2013 auditing AICPA released questions

2013 AICPA Newly Released Questions – Auditing Following are multiple choice questions and simulations recently released by the AICPA These questions were released by the AICPA with letter answers only Our editorial board has provided the accompanying explanation Please note that the AICPA generally releases questions that it does NOT intend to use again These questions and content may or may not be representative of questions you may see on any upcoming exams 2013 AICPA Newly Released Questions – Auditing AICPA QUESTIONS RATED MODERATE DIFFICULTY CPA-8140 Which of the following types of audit evidence provides the least assurance of reliability? a b c d Receivable confirmations received from the client's customers Prenumbered receiving reports completed by the client's employees Prior months' bank statements obtained from the client Municipal property tax bills prepared in the client's name Solution: Choice "b" is correct Prenumbered receiving reports completed by the client's employees are considered internal evidence and are the least reliable of the items listed Choice "a" is incorrect Receivable confirmations received from client's customers, which are considered external evidence, are more reliable than internal evidence Choice "c" is incorrect Prior months' bank statements obtained from the client, which are considered external evidence, are more reliable than internal evidence Choice "d" is incorrect Municipal property tax bills prepared in the client's name, which are considered external evidence, are more reliable than internal evidence 2013 AICPA Newly Released Questions – Auditing CPA-08141 An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion The auditor need not perform this omitted procedure if: a b c d The results of alternative procedures that were performed compensate for the omission The auditor's assessed level of detection risk is low The omission is documented in a communication with the audit committee No individual investment is material to the financial statements taken as a whole Solution: Choice "a" is correct If other audit procedures compensate for an omitted procedure, the auditor does not need to perform the omitted procedure Choice "b" is incorrect If an auditor's assessed level of detection risk is low, this would provide a further reason to perform the omitted procedure or an alternative procedure to confirm the investment balance Choice "c" is incorrect An auditor would still need to apply the omitted procedure (or alternative procedure) even if the omission is documented in a communication with the audit committee Choice "d" is incorrect An auditor would need to perform the omitted procedure or an alternative procedure, as the aggregate amount of investments may be material to the financial statements taken as a whole 2013 AICPA Newly Released Questions – Auditing CPA-08142 Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to accumulated depreciation accounts in the current year? a b c d Prior years' depreciation expenses were erroneously understated Current year's depreciation expense was erroneously understated The estimated remaining useful lives of plant assets were revised upward Plant assets were retired during the current year Solution: Choice "d" is correct The explanation that plant assets were retired during the year would most likely satisfy an auditor who questions management about significant debits to accumulated depreciation accounts made during the year The journal entry to retire an asset includes a debit to accumulated depreciation and a credit to the asset account Choice "a" is incorrect If prior years' depreciation expense was erroneously understated, the auditor would expect a debit to retained earnings and a credit to accumulated depreciation for the error correction Choice "b" is incorrect Typically, accumulated depreciation is debited when there is total and permanent impairment, and when an asset is sold, retired, or otherwise disposed of If the current year's depreciation expense was erroneously understated, this would not typically result in debits to accumulated depreciation Instead, the auditor would expect smaller amounts credited to accumulated depreciation Choice "c" is incorrect A change in useful life is handled prospectively An increase in the remaining useful lives of assets would result in smaller amounts of depreciation expense being credited to accumulated depreciation 2013 AICPA Newly Released Questions – Auditing CPA-08143 An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies Under these circumstances, the auditor would be most concerned about the: a b c d Control environment factors that affect the organizational structure Correlation of detection risk and inherent risk Effectiveness of the entity's internal control activities Possible effects on the entity's financial statements Solution: Choice "d" is correct If an auditor has substantial doubt about the entity's ability to continue as a going concern, the auditor would be most concerned about the possible effects on the entity's financial statements Choice "a" is incorrect The control environment factors that affect the organizational structure not directly relate to going concern Choice "b" is incorrect The auditor is concerned about the correlation between detection risk and inherent risk when deciding the nature, extent, and timing of audit procedures Choice "c" is incorrect When the auditor is concerned about an entity's ability to continue as a going concern, the auditor is concerned about the effects on the entity's financial statements and will identify conditions and events that may be indicative of substantive doubt The effectiveness of internal controls would not typically provide evidence of substantial doubt 2013 AICPA Newly Released Questions – Auditing CPA-08144 Subsequent to issuing a report on audited financial statements, a CPA discovers that the accounts receivable confirmation process omitted a number of accounts that are material, in the aggregate Which of the following actions should the CPA take immediately? a b c d Bring the matter to the attention of the board of directors or audit committee Withdraw the auditor's report from those persons currently relying on it Perform alternative procedures to verify account balances Discuss the potential financial statement adjustments with client management Solution: Choice "c" is correct If an auditor omits a procedure, the auditor should first determine whether other audit procedures compensate for the omitted audit procedures If so, no further action is necessary If other procedures not compensate for the omitted audit procedure and there are people relying on the report, the auditor should promptly apply the omitted procedure or perform alternative procedures Choice "a" is incorrect The auditor would first need to apply the procedure or alternative procedure to determine the account balance If the procedure indicated the account was materially misstated, then the auditor would bring the matter to the attention of the board of directors or audit committee Choice "b" is incorrect The auditor would first need to apply the procedure or alternative procedure to determine the account balance The auditor would withdraw the auditor's report if the client refuses to adjust the financial statements Choice "d" is incorrect The auditor would first need to apply the procedure or alternative procedure to determine the account balance If adjustments were necessary, the auditor would then talk to the client about the potential adjustments 2013 AICPA Newly Released Questions – Auditing CPA-08145 An entity engaged an accountant to review its financial statements in accordance with Statements on Standards for Accounting and Review Services The accountant determined that the entity maintained its accounts on a comprehensive basis of accounting other than generally accepted accounting principles (GAAP) In this situation, the accountant most likely would have taken which of the following actions? a Withdrawn from the engagement because the entity has not been following GAAP b Advised management to make the adjustments necessary for the account balances to conform with GAAP c Modified the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting d Requested that management justify the use of the other comprehensive basis of accounting in the management representation letter Solution: Choice "c" is correct An accountant asked to review financial statements on a comprehensive basis of accounting other than generally accepted accounting principles should modify the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting Choice "a" is incorrect An accountant is permitted to review financial statements that are prepared on a comprehensive basis of accounting other than GAAP Choice "b" is incorrect Financial statements are allowed to be prepared using a comprehensive basis of accounting other than generally accepted accounting principles In order for the financial statements to be considered in appropriate form, the financial statements would need to include: A description of the OCBOA, including a summary of significant accounting policies and description of the primary differences from GAAP Disclosures similar to those required by GAAP if the financial statements contain items similar to those included in financial statements prepared in accordance with GAAP Choice "d" is incorrect Management does not need to justify the use of the other comprehensive basis of accounting in the management representation letter 2013 AICPA Newly Released Questions – Auditing CPA-08146 Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence? a b c d The reporting status of the internal auditor within the organization The educational level and professional experiences of the internal auditor Whether policies prohibit the internal auditor from auditing areas where relatives are employed Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor Solution: Choice "b" is correct The educational level and professional experiences of the internal auditor help the external auditor assess an internal auditor's competence Choice "a" is incorrect The reporting status of the internal auditor within the organization helps the external auditor assess an internal auditor's objectivity Choice "c" is incorrect Objectivity is reflected by policies prohibiting the internal auditor from auditing areas where relatives are employed Choice "d" is incorrect Objectivity is reflected by the organization level to which the internal auditor reports, which includes who oversees the employment decisions related to the internal auditor 2013 AICPA Newly Released Questions – Auditing CPA-08147 An auditor traces the serial numbers on equipment to a nonissuer's sub-ledger Which of the following management assertions is supported by this test? a b c d Valuation and allocation Completeness Rights and obligations Presentation and disclosure Solution: Choice "b" is correct Completeness is the assertion supported by the auditor tracing the serial numbers on equipment (source) to a nonissuer's sub-ledger (book) Choice "a" is incorrect Valuation and allocation relate to whether the amounts have been recorded correctly Reviewing serial numbers on equipment would not provide information about the proper value of the equipment Choice "c" is incorrect Rights and obligations relate to whether the entity holds or controls the rights to the equipment Inspecting supporting transactions or inspection of contracts would provide evidence of rights and obligations for equipment Choice "d" is incorrect Assertions about presentation and disclosure relate to making sure components of the financial statements are properly presented, described, and disclosed The auditor would need to review the financial statements, not the serial numbers on equipment, to support the presentation and disclosure assertion 2013 AICPA Newly Released Questions – Auditing CPA-08148 Which of the following should a practitioner perform as part of an engagement for agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements? a b c d Issue a report on findings based on specified procedures performed Assess whether the procedures meet the needs of the parties Express negative assurance on findings of work performed Report the differences between agreed-upon and audit procedures Solution: Choice "a" is correct An agreed-upon procedures engagement is one in which the practitioner is engaged to issue a report of findings based on specific procedures performed Choice "b" is incorrect The sufficiency of the procedures is solely the responsibility of the specified parties, not the practitioner Choice "c" is incorrect The report includes a listing of the procedures performed and the related findings, but does not provide any assurance on these items Choice "d" is incorrect The practitioner does not report on the differences between agreed-upon and audit procedures 10 2013 AICPA Newly Released Questions – Auditing 47 CPA-08186 Which of the following circumstances would be inappropriate for the auditor to communicate to those charged with governance? a b c d A material misstatement was noted by the auditor and corrected by management No significant deficiencies in internal control exist that would affect the financial statements The auditor is requesting representations regarding the financial statements from management Management has consulted with other accountants about accounting and auditing matters during the period under audit Solution: Choice "b" is correct The auditor may not report the absence of significant deficiencies to those charged with governance or management Choice "a" is incorrect It is appropriate for the auditor to communicate to those charged with governance a material misstatement noted by the auditor and corrected by management Choice "c" is incorrect The auditor's request that management provide representations regarding the financial statements is an appropriate communication from the auditor to those charged with governance Choice "d" is incorrect Management's consultation with other accountants about accounting and auditing matters during the period under audit is an appropriate communication for the auditor to make to those charged with governance 48 2013 AICPA Newly Released Questions – Auditing 48 CPA-08187 An auditor may provide an issuer client any of the following non-audit services without impairing independence and without obtaining the preapproval of the audit committee, except: a Non-audit services with revenues in aggregate of less than 5% of the total revenues paid by the issuer to the auditor during the fiscal year in which the non-audit services are provided b Non-audit services that were promptly brought to the attention of, and approved by, the audit committee prior to the completion of the audit c Non-audit services to perform financial information systems design and implementation d Services that the issuer did not recognize as non-audit services at the time of the engagement Solution: Choice "c" is correct Financial information systems design and implementation to an attestation client would impair independence In addition, all non-audit services, except those that fall under the de minimis exception, need to be preapproved by the audit committee Note to Students: This question implies that there are three unique situations in which the auditor may provide an issuer client non-audit services without impairing independence and without obtaining the preapproval of the audit committee However, Regulation S-X provides that all three conditions must be met The incorrect answers in this question are ALL required in order to satisfy the exception 49 2013 AICPA Newly Released Questions – Auditing 49 CPA-08188 An accountant compiles the financial statements of a nonissuer and issues the standard compilation report Although not specifically stated in this report, it is implied that: a b c d The accountant has not audited or reviewed the financial statements Substantially all disclosures required by GAAP are included in the financial statements The financial statements should not be used to obtain credit The compilation is limited to presenting information that is the representation of management Solution: Choice "b" is correct A standard compilation report implies that substantially all disclosures required by GAAP are included in the financial statements Choice "a" is incorrect The standard compilation report explicitly states that the accountant has not reviewed or audited the financial statements Choice "c" is incorrect The financial statements may be used to obtain credit if a standard compilation report is issued Choice "d" is incorrect The standard compilation report addresses this by stating, "Management is responsible for the preparation and fair presentation of the financial statements " 50 2013 AICPA Newly Released Questions – Auditing 50 CPA-08189 According to the Sarbanes-Oxley Act of 2002, what is the maximum number of years an audit partner can perform audit services for an issuer before the auditor rotation is required? a b c d years years years years Solution: Choice "d" is correct The lead (or coordinating) audit partner or the reviewing audit partner must rotate off the audit every five years Note: The Sarbanes-Oxley Act of 2002 addresses the partner rotation for the lead audit partner and the concurring partner On the other hand, SEC Standards reference both the maximum number of years a lead or concurring partner may perform audit services (5 years) and the maximum number of years other audit partners may perform audit services before audit rotation is required (7 years) Choices "a", "b", and "c" are incorrect The number of years for these answer choices does not match the SOX audit requirement for audit partner rotation 51 AUDIT Released by AICPA 2013 Task 527_01 Selection list SOLUTION AND EXPLANATION: Account balance—A/R Assertion—Completeness Procedure—Trace sales invoice and shipping documents just before year-end to customer account transactions The completeness assertion is tested by going from the supporting documents to the financial statement records An auditor may test accounts receivable for completeness by tracing sales invoices (source) and shipping documents (source) just before yearend to customer account transactions (accounting records) Note: Reviewing confirmation of accounts receivable balances does not provide evidence of completeness (i.e., customers may not report understatement errors) Account balance—Inventory Assertion—Valuation and allocation Procedure—Examine invoices from suppliers An auditor would examine invoices from suppliers to make sure that inventory is valued at the correct amount #3 Account balance—Fixed assets Assertion—Rights and obligations Procedure—Vouch fixed asset acquisitions to purchase invoices An auditor would examine invoices related to fixed assets acquired during the year to confirm ownership of fixed assets Account balance—Accounts payable Assertion—Completeness Procedure—Examine invoices paid subsequent to year-end and trace to subsidiary ledger Completeness is tested by going from the supporting documents to the financial statement records When testing completeness of accounts payable, the auditor is looking for items that should have been recorded at the balance sheet date, but were not Therefore, an auditor can test accounts payable for completeness by examining invoices paid subsequent to year-end (support) to the subsidiary ledger (accounting records) Account balance—Cash Assertion—Existence Procedure—Agree cash balance per bank reconciliation to year-end bank statement Existence is tested by going from the financial statements records to the supporting documents An auditor can test existence of cash by agreeing the cash balance per bank reconciliation (per accounting records) to year-end bank statement (source document) Task 1921_01 Selection List SOLUTION AND EXPLANATION: Days' sales in accounts receivable Sales managers are recording fraudulent sales to receive larger commissions The formula for "Days sales in accounts receivable" is: Average net receivables x (365 / Net credit sales) The ratio increased in Year as compared in Year This ratio indicates the average number of days required to collect accounts receivable increased An increase in average net receivables would result in an increase in the ratio If sales managers are recording fraudulent sales this would result in a larger amount of accounts receivables as fictitious customers not pay their account receivables balance Inventory turnover Due to an economic downturn, buyers have shifted to economy cars The formula for inventory turnover is: Cost of goods sold / Average inventory The ratio decreased in Year as compared to Year This can result from a decrease in cost of goods sold and/or an increase in average inventory If buyers have shifted to economy cars this means that fewer luxury cars are being sold in Year 2, resulting in a lower cost of goods sold as well as an increase in average inventory (The journal entry when inventory is sold is a debit to cost of goods sold and a credit to inventory.) Debt to equity In Year 2, the company made a required principal payment on its long-term debt The formula for debt to equity is: Total liabilities / Common shareholders' equity The ratio decreased in Year as compared to Year This can result due to a decrease in total liabilities and/or an increase in common shareholders' equity If the company made a required payment on long-term debt this would decrease total liabilities Note that an increase in dividends to shareholders or a buyback of stock would decrease shareholders' equity Return on assets Due to an economic downturn, buyers have shifted to economy cars The formula for return on assets is: (Net income / Net sales ) * (Net sales/ Average total assets) or Net income / Average total assets The ratio decreased in Year as compared to Year This may result from a decrease in net income and/or an increase in average total assets If buyers have shifted to buying economy cars instead of luxury cars this would result in a decrease in net income as a result of lower sales Also, average total assets may have increased as a result of higher inventory levels Net fixed assets to equity In Year 2, the company reclassified its international production factories to held for sale The formula for net fixed assets to equity is: Net fixed assets / Equity The ratio decreased in Year as compared to Year This can result due to a decrease in net fixed assets and/or an increase in equity If the company reclassified its international production facilities to held for sale, this would result in a decrease in net fixed assets because long-lived assets classified as held for sale are presented separately from other assets (Items held for sale get their own individual line item on the balance sheet.) Note that there would be no change in assets when a company removed fully depreciated machinery from its books Task 3837_01 SOLUTION AND EXPLANATION: Source of answer for this question: ET 54.03 Keyword: Integrity .. .2013 AICPA Newly Released Questions – Auditing AICPA QUESTIONS RATED MODERATE DIFFICULTY CPA-8140 Which of the following types... the accountant discloses their lack of independence in the report 26 2013 AICPA Newly Released Questions – Auditing AICPA QUESTIONS RATED HARD DIFFICULTY 26 CPA-08165 When there has been a change... after the audit team worked for two consecutive weekends 21 2013 AICPA Newly Released Questions – Auditing 21 CPA-08160 When a PCAOB auditing standard indicates that an auditor "could" perform