Testlet 1 (30 items)

Question 1

Which of the following is ordinarily considered to be a fraud risk factor?
a. The company’s financial statements include a number of last minute material adjustments.
b. Management regularly informs investors of forecast information.
c. The company has experienced increasing earnings over the previous five years.
d. The company’s president is included as a member of the board of directors.

Answer 1

A

Question 2

Which of the following statements best describes the pri- mary purpose of Statements on Auditing Standards?
a. They are guides intended to set forth auditing proce- dures that are applicable to a variety of situations.
b. They are procedural outlines that are intended to narrow the areas of inconsistency and divergence of auditor opinion.
c. They are authoritative statements, enforced through the Code of Professional Conduct.
d. They are interpretive guidance.

Answer 2

C

Question 3

Independence is required for which of the following types of engagements?
a. Agreed-upon procedures: Yes
Review: Yes
b. Agreed-upon procedures: Yes
Review: No
c. Agreed-upon procedures: No
Review: Yes
d. Agreed-upon procedures: No
Review: No

Answer 3

C

Question 4

Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?
a. Analysis of balance sheet accounts.
b. Analysis of income statement accounts.
c. All matters of continuing accounting significance.
d. Facts that might bear on the integrity of management.

Answer 4

D

Question 5

Which of the following is correct concerning allowing additions and deletions to audit documentation after the doc- umentation completion date under requirements of the Public Company Accounting Oversight Board?
a. Additions: Allowed
Deletions: Allowed
b. Additions: Allowed
Deletions: Not Allowed
c. Additions: Not Allowed
Deletions: Allowed
d. Additions: Not Allowed
Deletions: Not Allowed

Answer 5

B

Question 6

One reason that an auditor only obtains reasonable, and not absolute, assurance that financial statements are free from material misstatement is
a. Comprehensive basis reporting.
b. Employee collusion.
c. Material misstatements.
d. Professional skepticism.

Answer 6

B

Question 7

The auditors of a nonissuer (nonpublic) company must perform a test of the operating effectiveness of a significant control
a. In all audits.
b. When the control relates to a significant asset.
c. When substantive procedures alone will not provide
sufficient evidence about the related assertion.
d. When the auditors believe that the control may not be
effective.

Answer 7

C

Question 8

The independent auditor selects several transactions in each functional area and traces them through the entire system, paying special attention to evidence about whether or not the controls are in operation. This is an example of a(n)
a. Application test.
b. Test of a controls.
c. Substantive test.
d. Test of a function.

Answer 8

B

Question 9

In obtaining an understanding of a manufacturing entity’s internal control over inventory balances, an auditor most likely would
a. Review the entity’s descriptions of inventory policies and procedures.
b. Perform test counts of inventory during the entity’s physical count.
c. Analyze inventory turnover statistics to identify slow- moving and obsolete items.
d. Analyze monthly production reports to identify vari- ances and unusual transactions.

Answer 9

A

Question 10

Further audit procedures consist of which of the following?
a. Risk assessment procedures: Yes
Substantive procedures: No
Test of controls: No
b. Risk assessment procedures: Yes
Substantive procedures: Yes
Test of controls: No
c. Risk assessment procedures: No
Substantive procedures: Yes
Test of controls: Yes
d. Risk assessment procedures: No
Substantive procedures: Yes
Test of controls: Yes

Answer 10

D

Question 11

Which of the following statements best describes the ethi- cal standard of the profession pertaining to advertising and solicitation?
a. All forms of advertising and solicitation are prohibited.
b. There are no prohibitions regarding the manner in
which CPAs may solicit new business.
c. A CPA may advertise in any manner that is not false,
misleading, or deceptive.
d. A CPA may only solicit new clients through mass
mailings.

Answer 11

C

Question 12

Which is least likely to be a question asked of client per- sonnel during a walk-through in an audit of the internal control of an issuer (public) company?
a. What do you do when you find an error?
b. Who is most likely to commit fraud among your
coworkers?
c. What kind of errors have you found?
d. Have you ever been asked to override the process or
controls?

Answer 12

B

Question 13

Which of the following matters is an auditor required to communicate to an entity’s audit committee?
a. Significant audit adjustments: Yes
Changes in significant accounting policies: Yes
b. Significant audit adjustments: Yes
Changes in significant accounting policies: No
c. Significant audit adjustments: No
Changes in significant accounting policies: Yes
d. Significant audit adjustments: No
Changes in significant accounting policies: No

Answer 13

A

Question 14

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of
a. Tests of transactions and balances.
b. Apreliminaryreviewofinternalcontrol.
c. Specialized audit programs.
d. Analytical procedures.

Answer 14

D

Question 15

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that
a. All goods purchased before year-end are received be- fore the physical inventory count.
b. No goods held on consignment for customers are in- cluded in the inventory balance.
c. No goods observed during the physical count are pledged or sold.
d. All goods owned at year-end are included in the in- ventory balance.

Answer 15

D

Question 16

An auditor who uses the work of a specialist may refer to and identify the specialist in the auditor’s report if the
a. Specialist is also considered to be a related party.
b. Auditor indicates a division of responsibility related to
the work of the specialist.
c. Specialist’s work provides the auditor greater assurance
of reliability.
d. Auditor expresses an “except for” qualified opinion or
an adverse opinion related to the work of the specialist.

Answer 16

D

Question 17

Which of the following statements concerning audit evi- dence is correct?
a. Appropriate evidence supporting management’s assertions should be convincing rather than merely persuasive.
b. Effective internal control contributes little to the re- liability of the evidence created within the entity.
c. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
d. A client’s accounting data cannot be considered suffi- cient audit evidence to support the financial statements.

Answer 17

D

Question 18

Burrow&Co.,CPAs,haveprovidedannualauditandtax compliance services to Mare Corp. for several years. Mare has been unable to pay Burrow in full for services Burrow rendered nineteen months ago. Burrow is ready to begin fieldwork for the current year’s audit. Under the ethical standards of the profession, which of the following arrangements will permit Burrow to begin the fieldwork on Mare’s audit?
13.
a. Mare sets up a two-year payment plan with Burrow to settle the unpaid fee balance.
b. Mare commits to pay the past due fee in full before the audit report is issued.
c. Mare gives Burrow an eighteen-month note payable for the full amount of the past due fees before Burrow begins the audit.
d. Mare engages another firm to perform the fieldwork, and Burrow is limited to reviewing the workpapers and issuing the audit report.

Answer 18

B

Question 19

A note to the financial statements of the First Security Bank indicates that all of the records relating to the bank’s business operations are stored on magnetic disks, and that there are no emergency back-up systems or duplicate disks stored since the First Security Bank and their auditors consider the occurrence of a catastrophe to be remote. Based upon this, one would expect the auditor’s report to express
a. An adverse opinion.
b. An “except for” opinion.
c. An unmodified (unqualified) opinion.
d. A qualified opinion.

Answer 19

C

Question 20

A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor’s report on the financial statements of the year of the change should include
a. No reference to consistency.
b. A reference to a prior period adjustment in the opinion
paragraph.
c. An emphasis-of-matter paragraph explaining the change.
d. A justification for making the change and the impact of
the change on reported net income.

Answer 20

C

Question 21

When an auditor reissues in 20X7 the auditor’s report on the 20X5 financial statements at the request of the client with- out revising the 20X5 wording, the auditor should
a. Use the date of the original report.
b. Use the date of the client’s request.
c. Use the date of the current period report.
d. Dual date the report.

Answer 21

A

Question 22

Which of the following is not a covered member for pur- poses of application of the independence requirements of the AICPA Code of Professional Conduct?
a. A staff person on the attest team.
b. A staff person that performs tax services for the attest
client.
c. The partner in charge of the firm office that performs
the attest engagement.
d. A partner that performs extensive consulting services
for the attest client.

Answer 22

B

Question 23

Accounting control procedures within computer pro- cessing may leave no visible evidence indicating that the procedures were performed. In such instances, the auditor should test these controls by
a. Making corroborative inquiries.
b. Observing the separation of duties of personnel.
c. Reviewing transactions submitted for processing and
comparing them to related output.
d. Reviewing the run manual.

Answer 23

C

Question 24

Which is least likely to be a response when an auditor has obtained evidence indicating a risk of material misstatement in the area of inventory?
a. Discuss questions of inventory valuation with any other auditors involved with the audit.
b. Make oral inquiries of major suppliers in addition to written confirmations.
c. Perform inventory observations on an unannounced basis.
d. Request inventory counts at the end of each month.

Answer 24

D

Question 25

Confirmations of accounts receivable address which asser- tion most directly?
a. Completeness. b. Existence.
c. Valuation.
d. Classification.

Answer 25

B

Question 26

Which of the following is always present in an attestation engagement?
a. Assertion about the subject matter.
b. Generally accepted assurance principles.
c. Subject matter.
d. An examination report.

Answer 26

C

Question 27

Which of the following is not typically performed when accountants are performing a review of the financial statements of a nonissuer?
a. Analytical procedures applied to financial data.
b. Inquiries about significant subsequent events.
c. Inquiries of the client’s attorney about legal matters.
d. Obtaining an understanding of the accounting principles
followed by the client’s industry.

Answer 27

C

Question 28

If information is for management’s use only, which of the following forms of CPA association with financial information is most likely to result in no report being issued?
a. An agreed-upon procedures engagement.
b. An audit.
c. A compilation.
d. A review.

Answer 28

C

Question 29

A CPA who is not independent may perform which of the following services for a nonissuer company?
a. Compilation: Yes
Review: Yes
b. Compilation: Yes
Review: No
c. Compilation: No
Review: Yes
d. Compilation: No
Review: No

Answer 29

B

Question 30

When performing a review of an issuer company, which is least likely to be included in the CPA’s inquires of management members with responsibility for financial and accounting matters?
a. Subsequent events.
b. Significant journal entries and other adjustments.
c. Communications with related parties.
d. Unusual or complex situations affecting the financial
statements

Answer 30

C