2014 auditing AICPA released questions

Appendix D: 2014 Released AICPA Questions for Auditing and Attestation Which of the following would be considered an analytical procedure? a Examining a sample of paid vendors’ invoices for proper approval by an authorized supervisor b Developing the current year’s expected net sales based on the entity’s sales trend of prior years c Projecting a deviation rate by comparing the results of a sample with the actual population characteristics d Evaluation management’s plans for dealing with the adverse effects of recurring operating losses Which of the following events occurring after the issuance of the auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements? a The auditor discovers that the entity intends to present comparative financial statements in subsequent years b Litigation that had been disclosed in the financial statements is resolved c A subsidiary that accounts for 30% of the entity’s consolidated net revenue is sold d New information regarding significant unrecorded transactions from the year under audit is discovered Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations? a The auditor’s combined assessed level of control risk and inherent risk is low b Prior years’ audits indicate a pattern of overstatement of account balances c Recipients are likely to sign other types of positive confirmations without careful investigation d Accounts receivable are immaterial to the entity’s financial statements (b) Answer (b) is correct because analytical procedures involve evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial information—here using the prior year sales trend to develop an expectation of current year sales Answer (a) is incorrect because examining a sample of paid vendors’ invoices for proper approval is a test of a control and not an analytical procedure Answer (c) is incorrect because projecting a deviation rate is a part of a sampling procedure and not an analytical procedure Answer (d) is incorrect because evaluating management’s plans for dealing with the adverse effects of recurring operating losses is generally a procedure performed when an auditor believes substantial doubt about a company’s going concern status may exist (d) Answer (d) is correct because the significant unrecorded transactions might have impacted the auditor’s report when issued had that information been known—the audit report may be misleading Answer (a) is incorrect because a decision to present comparative financial statements in subsequent years is unlikely to require any particular inquiries relating to the previously issued financial statements at the point the decision is made Answer (b) is incorrect because the litigation created an uncertainty at the time the financial statements were issued that appears to have been properly disclosed; the resolution of such an uncertainty ordinarily does not require further inquiries Answer (c) is incorrect because the subsequent sale of a subsidiary does not relate directly to the audit report on the previously issued financial statements (c) Answer (c) is correct because an auditor may reduce the risk relating to recipients signing confirmation requests without careful investigation by using positive confirmation requests that not state the amount on the confirmation request (a “blank form” of confirmation request) and asking whether the confirming party fill in the amount or other information requested Answer (a) is incorrect because a low assessed level of control risk and inherent risk is not particularly likely to result in a situation in which the blank form is used Answer (b) is incorrect because no indication of the confirmation process being ineffective in the past is provided Answer (d) is incorrect because immaterial receivables are likely to result in less auditor concern; in fact, confirmations may or may not be used when the account balance is immaterial 709 bapp04.indd 709 10/16/2014 6:34:08 PM 710 Appendix D: 2014 Released AICPA Questions for Auditing and Attestation Which of the following procedures most likely would be performed in an engagement to review financial statements of a nonissuer? a Analytical review of payroll tax expense b Testing of internal controls over cash receipts c Testing the aging of accounts payable d Confirmation of notes receivable bapp04.indd 710 (a) Answer (a) is correct because a review of a nonissuer consists primarily of the accountant performing analytical procedures on accounts such as payroll tax expense and making inquiries of company management to obtain limited assurance that there are no material modifications that should be made to the financial statements Answer (b) is incorrect because a review of a nonissuer does not include obtaining an understanding of the entity’s internal control Answer (c) is incorrect because a review does not include testing accounting records (here the aging) unless information seems incorrect, incomplete, or otherwise unsatisfactory, in which case such a procedure may or may not be performed depending upon the circumstances involved Answer (d) is incorrect because a review does not include confirmation of accounts When performing an audit, a CPA notes that bad-debt expense is unusually high relative to similar firms in the industry The CPA should recommend which of the following controls? a Use approved price lists for customer billing b Send monthly statements of account to customers with outstanding balances c Require credit checks on all new customers d Reconcile accounts receivable in the general ledger with the subsidiary ledger (c) Answer (c) is correct because effective credit checks on new customers are likely to decrease the likelihood of sales to customers whose accounts ultimately become uncollectible Answer (a) is incorrect because, while the use of approved price lists for customer billing is likely to provide assurance of consistency of product pricing, the control is likely to have only a very limited effect on the collectibility of accounts Answer (b) is incorrect because it is doubtful that customer lack of knowledge relating to the outstanding balance is the reason the accounts are not collected Answer (d) is incorrect because a reconciliation of accounts receivable in the general ledger with the subsidiary ledger is unlikely to have a significant effect on the collectibility of accounts Which of the following steps should be performed first in applying analytical procedures? a Determine whether the difference between the expectation and the recorded amount is reasonable b Investigate and evaluate significant differences from the expectation c Develop an expectation of a balance or ratio by using relationships that are expected to exist d Compare the client’s recorded balance or ratio with the expectation (c) Answer (c) is correct because auditors first develop an expectation of a balance or ratio before performing the investigation Answer (a) is incorrect because one must calculate the difference between the expectation and the recorded amounts prior to determining whether that difference is reasonable Answer (b) is incorrect because no such investigation and evaluation is possible prior to calculating the difference from the expectation Answer (d) is incorrect because the comparison of the client’s recorded balance or ratios with the expectation may not occur prior to developing such expectation Which of the following actions is an analytical procedure that an auditor most likely would use while auditing a company’s notes payable? a Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded b Performing calculations to determine if the company is in compliance with debt covenants c Sending a confirmation to the lender requesting verification of the loan’s outstanding balance d Reviewing the details of the company’s loan and interest expense accounts to determine that all payments were properly recorded (a) Answer (a) is correct because analytical procedures involve an assumption of the existence of a plausible relationship among financial and nonfinancial information and such a relationship would seem to exist between the average outstanding loan balance, the interest rate, and the resulting interest expense Answer (b) is incorrect because performing calculations to determine whether the company is in compliance with debt covenants is not likely to be considered an analytical procedure and because such a procedure is only performed when such debt covenants exist Answer (c) is incorrect because sending a confirmation request is a test of details of the balance of the loan rather than an analytical procedure Answer (d) is incorrect because reviewing details of loan and interest expense payments is a test of details of transactions relating to the loan rather than an analytical procedure 10/16/2014 6:34:08 PM Appendix D: 2014 Released AICPA Questions for Auditing and Attestation bapp04.indd 711 711 Which of the following items is an example of an inherent limitation in an internal control system? a Segregation of employee duties b Human error in decision making c Ineffective board of directors d Understaffed internal audit functions (b) Answer (b) is correct because human judgment is an inherent limitation since that judgment can be faulty and result in a breakdown in internal control because of human error; additional inherent limitations of internal control include (1) collusion of two or more people and (2) inappropriate management override of internal control Answer (a) is incorrect because the segregation of employee duties is used to improve internal control and is not, by itself, a limitation Answer (c) is incorrect because an ineffective board of directors is not inherent Answer (d) is incorrect because understaffed internal audit functions are not inherent Which of the following circumstances would generally require an accountant to decline to perform a compilation of financial statements under Statements on Standards for Accounting and Review Services? a A substantial portion of generally accepted accounting principles disclosures was omitted b There was a lack of independence between the accountant and client c The accountant had no prior experience with similar organizations within the industry d The accountant was not able to come to an understanding with representatives of the organization for services to be performed (d) Answer (d) is correct because for a compilation to be performed an accountant should agree with management (or those charged with governance, if appropriate) on the terms of the engagement, including services to be performed Answer (a) is incorrect because a compilation form of association allows companies to omit disclosures when such omission is not meant to make the financial statement misleading and such omission is properly disclosed Answer (b) is incorrect because independence is not required for compilations Answer (c) is incorrect because such experience is not required 10 Which of the following types of risks most likely would increase if accounts receivable are confirmed three months before year end? a Inherent b Control c Detection d Business 10 (c) Answer (c) is correct because detection risk, the risk that audit procedures will not detect a material misstatement, increases due to the three months between confirmation and year-end Answer (a) is incorrect because inherent risk is the susceptibility to misstatement before consideration of any related controls Answer (b) is incorrect because control risk is the risk of misstatement due to ineffective internal control Answer (d) is incorrect because the term business risk, as it relates to the client, is the likelihood that significant conditions, events, circumstances, etc could adversely affect the entity’s ability to achieve its objectives 11 Which of the following statements is correct regarding an independent auditor’s reliance on a client’s internal audit staff? a An independent auditor should not reduce the amount of audit testing based on the work of internal auditors b An independent auditor should assess the organizational status of the director of internal audit c An internal auditor should provide direct assistance to the independent auditor during preparation of audit workpapers d An independent auditor should use internal audit workpapers when available 11 (b) Answer (b) is correct because an auditor assesses the organizational status of the director of internal audit as a method of addressing the function’s likely independence from management Answer (a) is incorrect because an independent auditor may, under appropriate circumstances, reduce audit testing based on the work of internal auditors Answer (c) is incorrect because while an internal auditor may provide direct assistance to the independent auditor in appropriate circumstances, it is not required Answer (d) is incorrect because an independent auditor may or may not use internal audit workpapers 12 Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk? a The audit committee b An appropriate level of management c The client’s legal counsel d The client’s internal auditor 12 (b) Answer (b) is correct because an auditor will first notify an appropriate level of management (at least one level above the fraud) when an immaterial fraud is discovered Answer (a) is incorrect because such immaterial fraud performed by an accounting clerk may or may not be disclosed to the audit committee based on whether the auditor believes it is relevant to the committee’s responsibilities Answer (c) is incorrect because contacting legal counsel for such a matter is unlikely to be necessary Answer (d) is incorrect because while the auditor may consider informing the internal auditor based on the terms of the engagement, the standards indicate that it is management that should be informed 10/16/2014 6:34:08 PM 712 bapp04.indd 712 Appendix D: 2014 Released AICPA Questions for Auditing and Attestation 13 Which of the following circumstances most likely would require an auditor to apply an omitted procedure after the audit report issuance date? a The auditor’s report is unsupported as a result of the omitted procedure b Generally accepted accounting principles are violated c The client has requested that the procedure be performed d The engagement letter requires the procedure to be performed 13 (a) Answer (a) is correct because when an auditor discovers (1) that the audit report is unsupported due to an omitted procedure and (2) believes it likely that users may be relying upon the statements, the auditor should attempt to perform that procedure Answer (b) is incorrect because there may or may not be a violation of GAAP—the auditor in general may not know whether there is such a violation since an appropriate audit procedure was not performed Answer (c) is incorrect because a client request will not ordinarily determine whether such a procedure is performed Answer (d) is incorrect because the professional standards require application of such a procedure in appropriate circumstances regardless of information in the engagement letter 14 Analytical procedures are required for which of the following? a Audit planning b Tests of balances c Client retention decision d Internal control evaluation 14 (a) Answer (a) is correct because analytical procedures are required (1) as a risk assessment procedure relating to audit planning and (2) near the end of the audit Answer (b) is incorrect because while analytical procedures may be performed as substantive procedures, they are not required Answer (c) is incorrect because analytical procedures are not required relating to a client retention decision Answer (d) is incorrect because analytical procedures are not required as a part of the internal control evaluation and ordinarily are not used as such 15 Which of the following is correct regarding the communication between successor and predecessor auditors? a The successor and predecessor auditors should communicate with each other in writing regarding potential problems b The successor auditor should contact the predecessor auditor prior to proposing an audit engagement c The client should be present during the communications between the predecessor auditor and the successor auditor d The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor 15 (d) Answer (d) is correct because a successor auditor is required to attempt communication with the predecessor auditor after having obtained prospective client permission to contact that auditor Answer (a) is incorrect because such written communication is not required Answer (b) is incorrect because such communication may occur either prior to or subsequent to making a proposal on an audit engagement Answer (c) is incorrect because the client is not ordinarily present during communications between the predecessor and successor auditors 16 Which of the following would an auditor most likely consider in evaluating the control environment of an audit client? a Overall employee satisfaction with assigned duties b The number of CPAs in the accounting department c Management reviews of monthly financial statements d Management’s operating style 16 (d) Answer (d) is correct because management’s operating style is a part of the control environment and it is considered by auditors Answer (a) is incorrect because while an auditor may consider overall employee satisfaction, its consideration is less likely than the correct reply Answer (b) is incorrect because while an auditor may consider the number of CPAs in the accounting department, the number itself is of limited importance Answer (c) is incorrect because while management review of monthly financial statements is a good control which may be considered by auditors, it is less likely to be considered a part of the control environment than the correct reply 17 Which of the following statements is true with regard to review services performed under Statements on Standards for Accounting and Review Services? a To perform a review, an accountant need not be independent but should disclose that fact b In a review, an accountant will express limited assurance as to generally accepted accounting principles on the financial statements c An accountant must have extensive knowledge of the client’s business, industry, and the economy to perform a review d In a review, an accountant gives no assurance as to generally accepted accounting principles on the financial statements 17 (b) Answer (b) is correct because a review does result in limited (negative) assurance as to generally accepted accounting principles (or other financial reporting framework being followed by the client) Answer (a) is incorrect because to perform a review the accountant must be independent Answer (c) is incorrect because while an accountant should have an understanding of the client’s business and accounting methods and the economy, the extensive knowledge suggested is not required Answer (d) is incorrect because a review does obtain limited assurance 10/16/2014 6:34:08 PM Appendix D: 2014 Released AICPA Questions for Auditing and Attestation bapp04.indd 713 713 18 Each of the following broker-dealer relationships impairs auditor independence with respect to a broker-dealer issuer audit client, except: a The auditor has a brokerage account that holds both U.S securities and assets other than cash or securities b The auditor has a brokerage account that holds U.S securities in excess of Securities Investor Protection Corporation coverage limits c The auditor has a brokerage account that includes assets other than cash or securities d The auditor has a cash balance in a brokerage account that is fully covered by the Securities Investor Protection Corporation 18 (d) Answer (d) is correct because an exception to the profession’s independence requirements exists for a cash balance in a brokerage account that is fully insured by an organization such as the Securities Investor Protection Corporation Answer (a) is incorrect because, when material, such an account violates the profession’s independence standards Answer (b) is incorrect because, when material, such an account violates the profession’s independence standards Answer (c) is incorrect because, when material such an account violates the profession’s independence standards 19 When a former partner of a registered public accounting firm who left the firm two years ago accepts a financial reporting oversight role at an issuer audit client, the independence of the registered public accounting firm is considered impaired unless which of the following is true? a The former partner discloses the relationship to the issuer audit client’s board of directors b The former partner was employed by the registered public accounting firm for a period of years or less c The former partner has no remaining capital balance in the registered public accounting firm d The former partner exerts only limited influence over the registered public accounting firm’s operations and financial policies 19 (c) Answer (c) is correct because a situation in which the former partner has no remaining capital balance in the public accounting firm (and no remaining responsibilities to that firm) will not impair firm independence Answer (a) is incorrect because disclosure of the relationship is not sufficient; the audit firm’s independence is impaired Answer (b) is incorrect because no such employment limitation exists Answer (d) is incorrect because exerting any influence is problematical and impairs the CPA firm’s independence 20 Each of the following is a required attribute of an issuer’s audit committee financial expert, except a The ability to assess the application of accounting principles in connection with estimates, accruals, and reserves b Significant audit experience as a certified public accountant c An understanding of internal controls related to financial reporting d An understanding of generally accepted accounting principles 20 (d) Answer (d) is correct because a financial expert need not have significant audit experience as a CPA Answer (a) is incorrect because a financial expert must have the ability to assess the application of accounting principles Answer B is incorrect because a financial expert must have an understanding of internal control Answer (c) is incorrect because a financial expert must have an understanding of GAAP 21 West, CPA, is engaged to compile the financial statements of Lake Co., a nonissuer Lake’s financial statements are prepared in conformity with the cash basis of accounting If Lake’s financial statements not disclose the basis of accounting used, which of the following statements best describes West’s reporting responsibility concerning this matter? a West should disclose the basis of accounting used in the notes to Lake’s financial statements b West should disclose the basis of accounting used in West’s compilation report c West should quantify the effects of the differences between GAAP and the cash basis and disclose them in West’s compilation report d West should quantify the effects of the differences between GAAP and the cash basis and disclose them in the notes to Lake’s financial statements 21 (b) Answer (b) is correct because when the client’s financial statements not disclose the basis of accounting, the compilation report should Answer (a) is incorrect because the financial statements are those of management, not the accountant, and management is responsible for financial statement disclosures Answer (c) is incorrect because no such quantification of effects is required in the compilation report Answer (d) is incorrect no such quantification of effects is required in the notes 10/16/2014 6:34:08 PM Appendix D: 2014 Released AICPA Questions for Auditing and Attestation 714 22 According to the AICPA Code of Professional Conduct, which of the following disclosures of client information by a member CPA to an outside party would normally require client consent? a Disclosure of confidential client information to a thirdparty service provider when the member does not enter into a confidentiality agreement with the provider b Disclosure to a potential client of the name of a client for whom the member or member’s firm performed professional services c Disclosure of confidential client information to the member’s liability insurance carrier in response to a potential claim d Disclosure of confidential client information to a court or in documents in connection with a subpoena 22 (a) Answer (a) is correct because the AICPA Code of Professional Conduct’s confidential client information rule requires a confidentiality agreement when disclosing confidential client information to a third party service provider Answer (b) is incorrect because the Code of Professional Conduct allows the revealing of client names, whether publicly or privately owned, without the client’s specific consent unless the disclosure constitutes the release of confidential information (e.g., a CPA who is involved only in bankruptcy matters who discloses such information may indicate the client is experiencing financial difficulties, which could be confidential client information) Answer (c) is incorrect because interpretation of the Code of Professional Conduct allows a CPA to release such information to the member’s liability insurance carrier in response to a potential claim Answer (d) is incorrect because the confidential client information rule allows disclosure of confidential client information to a court or in response to a subpoena 23 In accordance with Office of Management and Budget audit requirements for audits of non-Federal entities expending Federal awards, which of the following statements is accurate regarding Federal awards expended? a Donated surplus property cannot be valued at the assessed value provided by the federal agency b Food stamps cannot be valued at fair market value at the time of receipt c Government loans are classified as noncash assistance programs d Free rents received as part of an award to carry out a federal program are treated as federal funds expended 23 (d) Answer (d) is correct because under OMB Circular No A-133, such free rents are treated as federal funds expended Answer (a) is incorrect because donated surplus may be valued at the assessed value Answer (b) is incorrect because food stamps can be valued at fair market value Answer (c) is incorrect because government loans ordinarily involve cash and are not classified as noncash assistance programs 24 In the integrated audit of an issuer, which of the following would not be considered an entity-level control? a Management’s established controls to monitor results of operations b The executive committee’s process for assessing business risk c The board of directors’ controls to monitor the activities of the audit committee d The outside auditor’s assessment process of internal auditor competence and objectivity 24 (d) Answer (d) is correct because the outside auditor’s assessment of internal auditor competence and objectivity relates to the “outside auditor’s” audit and is not considered one of the client’s entity-level controls Answer (a) is incorrect because management’s monitoring controls are considered entity-level controls by PCAOB Statement Answer (b) is incorrect because the executive committee’s process of assessing business risk is considered an entitylevel control by PCAOB Statement Answer (c) is incorrect because board of director controls to monitor the audit committee are considered entity level controls by PCAOB Statement 25 For which of the following judgments may an independent auditor share responsibility with an entity’s internal auditor who is assessed to be both competent and objective? 25 (d) Answer (d) is correct because the auditor is required to make all significant judgments in the audit, including evaluating significant accounting estimates and determining the materiality of misstatements; other significant judgments include assessing the risks of material misstatement, evaluating the sufficiency of tests performed, evaluating the going concern assumption, and evaluating the adequacy of disclosures Answer (a) is incorrect because neither the evaluation of significant accounting estimates nor the materiality of misstatements may be shared Answer (b) is incorrect because the evaluation of significant accounting estimates may not be shared Answer (c) is incorrect because judgments on the materiality of misstatements may not be shared Evaluation of significant accounting estimates bapp04.indd 714 Materiality of misstatements a Yes Yes b Yes No c No Yes d No No 10/16/2014 6:34:08 PM Appendix D: 2014 Released AICPA Questions for Auditing and Attestation bapp04.indd 715 715 26 Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? a Reconcile receiving reports with related cash payments made just prior to the year end b Review the responses of accounts receivable confirmations for indications of disputes with customers c Compare cash payments made after the balance sheet date with the accounts payable trial balance d Examine a sample of creditor balances to supporting invoices, receiving reports, and purchase orders 26 (c) Answer (c) is correct because comparing payments made after the balance sheet date with the accounts payable trial balance may reveal year-end payables that were not properly recorded as of year-end Answer (a) is incorrect purchases for which cash payments have been made prior to year-end are not unrecorded payables as of year-end Answer (b) is incorrect because it addresses receivables and not payables Answer (d) is incorrect because beginning with recorded balances is less likely to reveal unrecorded payables than is beginning with payments made after year-end 27 Which of the following procedures would an accountant most likely perform when reviewing the financial statements of a nonissuer? a Ask management about the entity’s procedures for recording transactions b Obtain an understanding of the entity’s internal control components c Send a letter of inquiry to the entity’s attorney regarding pending litigation d Assess the risk of material misstatement arising from fraudulent financial reporting 27 (a) Answer (a) is correct because a review of a nonissuer consists primarily of the accountant performing analytical procedures and making inquiries of company management to obtain limited assurance that there are no material modifications that should be made to the financial statements Answer (b) is incorrect because a review of a nonissuer does not include obtaining an understanding of internal control Answer (c) is incorrect because a review of a nonissuer does not ordinarily include inquiry of the entity’s attorney Answer (d) is incorrect because a review of a nonpublic entity does not include an assessment of the risk of material misstatement arising from fraudulent financial reporting 28 A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements when engaged to a Provide assurance on investment performance statistics prepared by an investment company on established criteria b Issue a letter for an underwriter, also known as a comfort letter, to a broker or dealer of securities c Compile financial statements in conformity with a comprehensive basis of accounting other than GAAP d Communicate with an audit committee regarding management’s consultations with another CPA 28 (a) Answer (a) is correct because the Statements on Standards for Attestation Engagements apply to such investment performance statistics Answer (b) is incorrect because the Statements on Auditing Standards apply to letters for underwriters Answer (c) is incorrect because the Statement on Standards for Accounting and Review Services apply to compilations (and reviews) Answer (d) is incorrect because the Statements on Auditing Standards provide guidance for communicating with audit committees regarding management’s consultations with another CPA 29 Which of the following is a component of internal control? a Financial reporting b Operating effectiveness c Risk assessment d Organizational structure 29 (c) Answer (c) is correct because risk assessment is a component of internal control—the other four components are (1) the control environment, (2) control activities, (3) the information system relevant to financial reporting and (4) the monitoring of controls Answer (a) is incorrect because while internal control over financial reporting is important to a financial statement audit, it is not a component of internal control Answer (b) is incorrect because operating effectiveness relates to the results of an auditor’s tests of controls and does not represent a component of internal control Answer (d) is incorrect because while organizational structure relates most directly to the control environment, it is not a component of internal control 30 Which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit? a Relationships involving only balance sheet accounts tend to be more predictable than relationships involving income statement accounts b Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts c Relationships involving transactions subject to management discretion tend to be more predictable than automated transactions d Relationships in a dynamic environment tend to be more predictable than relationships in a stable environment 30 (b) Answer (b) is correct because income statement account relationships tend to be more predictable than relationships involving only balance sheet accounts because income statement accounts represent transactions over a period of time, whereas balance sheet accounts represent amounts as of a point in time Answer (a) is incorrect because relationships involving balance sheet accounts not tend to be more predictable than relationships involving income statement accounts Answer (c) is incorrect because relationships involving management discretion may be subject to very significant changes over time (for example, management may elect to incur maintenance expense rather than replace plant and equipment, or may delay advertising expenses) Answer (d) is incorrect because, almost by definition, a stable environment will have more predictable relationships 10/16/2014 6:34:08 PM 716 bapp04.indd 716 Appendix D: 2014 Released AICPA Questions for Auditing and Attestation 31 According to the PCAOB, which of the following tax services may be provided jointly with the audit of an issuer’s financial statements without impairing independence? a Planning and issuing an opinion in favor of the tax treatment of an aggressive tax position b Reviewing a proposed transaction and informing the client of the tax consequences c Providing consultations under a contingency fee arrangement d Preparing tax returns for an individual in a financial oversight reporting role during the audit period 31 (b) Answer (b) is correct because the PCAOB allows the provision of a review of a proposed transactions and consideration of its tax consequences for an audit client Answer (a) is incorrect because an opinion in favor of a questionable or aggressive tax position is not allowed Answer (c) is incorrect because consultations for a contingent fee from an audit client are not allowed Answer (d) is incorrect because preparing tax returns for individuals in financial oversight reporting roles is not allowed 32 A CPA firm has decided to rely on the audit work performed by another audit firm Which of the following procedures should the CPA firm perform when taking responsibility for the other firm’s audit work? a Review the other firm’s audit workpapers and reperform a subset of audit testing to validate the firm’s conclusions b Reference the reliance on the other firm’s work in a footnote disclosure to the financial statements c Reference the reliance on the other firm’s work in the first paragraph of the opinion in the audit report d Obtain and attach a copy of the other firm’s representation letter and audit report to the opinion that the CPA firm issues 32 (a) Answer (a) is correct because a CPA firm relying on the work performed by another audit firm (e.g., a component auditor under the Statements on Auditing Standards) ordinarily will be required to review the other firm’s audit workpapers and reperform certain tests, depending upon the significance of the component audited by the other audit firm Answer (b) is incorrect because no such reference to the other firm’s work is included in a footnote disclosure to the financial statements Answer (c) is incorrect because reference to the other firm’s work is only appropriate when the CPA has decided not to rely on the audit work of the other audit firm Answer (d) is incorrect because such information is not attached to the opinion the CPA firm issues—also, the CPA firm may or may not obtain the firm’s representation letter 33 Which of the following characteristics of prospective financial statements would require the practitioner to include in a report on the prospective financial statements a paragraph that restricts the use and distribution of the report? a They are considered a financial projection b They are considered a financial forecast c They contain a range of forecasted results d They are prepared by a practitioner who lacks independence 33 (a) Answer (a) is correct because a financial projection (prospective financial statements with one or more hypothetical assumptions relating to the future) results in a report that is restricted as to use and distribution Answer (b) is incorrect because a financial forecast report may be a general distribution report Answer (c) is incorrect because a prospective financial statements report that is not a projection may be a general distribution report Answer (d) is incorrect because a forecast compilation report may be issued by a practitioner who lacks independence 34 The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk Which of the following is an example of nonsampling risk? a The auditor selecting inappropriate auditing procedures b The internal control being more effective than the auditor believes c The auditor concluding the account balance is not materially misstated, but is, in fact, materially misstated d The internal control not being as effective as the auditor believes 34 (a) Answer (a) is correct because nonsampling risk includes the aspects of audit risk not due to the mathematics supporting the sampling process itself; nonsampling risk includes “human” errors such as selecting an inappropriate auditing procedure rather than “statistical” errors Answer (b) is incorrect because the risk of internal control being more effective than the auditor believes is a type of sampling risk associated with attributes sampling Answer (c) is incorrect because the auditor concluding that the account balance is not materially misstated when it is materially misstated is an example of sampling risk associated with variables sampling Answer (d) is incorrect because internal control not being as effective as the auditor believes is an example of sampling risk associated with attributes sampling 10/16/2014 6:34:08 PM Appendix D: 2014 Released AICPA Questions for Auditing and Attestation bapp04.indd 717 717 35 How would an auditor of a nonissuer most appropriately respond to a heightened assessed risk of material misstatement? a By obtaining a management representation letter b By performing analytical procedures, but not substantive procedures, at period end c By assigning more experienced staff or those with specialized skills to high-risk areas d By performing tests of controls at interim-and periodend dates 35 (c) Answer (c) is correct because a heightened assessed risk of material misstatement may result in the assignment of more experienced staff and/or those with specialized skills to high-risk areas; examples of other responses include (1) providing more supervision and emphasizing the need for professional skepticism, (2) incorporating additional elements of unpredictability into audit procedures and (3) increasing the overall scope of audit procedures Answer (a) is incorrect because auditors obtain a management representation letter regardless of the risk of material misstatement Answer (b) is incorrect because substantive procedures are likely to be performed at period-end Answer (d) is incorrect because tests of controls are more likely to be performed using transactions from throughout the period at period-end 36 Generally accepted government auditing standards use which of the following terms to describe a professional requirement to comply with a standard or provide a special explanation for not doing so? a Explanatory requirement b Conditional requirement c Unconditional requirement d Presumptively mandatory requirement 36 (d) Answer (d) is correct because the GAO “yellow book,” which presents generally accepted government auditing standards, requires that auditors document justification of any deviation from presumptively mandatory procedures Answer (a) is incorrect because the term explanatory requirement is not used in this situation Answer (b) is incorrect because the term conditional requirement does not relate to this situation Answer (c) is incorrect because an unconditional requirement must be performed in all circumstances in which it is relevant 37 Which of the following statements is least likely to be included in a practitioner’s report on agreed-upon procedures? a The use of the report is subject to specified restrictions b The report has provided limited assurance c The subject matter is the responsibility of the responsible party d The procedures performed were agreed to by the specified parties 37 (b) Answer (b) is correct because a report issued based on the application of agreed-upon procedures includes a summary of procedures performed and findings, but not limited assurance; limited assurance is provided based on review engagements Answer (a) is incorrect because use of the report is ordinarily limited to the company itself and specified users Answer (c) is incorrect because the subject matter is the responsibility of the responsible party Answer (d) is incorrect because the procedures performed are agreed upon by the specified parties 38 According to the AICPA Code of Professional Conduct, under which of the following circumstances may a CPA receive a contingent fee for services? a Examining a client’s prospective financial information b Preparing a client’s federal income tax return c Representing a client in an IRS examination of the client’s federal income tax return d Reviewing a client’s financial statements 38 (c) Answer (c) is correct because the Code of Professional Conduct (on contingent fees) allows representing of a client in an IRS examination of the client’s federal income tax return for a contingent fee Answer (a) is incorrect because attest engagements (here an examination) may not be performed for a contingent fee Answer (b) is incorrect because a client’s federal income tax return may not be prepared for a contingent fee Answer (d) is incorrect because attest engagements (here a financial statement review) may not be performed for a contingent fee 39 In an engagement to examine management’s discussion and analysis (MD&A), which of the following best defines control risk? a The risk that an assertion within the MD&A will lead to a material misstatement b The risk of detecting misstatements that are material to the MD&A presentation taken as a whole c The risk that the practitioner will not uncover a material misstatement within an MD&A assertion d The risk that material misstatements in the MD&A presentation will not be prevented in a timely manner 39 (d) Answer (d) is correct because the Statements on Standards for Attestation Engagements on MD&A as well as for other attestation engagements define control risk as relating to the risk that material misstatements will not be prevented or detected in a timely manner Answer (a) is incorrect because inherent risk is the susceptibility of an assertion to misstatement, assuming there are no related controls Answer (b) is incorrect because the risk of detecting misstatements that are material is a term not used in the MD&A standard Answer (c) is incorrect because detection risk is the risk that the practitioner will not detect material misstatement that exists in an assertion within MD&A 10/16/2014 6:34:08 PM 718 bapp04.indd 718 Appendix D: 2014 Released AICPA Questions for Auditing and Attestation 40 Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following? a Representations from the company’s external auditors that the company has effective internal control over operations b Management representations that the company’s external auditors have examined its internal control over compliance with laws and regulations c Reasonable assurances that fraud will be identified before the issuance of the company’s annual report d Management’s assessment of the effectiveness of internal control over financial reporting 40 (d) Answer (d) is correct because Section 404 of the Sarbanes-Oxley Act of 2002 requires such a management assessment of the effectiveness of internal control over financial reporting Answer (a) is incorrect because external auditors report on internal control over financial reporting, not over operations Answer (b) is incorrect because external auditors report on internal control over financial reporting, not over laws and regulations Answer (c) is incorrect because such a statement on fraud is not included before issuance of the company’s annual report 41 To ensure that the audit report for an issuer is prepared in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the report must a Be prepared within 60 days of the end of the issuer’s fiscal year end unless extenuating circumstances, as outlined in the act, are publicly disclosed b Attest to and report on the internal control assessment made by the management of the issuer c Be prepared within 60 days of the issuer’s fiscal year end, be certified by the Public Company Accounting Oversight Board, and be publicly disclosed d Attest to, and report on, the efficiency and effectiveness of the issuer’s system of internal control 41 (b) Answer (b) is correct because Section 404 of the Sarbanes-Oxley Act requires that the audit report attest to, and report on, the assessment made by management Answer (a) is incorrect because Section 404 does not include such a detailed requirement or discuss extenuating circumstances Answer (c) is incorrect because Section 404 does not include this requirement Answer (d) is incorrect because the report does not address efficiency of the issuer’s system of internal control 42 In an integrated audit of a nonissuer, an auditor should issue an adverse opinion on the effectiveness of an entity’s internal control in which of the following situations? a The financial statements are misstated b A material weakness exists c The entity may not continue as a going concern d The auditor was asked by the client to provide the report to another practitioner 42 (b) Answer (b) is correct because PCAOB Auditing Standard indicates that existence of a material weakness results in an adverse opinion on internal control Answer (a) is incorrect because while financial statements that are misstated may lead in an adverse opinion on internal control, it is the existence of a material weakness that leads to the report Answer (c) is incorrect because a situation in which an entity may not continue as a going concern does not lead to an adverse opinion on internal control Answer (d) is incorrect because providing a report to another practitioner does not result in an adverse opinion on internal control 43 In order to obtain an initial understanding of internal control sufficient to assess the risk of material misstatement of the financial statements, an auditor would most likely perform which of the following procedures? a Tests of key controls to determine whether they are effective b Expanded substantive testing to identify relevant controls c Analytical procedures to determine the need for specific controls d Risk-assessment procedures to evaluate the design of relevant controls 43 (d) Answer (d) is correct because risk assessment procedures are performed to assess the risk of material misstatement throughout the financial statements Answer (a) is incorrect because tests of controls are performed subsequent to obtaining an understanding of internal control Answer (b) is incorrect because expansion of substantive procedures occurs after the initial understanding, and generally addresses misstatements in the financial statements more directly than identifying relevant controls Answer (c) is incorrect because analytical procedures are not ordinarily performed to determine the need for specific controls 44 Which of the following procedures regarding accounts payable would an accountant most likely perform during a nonissuer’s review engagement? a Obtaining an understanding of the entity’s internal control over accounts payable b Assessing fraud risk within the accounts payable function c Comparing ratios developed from recorded amounts to expectations developed by the accountant d Obtaining confirmations of the year-end accounts payable amounts from the client’s five largest vendors 44 (c) Answer (c) is correct because a review consists primarily of the accountant performing analytical procedures and making inquiries of company management to obtain limited assurance that there are no material modifications that should be made to the financial statements Answer (a) is incorrect because a review of a nonissuer does not include obtaining an understanding of internal control Answer (b) is incorrect because a review does not include assessing fraud risk Answer (d) is incorrect because a review does not include tests of details of ending balances such as obtaining confirmation replies 10/16/2014 6:34:08 PM Appendix D: 2014 Released AICPA Questions for Auditing and Attestation bapp04.indd 719 719 45 Each of the following statements is correct regarding the likely sources of potential misstatements in an integrated audit of a nonissuer, except: a An evaluation of the entity’s information technology risk and controls should be performed separately from the top-down approach b The controls that management has implemented to address potential sources of misstatements should be identified c An understanding of how transactions are initiated, authorized, processed, and recorded should be achieved d Walkthroughs are frequently the most effective way of understanding sources of potential misstatements 45 (a) Answer (a) is correct because an evaluation of IT risk should be performed as a part of the top-down approach, not separately Answer (b) is incorrect because an integrated audit will address such management controls Answer (c) is incorrect because an understanding of transaction initiation, authorization, processing and recording should be achieved Answer (d) is incorrect because walkthroughs are frequently the most effective way of understanding the processing system and sources of potential misstatements 46 During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on improper influence on the conduct of audits? a The CFO discovers and corrects most of the errors in the spreadsheet, which was prepared by a staff accountant One immaterial error remains of which the CFO is aware, and this error remains undetected by the audit team, but the financial statements end up being fairly presented b The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO This intentional conduct of the CFO does not succeed in affecting the audit c The CFO had the spreadsheet prepared by a vendor of the company; the vendor intentionally misstates information in the spreadsheet, and the CFO does not discover the misstatements The errors remain undetected by the audit team, and the financial statements are materially misleading d The CFO was unaware of the errors in the spreadsheet, which was prepared by a staff accountant and reviewed by the CFO The errors remain undetected by the audit team, and the financial statements are materially misleading 46 (b) Answer (b) is correct because Section 303 of the Sarbanes-Oxley Act of 2002 makes it unlawful for an officer or director or any person acting under the direction thereof, to fraudulently mislead an independent public accountant for the purpose of making financial statements materially misleading Answer (a) is incorrect because the financial statements are not materially misleading Answer (c) is incorrect because the CFO did not know of the vendor’s misstatements Answer (d) is incorrect because the CFO is unaware of the errors 47 A nonissuer has asked an accountant to compile its financial statements that omit substantially all disclosures required by generally accepted accounting principles (GAAP) The accountant may comply with the entity’s request provided that the a Financial statements are compiled in conformity with a comprehensive basis of accounting other than GAAP b Financial statements will not be used to obtain credit from a third-party financial institution c Omission is not employed in order to mislead the users of the financial statements and is properly disclosed in the accountant’s report d Omission is acknowledged in the notes to the financial statements and is consistent with the prior-year’s financial statements 47 (c) Answer (c) is correct because disclosures may be omitted when there is no attempt to mislead users of the financial statements and the omission is properly disclosed in the financial statements and accountant’s report Answer (a) is incorrect because the financial statements may comply with the request regardless of whether a comprehensive basis of accounting other than GAAP is being followed Answer (b) is incorrect because there is no such limitation on the use of the financial statements Answer (d) is incorrect because the prior-year’s financial statements need not have omitted the disclosures 48 Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable? a Including a list of items or invoices that constitute the account balance b Restricting the selection of accounts to be confirmed to those customers with relatively large balances c Requesting customers to respond to the confirmation requests directly to the auditor by fax or email d Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner 48 (a) Answer (a) is correct because providing a list of items or invoices may make it easier for a respondent to reply; while any of the other replies may or may not increase the response rate, this one is most likely to because it may make obtaining the information much easier for individuals with information systems which are organized about invoices Answer (b) is incorrect because only confirming large accounts may or may not result in improvement in the response rate Answer (c) is incorrect because requesting fax or email replies may or may not increase the response rate; they may also result in increased risk to the auditor Answer (d) is incorrect because such notification is likely to have little effect 10/16/2014 6:34:09 PM Appendix D: 2014 Released AICPA Questions for Auditing and Attestation 720 bapp04.indd 720 49 Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate? a The chief financial officer and the chief executive officer are unwilling to sign the management representation letter b The auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme c Management refuses to produce documentation verifying the ownership of its equipment and production facilities d The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows 49 (d) Answer (d) is correct because a client who presents financial statements that purport to present financial position and result of operations is required to also include a statement of cash flows—otherwise, a departure from GAAP exists which will result in a qualified or adverse opinion, but not a disclaimer Answer (a) is incorrect because refusal to sign the management representation letter is a scope limitation that will result in either a qualified opinion or a disclaimer of opinion Answer (b) is incorrect because inability to determine the extent of amounts associated with a fraud scheme represents a scope limitation that will result in either a qualified opinion or a disclaimer of opinion Answer (c) is incorrect because such refusal represents a scope limitation that will result in either a qualified opinion or a disclaimer of opinion 50 A CPA in public practice is required to comply with the provisions of the Statements on Standards for Accounting and Review Services when 50 (d) Answer (d) is correct because the professional consulting and tax standards, respectively, address advising on selection of computer software, and advocating a client tax position before the IRS Answer (a) is incorrect because neither the software or tax engagements relate to the Statements on Standards for Accounting and Review Services Answer (b) is incorrect because the software engagement does not relate to Statements on Standards for Accounting and Review Services Answer (c) is incorrect because the tax engagement does not relate to Statements on Standards for Accounting and Review Services Advising a client regarding the selection of computer software Advocating a client’s position before the IRS a Yes Yes b Yes No c No Yes d No No 10/16/2014 6:34:09 PM ... of effects is required in the notes 10/16 /2014 6:34:08 PM Appendix D: 2014 Released AICPA Questions for Auditing and Attestation 714 22 According to the AICPA Code of Professional Conduct, which... indicate that it is management that should be informed 10/16 /2014 6:34:08 PM 712 bapp04.indd 712 Appendix D: 2014 Released AICPA Questions for Auditing and Attestation 13 Which of the following circumstances... is incorrect because a review does obtain limited assurance 10/16 /2014 6:34:08 PM Appendix D: 2014 Released AICPA Questions for Auditing and Attestation bapp04.indd 713 713 18 Each of the following