reference to the original engagement but not the reason for the change.

Answer 18

A

Question 19

Which of the following procedures regarding notes payable would an accountant most likely perform during a nonissuer’s review engagement?
a. Confirming the year-end outstanding note payable balance with the lender.
b. Examining records indicating proper authorization of the notes payable.
c. Making inquiries of management regarding maturities, interest rate, and collateral.
d. Documenting control procedures for payment calculations of the notes’ principal and interest.

Answer 19

C

Question 20

When financial statements that an accountant has compiled in accordance with Statements on Standards for Accounting and Review Services omit substantially all disclosures required by generally accepted accounting principles, the accountant’s report should include
a. Management’s justification for its decision to elect to omit substantially all the disclosures.
b. No modification of the standard compilation report because compilations do not require disclosures that are required for audited financial statements.
c. Information alerting readers about omission of the disclosures and notification that the omission may influence the user’s conclusions about the financial statements.
d. A separate paragraph in the compilation report stating that the financial statements are misleading due to the lack of disclosures by management.

Answer 20

C

Question 21

The standard accountant’s report issued after reviewing the financial statements of a nonissuer in accordance with SSARS should state that the
a. Accountant is not aware of any material modifications that should be made to the financial statements for them to be in conformity with GAAP.
b. Accountantdoesnotexpressanopinionoranyother form of assurance on the entity’s internal control system.
c. Accountant has no responsibility to update the report for circumstances occurring after the date of the report.
d. Financial statements present fairly the entity’s financial position and the results of its operations and cash flows
in conformity with GAAP.

Answer 21

A

Question 22

According to the AICPA Code of Professional Conduct, which of the following activities results in an act discreditable to the profession?
a. A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA.
b. A CPA signs a document containing immaterial false and misleading information, or permits or directs another CPA to do so.
c. A CPA who is engaged to perform a government audit neglects to follow certain government auditing requirements and discloses in the audit report the fact that such requirements were not followed and the reasons for it.
d. A CPA fails to give a client copies of the CPA’s workpapers related to a completed and issued work product upon the client’s request because the client has not paid fees payable to the CPA for the work product.

Answer 22

A

Question 23

An issuer’s auditor is prohibited from providing tax services to which of the following individuals?
a. The chair of the board of directors.
b. The chair of the audit committee.
c. The CEO.
d. The CFO of an affiliate of the issuer audited by another
firm.

Answer 23

C

Question 24

Each of the following is an ethical principle that should guide the work of auditors in the conduct of audits under government auditing standards, except
a. Materiality.
b. Integrity.
c. The public interest.
d. Proper use of government information.

Answer 24

A

Question 25

According to the IFAC Code of Ethics for Professional Accountants, audit teams are required to be independent of the audit client during the engagement period and during which other period?
a. The fiscal year following the period covered by the financial statements.
b. The period covered by the financial statements.
c. The calendar years that includes any part of the period
covered by the financial statements.
d. The two years prior to the period covered by the
financial statements.

Answer 25

B

Question 26

Reporting standards for financial audits under Government Auditing Standards differ from reporting standards under generally accepted auditing standards in that Government Auditing Standards require the auditor to
a. Describe the scope of the auditor’s tests of compliance with laws and regulations.
b. Provide positive assurance that the entity’s audit committee is adequately informed about the effects of any illegal acts.
c. Present the results of the auditor’s tests of economy and efficiency regarding the use of the entity’s resources.
d. Provide negative assurance that the auditor discovered no transactions that were indicative of illegal acts.

Answer 26

A

Question 27

Which of the following procedures would most likely assist an auditor in identifying related party transactions?
a. Evaluate the reasonableness of management’s accounting estimates that are subject to bias.
b. Retest ineffective internal control activities for evidence of management override.
c. Review the minutes of the meetings of the board of directors and its committees.
d. Send second requests for unanswered positive confirmations of accounts receivable.

Answer 27

C

Question 28

Which of the following factors would most likely influence the form and extent of the auditor’s documentation of an entity’s internal control environment?
a. Complexity and size of the entity.
b. Amount of audit work performed at an interim date. c. Amount of audit work performed by the internal
auditor.
d. Results of verifying material account balances.

Answer 28

A

Question 29

According to the AICPA Code of Professional Conduct, which of the following actions will impair independence?
a. Preparing client financial statements based on information in a trial balance.
b. Processing payroll for a client’s signature based on client recordkeeping.
c. Participating in the hiring or termination of a client’s employees.
d. Assisting a client in drafting a stock-offering document or memorandum.

Answer 29

C

Question 30

When an accountant compiles the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services, the accountant’s report should include
a. A statement that the accountant is not aware of material modifications that should be made to the financial statements for them to be in conformity with GAAP.
b. A statement regarding the accountant’s assessment of fraud risk.
c. A statement that the accountant does not express an opinion on the financial statements.
d. A statement regarding the entity’s compliance with laws and regulations.

Answer 30

C

Question 31

In which of the following circumstances is an auditor most likely to rely on work done by internal auditors?
a. If financial statement amounts are material and the degree of subjectivity in evaluating the audit evidence is high.
b. If the internal auditors have concluded that the risk of material misstatement at the overall financial level is negligible.
c. For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence.
d. For financial statement amounts determined largely or entirely on the basis of estimates made by management.

Answer 31

C

Question 32

Which of the following statements is correct regarding a management representation letter?
a. A representation letter can be used in place of specific, previously identified audit procedures.
b. A representation letter encompasses a different set of assertions than those inherent in the financial statements.
c. The date of the representation letter should typically be the same as the audit report.
d. The representations made apply until the date of a client’s financial statements.

Answer 32

C

Question 33

Which of the following components of internal control would be considered the foundation for the other components?
a. Information and communication.
b. Risk assessment.
c. Control environment.
d. Control activities.

Answer 33

C

Question 34

Which of the following activities by small-business clients best demonstrates management integrity in the absence of a written code of conduct?
a. Emphasizing ethical behavior through oral communication and management example.
b. Developing and maintaining formal descriptions of accounting procedures.
c. Documenting internal control procedures using flowcharts rather than narratives.
d. Reporting regularly to the board of directors about operations and finances.

Answer 34

A

Question 35

Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable?
a. Trace transactions from the subsidiary ledger to the general ledger.
b. Send confirmations to customers.
c. Trace a sample of invoices to recording in the general
ledger.
d. Determine that all shipments before year end are
recorded as sales.

Answer 35

B

Question 36

A company’s management provided its auditors with information concerning litigation, claims, and assessments. Which of the following is the auditor’s primary means of corroborating management’s information?
a. Inquiring of company’s outside counsel.
b. Meeting with the company’s audit committee.
c. Meeting with the company’s Chairman of the Board.
d. Inquiring of the company’s in-house counsel.

Answer 36

A

Question 37

Which of the following would cause an auditor of an entity’s financial statements to issue either a qualified opinion or a disclaimer of opinion?
a. Scope limitation involving a recorded uncertainty.
b. Inadequate disclosure of an uncertainty.
c. The use of inappropriate accounting principles.
d. Unreasonable accounting estimates.

Answer 37

A

Question 38

At the completion of an audit, which of the following entities has ownership of the audit working papers?
a. The client.
b. The client’s audit committee.
c. The CPA firm that performed the audit.
d. The client’s stockholders.

Answer 38

C

Question 39

Which of the following services would constitute a management function under Government Auditing Standards, and result in the impairment of a CPA’s independence if performed by the CPA?
a. Developing entity program policies.
b. Providing methodologies, such as practice guides.
c. Providing accounting opinions to a legislative body.
d. Recommending internal control procedures.

Answer 39

A

Question 40

Which of the following best characterizes an auditor’s exercise of professional skepticism?
a. Conducting all fraud-related inquiries in a non- confrontational manner.
b. Obtaining adequate conclusive evidence in support of the fairness of the financial statements.
c. Having an attitude that includes a questioning mind.
d. Taking into account past relationships and experiences
with management.

Answer 40

C

Question 41

Before accepting an engagement to compile or review the financial statements of a nonissuer, which of the following specific inquiries should a successor accountant consider making to the predecessor accountant?
a. How cooperative was the owner’s lawyer in providing a legal opinion?
b. How did you assess inherent risk and control risk?
c. How would you describe the integrity of the owner?
d. What evaluation did you make of any accounting
estimates?

Answer 41

C

Question 42

An entity has failed to provide documentation for a newly acquired material asset and informs its auditors that the documentation is lost. According to generally accepted government auditing standards what would this situation typically indicate to the auditors?
a. Fraudulent activity.
b. Abusive activity.
c. Misappropriation of assets.
d. A heightened risk of fraud.

Answer 42

D

Question 43

An accountant performing a compilation for a nonissuer believes that the financial statements might be materially misstated. The client refuses to provide additional or revised information. How should the accountant respond?
a. By requesting that the engagement be changed from a compilation to a review or audit.
b. By issuing a compilation report that is qualified for a scope limitation.
c. By withdrawing from the compilation engagement.
d. By issuing an adverse report on the compilation.

Answer 43

C

Question 44

During an audit of a nonissuer’s financial statements, an auditor should perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if
a. The auditor does not presume that client management has committed fraud.
b. More financial documentation is available through tests of controls.
c. Substantive procedures alone cannot provide sufficient appropriate audit evidence.
d. The auditor does not intend to rely on the operating effectiveness of controls.

Answer 44

C

Question 45

In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result?
a. Modify the scope of the engagement to include an analysis of the budget for the new product line and consider the new risk in conjunction with other risks after the budget items have been analyzed.
b. Analyze the newly identified risk in conjunction with economic circumstances related exclusively to the new product line and consider whether there is an immediate consequence for the risk of material misstatement for affected classes of transactions.
c. Modify the financial statement disclosures to include the newly identified risk if it is likely that the new product line will have an adverse effect on the company’s profitability.
d. Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.

Answer 45

D

Question 46

If interim substantive procedures for an account identified no exceptions, which of the following would the auditor not perform on that account at year end?
a. Tests of details for the entire year under audit.
b. Tests of details of activity during the period since the
interim testing date.
c. Reconciliation of year-end balances to interim balances.
d. Substantive analytical procedures of the period since the
interim testing date.

Answer 46

A

Question 47

In communicating with those charged with governance, the auditor must decide whether to communicate with the audit committee or the client’s entire board of directors. Which of the following considerations will be least relevant to this decision?
a. Whether the audit committee will be able to provide further information and explanations that the auditor may require while performing the audit.
b. The nature of the matters to be communicated.
c. Management’s preference.
d. Regulatory requirements related to audit
communications with those charged with governance.

Answer 47

C

Question 48

According to the Sarbanes-Oxley Act of 2002, the PCAOB has the legal authority to perform each of the following, except:
a. Prosecute suspected criminal violations by registered public accounting firms.
b. Process, review, and approve the registration of public accounting firms that audit issuers.
c. Inspect and review selected audit engagements of registered public accounting firms.
d. Establish auditing, quality control, and independence standards for audits of issuers.

Answer 48

A

Question 49

Which of the following best describes the effect of a contingent fee arrangement on the auditor’s independence?
a. The contingent fee arrangement does not impair independence if it is consistent with the registered public accounting firm’s quality control policies.
b. The contingent fee arrangement impairs independence.
c. The contingent fee arrangement does not impair
independence unless more than half of the fee is subject
to contingencies.
d. The contingent fee arrangement impairs independence
unless approved by the client’s audit committee.

Answer 49

B

Question 50

An accountant is engaged to perform compilation services for a new client in an industry with which the accountant
has no previous experience. How should the accountant
obtain sufficient knowledge of the industry to perform the compilation service?
a. By obtaining the most recent letter of credit from the entity’s primary financial institution.
b. By consulting AICPA guides, industry publications, or individuals knowledgeable about the industry.
c. By researching the entity’s Internet site and searching for current press releases.
d. By reviewing the predecessor accountant’s workpapers without the knowledge of the entity.

Answer 50

B