2012 auditing AICPA released questions

2012 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 2012 AICPA Newly Released Questions – Auditing Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? a b c d Confirmation of accounts receivable from principal customers Reconciliation of interest expense with debt outstanding Confirmation of bank balances Review of compliance with terms of debt agreements Solution: Choice "d" is correct By reviewing the debt agreements, the auditor may discover that the entity is near or in noncompliance with specific debt (financial) covenants This may cast doubt on whether the entity will be able to continue as a going concern Choice "a" is incorrect This procedure would not provide information on whether the entity has a going concern issue but instead could detect errors in financial reporting by the entity Choice "b" is incorrect The mere reconciliation of interest expense to the debt outstanding would not provide information regarding the entity's ability to function as a going concern Choice "c" is incorrect Confirming bank balances could detect reporting errors but would not be a procedure to ascertain whether the entity has a going concern issue 2012 AICPA Newly Released Questions – Auditing A principal auditor decides not to refer to the audit of another CPA who audited a subsidiary of the principal auditor's client After making inquiries about the other CPA's professional reputation and independence, the principal auditor most likely would: a Document in the engagement letter that the principal auditor assumes no responsibility for the other CPA's work b Obtain written permission from the other CPA to omit the reference in the principal auditor's report c Contact the other CPA and review the audit programs and working papers pertaining to the subsidiary d Add an explanatory paragraph to the auditor's report indicating that the subsidiary's financial statements are not material to the consolidated financial statements Solution: Choice "c" is correct When the principal auditor accepts responsibility for the work performed by another auditor, the principal auditor must contact the other CPA and review the audit program and working papers pertaining to the subsidiary Choice "a" is incorrect When a principal auditor decides not to reference another CPA who worked on the audit of a subsidiary, the principal auditor has assumed responsibility for the work performed by the other auditor Choice "b" is incorrect Permission does not need to be obtained to assume responsibility for the work of the other CPA Choice "d" is incorrect When the principal auditor assumes responsibility for the work of another auditor, no reference to the other auditor or to the subsidiary's financial statements is made in the auditor's report 2012 AICPA Newly Released Questions – Auditing An auditor should consider which of the following when evaluating the ability of a company to continue as a going concern? a b c d Audit fees Future assurance services Management's plans for disposal of assets A lawsuit for which judgment is not anticipated for 18 months Solution: Choice "c" is correct The nature of management's plan to sell or liquidate assets could provide valuable information to the auditor regarding whether or not the entity can continue to function as a going concern Choice "a" is incorrect Audit fees have no bearing on a client's going concern issue Choice "b" is incorrect This item would not be directly relevant when determining if there is a going concern issue Choice "d" is incorrect The future outcome of a pending lawsuit that is more than one year away is a contingency that would not have a significant impact on a going concern issue for a current audit Under U.S GAAP, the going concern period is one year 2012 AICPA Newly Released Questions – Auditing In which of the following should an auditor's report refer to the lack of consistency when there is a change in accounting principle that is significant? a b c d The scope paragraph The opinion paragraph An explanatory paragraph following the opinion paragraph An explanatory paragraph before the opinion paragraph Solution: Choice "c" is correct A justified lack of consistency caused by a material change in GAAP between periods would be reported in an explanatory paragraph after the opinion paragraph Under these circumstances, the auditor issues a modified unqualified opinion Choices "a", "b", and "d" are incorrect The proper treatment of a justified lack of consistency is to add an explanatory paragraph after the opinion paragraph 2012 AICPA Newly Released Questions – Auditing In which of the following paragraphs of an auditor's report does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit? a b c d Scope paragraph Opinion paragraph Introductory paragraph Explanatory paragraph Solution: Choice "c" is correct The introductory paragraph indicates the nature of the engagement (i.e., audit), the financial statements covered in the (audit) engagement, and the responsibilities of management and the auditor regarding the financial statements Choice "a" is incorrect The scope paragraph includes the following statements: audit prepared in accordance with GAAS; audit was planned and performed to obtain reasonable assurance that the financial statements are free from material misstatements; audit included examining evidence on a test basis, assessing the accounting principles used and management estimates; and, that the audit provides a reasonable basis for opinion Choice "b" is incorrect The opinion paragraph refers to the financial statements identified in the introductory paragraph, an opinion on the fair presentation of the financial statements, and a statement regarding their conformity with U.S GAAP Choice "d" is incorrect This information is included in the introductory paragraph and not in an explanatory paragraph 2012 AICPA Newly Released Questions – Auditing Zag Co issues financial statements that present financial position and results of operations but Zag omits the related statement of cash flows Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements will not be limited Under these circumstances, Brown most likely would: a Add an explanatory paragraph to the standard auditor's report that justifies the reason for the omission b Refuse to accept the engagement as proposed because of the client-imposed scope limitation c Explain to Zag that the omission requires a qualification of the auditor's opinion d Prepare the statement of cash flows as an accommodation to Zag and express an unqualified opinion Solution: Choice "c" is correct The auditor would explain to the client that in order for the entity's financial statements to be in conformity with GAAP, there must be adequate disclosures of all material matters including all financial statements and the supporting footnotes As a result, the auditor would tell Zag that without adequate disclosure of the entity's cash flows, the audit report would have issued a qualified or adverse audit opinion Choice "a" is incorrect Missing the statements of cash flows would not result in an unqualified opinion with an additional explanatory paragraph because no statement of cash flows is a material departure from GAAP Choice "b" is incorrect The auditor is not required to refuse to accept the engagement, but the client should be made aware that the missing statement of cash flows will result in a qualified or adverse opinion Choice "d" is incorrect The responsibility to prepare the statement of cash flows is solely the client's 2012 AICPA Newly Released Questions – Auditing An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements Under these circumstances, the report on the selected data should: a b c d State that the presentation is a comprehensive basis of accounting other than GAAP Restrict the use of the report to those specified users within the entity Be limited to data derived from the entity's audited financial statements Indicate that the data are subject to prospective results that may not be achieved Solution: Choice "c" is correct When the audit engagement includes reporting on selected financial data, the report prepared by the auditor should be limited to the data that was obtained from the financial statements Choice "a" is incorrect The presentation of selected financial data is not based on a comprehensive basis of accounting other than GAAP Choice "b" is incorrect The report is not required to be restricted to specific individuals within the organization Choice "d" is incorrect The presentation of selected financial data is not a form of prospective financial statement 2012 AICPA Newly Released Questions – Auditing A client has capitalizable leases but refuses to capitalize them in the financial statements Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements? a b c d Qualified opinion Unqualified opinion Disclaimer opinion Adverse opinion Solution: Choice "d" is correct The scenario above indicates a material departure from GAAP that is neither necessary nor justified by the client When a misstatement is both material and pervasive, the auditor should issue an adverse opinion Choice "a" is incorrect A misstatement that is both material and pervasive is too significant to justify a qualified opinion Choice "b" is incorrect An unqualified opinion cannot be issued because the financial statements are not fairly presented in conformity with GAAP Choice "c" is incorrect A disclaimer opinion would not be used by the auditor for the above scenario as there are no apparent scope limitations to inhibit the auditor from rendering an opinion 2012 AICPA Newly Released Questions – Auditing An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unqualified opinion on the current years: a b c d Income statement only Statement of cash flows only Balance sheet only Statement of shareholders' equity only Solution: Choice "c" is correct If the auditor is unable to form an opinion on a new client's opening inventory balances, the auditor will issue an opinion on the closing balance sheet only and will issue a disclaimer of opinion on the statements of income, retained earnings and cash flows Choices "a", "b", and "d" are incorrect The auditor should issue a disclaimer of opinion on these financial statements if the auditor is unable to form an opinion regarding opening inventory balances 10 2012 AICPA Newly Released Questions – Auditing 46 The controller of a small utility company has interviewed audit firms proposing to perform the annual audit of their employee benefit plan According to the guidelines of the Department of Labor (DOL), the selected auditor must be: a The firm that proposes the lowest fee for the work required b Independent for purposes of examining financial information required to be filed annually with the DOL c Included on the list of firms approved by the DOL d Independent of the utility company and not relying on its services Solution: Choice "b" is correct The DOL requires auditor independence when auditing and providing an opinion on the financial information submitted annually to the DOL Choices "a", "c", and "d" are incorrect Each of these choices is not a requirement outlined by the DOL 47 2012 AICPA Newly Released Questions – Auditing 47 Under the ethical standards of the profession, which of the following is a "permitted loan" regardless of the date it was obtained? a b c d Home mortgage loan Student loan Secured automobile loan Personal loan Solution: Choice "c" is correct According to Rule 101-Independence of the AICPA code, a fully secured automobile loan with a financial institution client is permitted (regardless of the date obtained) and does not impair the independence rule Choices "a", "b", and "d" are incorrect Each of these loans from the client would be considered an impairment of independence under Rule 101 48 2012 AICPA Newly Released Questions – Auditing 48 According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee? a b c d Performing an audit of a financial statement Performing a review of a financial statement Performing an examination of prospective financial information Seeking a private letter ruling Solution: Choice "d" is correct Under Rule 302, contingent fees are permitted when they involve a legal proceeding or ruling When a CPA is receiving a contingent fee for a private letter ruling, it would be allowed under Rule 302 and not be considered actually "contingent" because it would most likely be fixed by the legal jurisdiction Choice "a" is incorrect Contingent fees are prohibited for audits of a client's financial statements Choice "b" is incorrect Contingent fees are not allowed for a review engagement of a client's financial statements Choice "c" is incorrect Contingent fees are prohibited for an examination of a prospective client's financial information 49 2012 AICPA Newly Released Questions – Auditing 49 In which of the following circumstances would a covered member's independence be impaired with respect to a nonissuer client? a The member is designated to serve as guardian of a friend's children if the need arises, and the friend's estate, which would be held in trust for the children, holds significant stock ownership in a client entity b The member's spouse qualifies because of geographical residence to belong to a client's credit union, and all transactions with the credit union are conducted under normal operating practices c The member owns municipal utility bonds issued by a client, and the bonds are not material to the member's wealth d The member belongs to a client golf club that requires members to acquire a share of the club's debt securities Solution: Choice "c" is correct Although the bonds are not material in relation to the member's total wealth, independence is still impaired because the ownership of the bonds represents a direct financial interest in the client and a violation of AICPA Rule 101 – Independence Choice "a" is incorrect Independence is not violated because the member is the children's guardian, but is not a trustee of the estate held in trust for the children Choice "b" is incorrect Independence is not impaired by membership in a client credit union Choice "d" is incorrect According to an AICPA ethics ruling, as long as the membership in the golf club is essentially a social matter, the covered member's association with the golf club would not impair independence because the debt ownership is not considered to be a direct financial interest 50 2012 AICPA Newly Released Questions – Auditing 50 A cooling-off period of how many years is required before a member of an issuer's audit engagement team may begin working for the registrant in a key position? a b c d One year Two years Three years Four years Solution: Choice "a" is correct The Securities and Exchange Commission requires a cooling-off period of one year for a former member of an audit client engagement team before he or she can be employed in a financial oversight role for that same client This requirement is necessary to preserve auditor (firm) independence Choices "b", "c", and "d" are incorrect based on the explanation above 51 AICPA Newly Released AUD Simulations Task 1515_01 Situation 1: Issue a Disclaimer of Opinion Failure to furnish the auditor with adequate evidence is a scope limitation When there is a scope limitation in an audit of internal controls, the auditor can issue a disclaimer of opinion or withdraw from the engagement Situation 2: Determine if the control deficiency is a material weakness by obtaining further audit evidence Control deficiencies can result from deficiencies in the design of an entity’s controls and/or failures in the operation of an entity’s controls In this situation, the controls are operating as designed, so there is no failure in the operation of the controls However, a control deficiency exists because there is a deficiency in the design of the controls The auditor must determine if the control deficiency is a material weakness by obtaining further audit evidence Situation 3: Express an adverse opinion on the internal controls In an audit of an entity’s internal control, a material weakness in internal control results in an adverse opinion Situation 4: Express an unqualified opinion on the internal controls In an internal control audit, management is required to provide an assertion about the effectiveness of the entity’s internal controls However, management does not provide assurance about the internal controls An unqualified opinion is issued If the auditor does not find any material weaknesses in the entity’s internal controls Situation 5: Express an unqualified opinion on the internal controls Although last year’s auditor’s report included an adverse opinion on the client’s internal controls, the client has since modified their internal controls, and the auditor has tested the effectiveness of these internal controls in the current year’s audt Because the audit tests found no material weaknesses in the client’s internal controls, the auditor will express an unqualified opinion on the internal controls in this year’s auditor’s report Tab 1765_01 Issue 1: Reconciliation was not reviewed in a timely manner The bank reconciliation for the period ended December 31, Year was prepared on January 10, Year Evan Monroe did not review the bank reconciliation until March 2, Year 3, which was 51 days later Issue 2: Reconciliation was not agreed to the bank statement balance at the appropriate date The bank reconciliation was as of December 31, Year 2, but the bank balance was agreed to the online account balance as of January 3, Year Issue 3: Reconciliation contains stale checks The actual bank reconciliation included a deduction for year outstanding checks dated March 29, November 30, and December 1, respectively The check dated March 29 is unlikely to clear the bank and should be written-off as a stale check Issue 4: Reconciliation has unsubstantiated unrecorded items At the very bottom of the bank reconciliation, there were adjustments totaling $5,500 that included a bank fee (amount undisclosed) and unrecorded items (no totals or item breakdown provided) Issue 5: Reconciliation contains aged items that should have been added to the bank balance The bank reconciliation had deposits in transit that were added to the balance per bank While an argument can be made that the December 28,Year deposit was still in transit at year-end, the second deposit, dated October 25, Year 2, should have been recorded by the bank at year-end Issue 6: Reconciliation balance was not properly agreed to the December 31 general ledger balance The bank reconciliation, dated as of December 31, Year 2, was improperly agreed to the general ledger on January 1, Year While these dates are only day apart and January is a U.S legal holiday, there could be transactions that posted the following day The reconciliation should agree balances to the same date Tab 3749_01 Key words: Updated auditor’s report, change in audit opinion ... the audit was conducted in accordance with auditing standards generally accepted in the United States of America 19 2012 AICPA Newly Released Questions – Auditing 19 Which of the following procedures... a review engagement, but may be done in an audit engagement 20 2012 AICPA Newly Released Questions – Auditing 20 According to the AICPA Statements on Standards for Attestation Engagements, a public... to its use 22 2012 AICPA Newly Released Questions – Auditing 22 A CPA is engaged to audit the financial statements of a nonissuer After the audit begins, the client''s management questions the