2009 auditing AICPA released questions

2009 AICPA Newly Released Questions – Auditing Following are multiple choice questions 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 2009 AICPA Newly Released Questions – Auditing In obtaining written representations from management, materiality limits ordinarily would apply to representations related to: a b c d Amounts concerning related party transactions Irregularities involving members of management The availability of financial records The completeness of minutes of directors' meetings Solution: Choice "a" is correct Representations may be limited to items that management and the auditor agree are material, such as amounts concerning related party transactions Materiality considerations not apply to items not directly related to financial statement amounts (e.g., all minutes and all financial records should be made available to the auditor) Choice "b" is incorrect Irregularities involving management are considered significant regardless of dollar amount Choices "c" and "d" are incorrect Materiality considerations not apply to items not directly related to financial statement amounts (e.g., all minutes and all financial records should be made available to the auditor) 2009 AICPA Newly Released Questions – Auditing As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate The most likely explanation for this situation is that: a The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate b The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate c The deviation rates of both the auditor's sample and the population exceed the tolerable rate d The deviation rates of both the auditor's sample and the population are less than the tolerable rate Solution: Choice "b" is correct If the deviation rate in the auditor's sample is higher than the tolerable rate, the auditor will assess control risk as unacceptably high If it turns out that the deviation rate in the population is less than the tolerable rate, the auditor will have made an improper decision by assessing control risk higher than appropriate Choice "a" is incorrect If the deviation rate in the auditor's sample is less than the tolerable rate, the auditor will assess control risk as acceptably low If it turns out that the deviation rate in the population exceeds the tolerable rate, the auditor will have made an improper decision by assessing control risk lower than appropriate Choice "c" is incorrect When both the deviation rate in the auditor's sample and the deviation rate in the population exceed the tolerable rate, there will be no sampling error and the auditor will assess risk properly Choice "d" is incorrect When both the deviation rate in the auditor's sample and the deviation rate in the population are less than the tolerable rate, there will be no sampling error and the auditor will assess risk properly 2009 AICPA Newly Released Questions – Auditing An accountant has been engaged to compile the financial statements of a nonpublic entity The financial statements contain many departures from GAAP because of inadequacies in the accounting records The accountant believes that modification of the compilation report is not adequate to indicate the deficiencies Under these circumstances, the accountant should: a Inform management that the engagement can proceed only if distribution of the accountant's report is restricted to internal use b Withdraw from the engagement and provide no further service concerning these financial statements c Quantify the effects of the departures from GAAP and describe the departures from GAAP in a special report d Obtain written representations from management that the financial statements will not be used to obtain credit from financial institutions Solution: Choice "b" is correct If the accountant believes that modification of the compilation report would not be adequate to indicate the deficiencies in the financial statements, he or she should withdraw from the engagement and provide no further services Choice "a" is incorrect If the accountant believes that modification of the compilation report would not be adequate to indicate the deficiencies in the financial statements, restricting the report to internal use is not a sufficient response The auditor should withdraw from the engagement Choice "c" is incorrect A compilation report cannot be "qualified," and special reports are specifically defined and are distinct from compilation reports Choice "d" is incorrect Obtaining written representations from management that the financial statements will not be used to obtain credit from financial institutions is important when compiling personal financial statements, but it is not an appropriate response to financial statements that contain many departures from GAAP 2009 AICPA Newly Released Questions – Auditing Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate? a The auditor is unable to obtain the audited financial statements of a consolidated investee b Management does not provide reasonable justification for a change in accounting principles c The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities d Management refuses to allow the auditor to have access to the company's canceled checks and bank statements Solution: Choice "b" is correct If management does not provide reasonable justification for a change in accounting principles, the auditor would issue a qualified or adverse opinion, depending on materiality Choice "a" is incorrect If the auditor is unable to obtain the audited financial statements of a consolidated investee, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality Choice "c" is incorrect If the company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality Choice "d" is incorrect If management refuses to allow the auditor to have access to the company's canceled checks and bank statements, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality 2009 AICPA Newly Released Questions – Auditing According to the third standard of fieldwork, which of the following terms identifies a requirement for audit evidence? a b c d Appropriate Adequate Reasonable Disconfirming Solution: Choice "a" is correct According to the third standard of fieldwork, the auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion Choice "b" is incorrect The third standard of fieldwork does not use the word adequate in describing the requirements for audit evidence Choice "c" is incorrect Although the third standard of fieldwork does use the word reasonable, this is used to describe the basis for the opinion, and not to describe a specific requirement for audit evidence Choice "d" is incorrect The third standard of fieldwork does not use the word disconfirming in describing the requirements for audit evidence 2009 AICPA Newly Released Questions – Auditing When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information? a b c d Unaudited information from internal quarterly reports Various account assertions in the planning memorandum Comments in the prior-year's management letter The control risk assessment relating to specific financial assertions Solution: Choice "a" is correct Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor During the planning stage, analytical procedures generally use financial data, such as unaudited information from internal quarterly reports Choice "b" is incorrect Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor Various account assertions in a planning memorandum would not necessarily be helpful in developing expectations Choice "c" is incorrect Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor Comments from the prior year's management letter would not necessarily provide a basis for developing expectations Choice "d" is incorrect Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor The control risk assessment would not be useful in developing expectations 2009 AICPA Newly Released Questions – Auditing An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the: a b c d Availability of documentary evidence that should be verified Extent of accounting estimates used in preparing the financial statements Precision and reliability of the data used to develop expectations Number of transactions recorded just before and just after the year end Solution: Choice "c" is correct The decision as to whether or not to use analytical procedures as substantive tests is based in part on the availability, reliability, and precision of the data used to develop expectations Choice "a" is incorrect Verification of documentary evidence is a test of details, not an analytical procedure Choice "b" is incorrect The extent of accounting estimates used in preparing the financial statements is not a factor that affects the auditor's decision with respect to the use of analytical procedures as a substantive test If there is a plausible and predictable relationship, estimated amounts should still fall within expected ranges Choice "d" is incorrect Transaction volume is not a factor that affects the auditor's decision with respect to the use of analytical procedures as a substantive test 2009 AICPA Newly Released Questions – Auditing In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following? a The internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee b The risk that the internal control system will not detect a material misstatement of a financial statement assertion c The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion d The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls Solution: Choice "d" is correct Inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls Choice "a" is incorrect Evaluation of inherent risk is based on the nature of the assertion, and is unrelated to the objectivity of the internal audit department Choice "b" is incorrect Control risk (not inherent risk) is the risk that a material misstatement will not be detected (or prevented) on a timely basis by the entity's internal control Choice "c" is incorrect Detection risk (not inherent risk) is the risk that the audit procedures implemented will not detect a misstatement that exists in a relevant assertion 2009 AICPA Newly Released Questions – Auditing Which of the following statements most likely would be included in an engagement letter from an auditor to a client? a The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement b The CPA firm is responsible for ensuring that the client complies with applicable laws c The CPA firm will involve information technology specialists in the performance of the audit d The CPA firm will adjust the financial statements to correct misstatements before issuing a report Solution: Choice "c" is correct The auditor's understanding with the client often includes discussion of any specialists who will be involved in the engagement Choice "a" is incorrect An audit should be planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement Absolute assurance is not provided Choice "b" is incorrect The client is responsible for ensuring compliance with applicable laws, not the auditor Choice "d" is incorrect The auditor may suggest correcting or adjusting entries, but it is the client who is responsible for actually making any adjustments to the financial statements 10 2009 AICPA Newly Released Questions – Auditing 36 A practitioner has been engaged to apply agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements (SSAE) to prospective financial statements Which of the following conditions must be met for the practitioner to perform the engagement? a b c d The prospective financial statement includes a summary of significant accounting policies The practitioner takes responsibility for the sufficiency of the agreed-upon procedures The practitioner and specified parties agree upon the procedures to be performed by the practitioner The practitioner reports on the criteria to be used in the determination of findings Solution: Choice "c" is correct The practitioner and specified parties should agree upon the procedures to be performed by the practitioner Choice "a" is incorrect The prospective financial statement should include a summary of significant assumptions, not a summary of significant accounting policies Choice "b" is incorrect The specified parties (not the practitioner) should take responsibility for the sufficiency of the agreed-upon procedures Choice "d" is incorrect The practitioner and specified parties should agree regarding the criteria to be used in the determination of findings, but there is no requirement that the practitioner report on the criteria 37 2009 AICPA Newly Released Questions – Auditing 37 A test of a payroll system involved comparing an individual's number of overtime hours a week with an average of weekly overtime during a similar period in a prior year and evaluating the results This is an example of what type of test? a b c d Range test Detail test Category test Reasonableness test Solution: Choice "d" is correct In a reasonableness test, data in two or more fields are checked for consistency Comparing overtime hours in the current period to a prior period is one type of reasonableness test Choice "a" is incorrect A range test identifies amounts that fall outside a predetermined range Choice "b" is incorrect A test of details is one in which specific details are evaluated, whereas in a reasonableness test, two different fields are compared A test of details with respect to overtime hours might involve looking at time sheets for that week, for example Choice "c" is incorrect A category test is not a commonly used term when discussing application controls 38 2009 AICPA Newly Released Questions – Auditing 38 Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit? a b c d Confirming a sample of accounts payable Scanning payroll files for terminated employees Comparing current-year balances to budgeted balances Recalculating interest expense based on notes payable balances Solution: Choice "c" is correct During planning, analytical procedures consist of a review of data aggregated at a high level, such as comparing financial statement amounts to budgeted amounts Choice "a" is incorrect Confirmation of accounts payable is a test of details, not an analytical procedure Choice "b" is incorrect Scanning payroll files for terminated employees is a test of details, not an analytical procedure Choice "d" is incorrect Recalculating interest expense based on notes payable balances is a test of details, not an analytical procedure 39 2009 AICPA Newly Released Questions – Auditing 39 Which of the following statements is correct concerning an auditor's use of the work of an actuary in assessing a client's pension obligations? a b c d The auditor is required to understand the objectives and scope of the actuary's work The reasonableness of the actuary's assumptions is strictly the auditor's responsibility The client is required to consent to the auditor's use of the actuary's work If the actuary has a relationship with the client, the auditor may not use the actuary's work Solution: Choice "a" is correct The auditor should obtain an understanding of the nature of the actuary's work, including its objectives and scope Choice "b" is incorrect The reasonableness of the actuary's assumptions is the responsibility of the actuary, not the auditor Choice "c" is incorrect There is no requirement that the client consent to the auditor's use of the actuary's work Choice "d" is incorrect If the actuary has a relationship with the client, the auditor may still use the actuary's work, but may need to perform additional procedures to verify objectivity 40 2009 AICPA Newly Released Questions – Auditing 40 Which of the following titles would be considered suitable for financial statements that are prepared on a cash basis? a b c d Income statement Statement of operations Statement of revenues collected and expenses paid Statement of cash flows Solution: Choice "c" is correct Non-GAAP statements should be suitably titled For example, instead of an income statement, an appropriate cash basis financial statement title might be "statement of revenues collected and expenses paid." Choices "a", "b", and "d" are incorrect Income statement, statement of operations, and statement of cash flows are all GAAP basis financial statement titles that would not be suitable for cash basis financial statements 41 2009 AICPA Newly Released Questions – Auditing 41 Which of the following could be difficult to determine because electronic evidence may not be retrievable after a specific period? a b c d The acceptance level of detection risk The timing of control and substantive tests Whether to adopt substantive or reliance test strategies The assessed level of inherent risk Solution: Choice "b" is correct When electronic data is not maintained indefinitely, the auditor must be careful to consider the appropriate timing for audit tests, making sure that testing is performed while data is still available Choice "a" is incorrect The auditor determines the acceptable level of detection risk based on the assessed risk of material misstatement (inherent risk and control risk) Assessed risk is not dependent on the length of time electronic evidence is available Choice "c" is incorrect Whether to adopt substantive or reliance test strategies (i.e., a substantive approach or a combined approach) is not dependent on the length of time electronic evidence is available Choice "d" is incorrect The assessed level of inherent risk is based on the nature of the underlying assertion, and not on the length of time electronic evidence is available 42 2009 AICPA Newly Released Questions – Auditing 42 The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to: a b c d Monitor the risk factors concerning misstatements arising from the misappropriation of assets Provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities Minimize the likelihood of associating with clients whose management lacks integrity Document objective criteria for the CPA firm's responses to peer review comments Solution: Choice "c" is correct The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to minimize the likelihood of associating with clients whose management lacks integrity Choice "a" is incorrect Establishing quality control policies and procedures for deciding whether to accept or continue a client relationship does not aid the auditor in monitoring the risk of material misstatement Choice "b" is incorrect Establishing quality control policies and procedures for deciding whether to accept or continue a client relationship does not provide any assurance with respect to ensuring that audit firm personnel are adequately trained to fulfill their responsibilities Choice "d" is incorrect Establishing quality control policies and procedures for deciding whether to accept or continue a client relationship does not result in documentation of criteria for responses to peer review comments 43 2009 AICPA Newly Released Questions – Auditing 43 Which of the following situations most likely could lead to an embezzlement scheme? a The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger b Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable bookkeeper who personally approves the voucher for payment c Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement d Vouchers and supporting documentation are examined and then canceled by the treasurer who personally mails the checks to vendors Solution: Choice "c" is correct Good internal control for cash includes the separation of cash handling, recordkeeping, and reconciliation of bank statements If the same person who disburses cash (via blank checks and signature plates) also reconciles the bank statement, there is an opportunity for that person to embezzle cash and cover it up Choice "a" is incorrect It is appropriate for the accounts receivable bookkeeper to receive a list of payments prepared by the cashier and make entries in the customers' accounts receivable subsidiary ledger Choice "b" is incorrect It is appropriate for the vouchers payable bookkeeper to match each vendor invoice with the related purchase order and receiving report before approving the voucher for payment Choice "d" is incorrect It is appropriate for the treasurer to examine and cancel vouchers and supporting documentation, and to mail the checks to vendors 44 2009 AICPA Newly Released Questions – Auditing 44 Independence is not required on which of the following types of engagements? a b c d Audit Review Compilation Agreed-upon procedures Solution: Choice "c" is correct An accountant need not be independent to compile financial statements, but should disclose this lack of independence Choices "a", "b", and "d" are incorrect An accountant must be independent to perform an audit, a review, or an agreed-upon procedures engagement 45 2009 AICPA Newly Released Questions – Auditing 45 An accountant's compilation report on a financial forecast should include a statement that: a The hypothetical assumptions used in the forecast are reasonable in the circumstances b The forecast should be read only in conjunction with the audited historical financial statements c The accountant expresses only limited assurance on the forecasted statements and their assumptions d There will usually be differences between the forecasted and actual results Solution: Choice "d" is correct An accountant's compilation report on a financial forecast should include a statement that there will usually be differences between the forecasted and actual results Choice "a" is incorrect An accountant's compilation report on a financial forecast does not state that the hypothetical assumptions used in the forecast are reasonable in the circumstances In fact, the report specifically states that no form of assurance is provided with respect to the assumptions Choice "b" is incorrect An accountant's compilation report on a financial forecast does not state that the forecast should be read only in conjunction with the audited historical financial statements Choice "c" is incorrect An accountant's compilation report on a financial forecast does not state that the accountant expresses only limited assurance on the forecasted statements and their assumptions In fact, the report specifically states that no form of assurance is provided with respect to the statements or the assumptions 46 2009 AICPA Newly Released Questions – Auditing 46 Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure? a b c d Make inquiries to understand the potential consequence of the deviation Assume that the deviation is an isolated occurrence without audit significance Report the matter to the next higher level of authority within the entity Increase sample size of tests of controls Solution: Choice "a" is correct In response to discovering a deviation from a prescribed control procedure, the auditor should make inquiries to understand the potential consequence of the deviation Choice "b" is incorrect The auditor should not simply assume that a deviation is an isolated occurrence without audit significance Choice "c" is incorrect There is no requirement that the auditor report all deviations to the next higher level of authority within the entity Note that a single deviation does not necessarily represent a control deficiency Choice "d" is incorrect The auditor would not increase the sample size in tests of controls just because he or she discovers a single deviation Instead, the auditor would estimate the population deviation rate based on the number of deviations in the sample 47 2009 AICPA Newly Released Questions – Auditing 47 Which of the following events least likely would indicate the existence of related party transactions? a b c d Making a loan with no scheduled date for the funds to be repaid Maintaining compensating balance arrangements for the benefit of principal stockholders Borrowing funds at an interest rate significantly below prevailing market rates Writing off obsolete inventory to net realizable value just before year end Solution: Choice "d" is correct Writing off obsolete inventory to net realizable value just before year end is not indicative of the existence of related party transactions Choice "a" is incorrect Making a loan with no scheduled date for the funds to be repaid differs significantly from market terms, and would therefore be indicative of the existence of related party transactions Choice "b" is incorrect Maintaining compensating balance arrangements for the benefit of principal stockholders is indicative of the existence of related party transactions Choice "c" is incorrect Borrowing funds at an interest rate significantly below prevailing market rates is indicative of the existence of related party transactions 48 2009 AICPA Newly Released Questions – Auditing 48 As part of the process of observing a client's physical inventories, an auditor should be alert to: a b c d The inclusion of any obsolete or damaged goods Any change in the method of pricing from prior years The existence of outstanding purchase commitments The verification of inventory values assigned to goods in process Solution: Choice "a" is correct As part of the process of observing a client's physical inventories, an auditor should be alert to the inclusion of any obsolete or damaged goods, which may need to be written down or written off Choice "b" is incorrect An auditor cannot determine whether there have been changes in pricing methods simply by observing a client's physical inventories Choice "c" is incorrect An auditor cannot determine whether outstanding purchase commitments exist simply by observing a client's physical inventories Choice "d" is incorrect An auditor cannot determine what inventory values are assigned to goods in process simply by observing a client's physical inventories 49 2009 AICPA Newly Released Questions – Auditing 49 After issuing an auditor's report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless: a Information about a material transaction that occurred just after the auditor's report was issued is deemed to be reliable b A final resolution is made of a contingent liability that had been disclosed in the financial statements c Information that existed at the report date and may affect the report comes to the auditor's attention d An event occurs just after the auditor's report was issued that affects the entity's ability to continue as a going concern Solution: Choice "c" is correct After issuing his or her report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless information that existed at the report date and may affect the report comes to the auditor's attention Choice "a" is incorrect An auditor has no obligation to make continuing inquiries concerning transactions that occurred after the auditor's report was issued Choice "b" is incorrect After issuing his or her report, an auditor has no obligation to make continuing inquiries concerning resolutions of contingent liabilities Choice "d" is incorrect An auditor has no obligation to make continuing inquiries concerning events occurring after the auditor's report was issued, even if those events affect the entity's ability to continue as a going concern 50 2009 AICPA Newly Released Questions – Auditing 50 Which of the following statements is correct regarding a review of a nonpublic entity's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)? a b c d The accountant is required to assess the risk of fraud It is not necessary for the accountant to obtain a management representation letter An opinion is expressed in the review report The accountant must be independent to issue the review report Solution: Choice "d" is correct In order to issue a review report on the financial statements of a nonpublic entity, the accountant must be independent Choice "a" is incorrect When reviewing the financial statements of a nonpublic entity, the accountant is not required to assess the risk of fraud Choice "b" is incorrect When reviewing the financial statements of a nonpublic entity, the accountant must obtain a management representation letter Choice "c" is incorrect When reviewing the financial statements of a nonpublic entity, no opinion is expressed in the review report 51 ... focus of analytical procedures used in the planning phase of an audit 19 2009 AICPA Newly Released Questions – Auditing 19 In auditing an entity''s computerized payroll transactions, an auditor would... assessment affect sample size 24 2009 AICPA Newly Released Questions – Auditing 24 Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation... Attestation standards, but not auditing standards, apply to engagements regarding financial forecasts and projections 25 2009 AICPA Newly Released Questions – Auditing 25 What is an auditor''s