2011 auditing AICPA released questions

2011 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 2011 AICPA Newly Released Questions – Auditing An entity's comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented If the predecessor's report was qualified, the successor should: a Issue an updated comparative audit report indicating the division of responsibility b Explain to the client that comparative financial statements may not be presented under these circumstances c Express an opinion only on the current year's financial statements and make no reference to the prior year's statements d Indicate the substantive reasons for the qualification in the predecessor auditor's opinion Solution: Choice "d" is correct When a predecessor auditor's report is not presented, the successor auditor should indicate the following items: (i) That the statements were examined by other auditors in prior periods The predecessor auditors should not be named unless the practice of the predecessors was acquired by or merged with that of the successor; (ii) The date of the predecessor auditor's report; (iii) The type of opinion expressed by the predecessor auditor; and (iv) The substantive reason(s) for other than an unqualified report Choice "a" is incorrect The comparative audit report does not need to be updated for this situation Choice "b" is incorrect There is no requirement that the comparative financial statements NOT be issued in such circumstances Choice "c" is incorrect There is nothing preventing the successor auditor from referencing the prior year's statements in this situation 2011 AICPA Newly Released Questions – Auditing How does an auditor make the following representations when issuing the standard auditor's report on comparative financial statements? a b c d Consistent application of accounting principles Implicitly Explicitly Implicitly Explicitly Examination of evidence on a test basis Explicitly Implicitly Implicitly Explicitly Solution: Choice "a" is correct Consistency is implicit in the auditor's report, while the discussion that the examination of evidence is performed on a test basis is explicitly stated in the scope paragraph Choice "b", "c", and "d" are incorrect based on the above explanation 2011 AICPA Newly Released Questions – Auditing As a condition of obtaining a loan from First National Bank, Maxim Co is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows Maxim would like to engage a CPA to audit only its balance sheet Under these circumstances, the CPA: a May not audit only Maxim's balance sheet if the amount of the loan is material to the financial statements taken as a whole b May not audit only Maxim's balance sheet if Maxim is a nonissuer c May audit only Maxim's balance sheet if the CPA disclaims an opinion on the other financial statements d May audit only Maxim's balance sheet if access to the information underlying the basic financial statements is not limited Solution: Choice "d" is correct The auditor may report on one basic financial statement and not the others, as long as access is not limited to information underlying the basic financial statement This is considered a limited reporting engagement Choice "a" is incorrect Materiality only comes into play when dealing with a piecemeal opinion, not an opinion on one entire statement Choice "b" is incorrect If Maxim is a nonissuer, it would not need to abide by GAAP, thus many of the financial statement requirements would not apply Choice "c" is incorrect A disclaimer of opinion on the other statements is not required as long as there is no limitation on the information underlying the basic financial statements 2011 AICPA Newly Released Questions – Auditing Which of the following statements is correct concerning analytical procedures used in planning an audit engagement? a They often replace the tests of controls that are performed to assess control risk b They usually use financial and nonfinancial data aggregated at a high level c They usually involve the comparison of assertions developed by management to ratios calculated by an auditor d They are often used to develop an auditor's preliminary judgment about materiality Solution: Choice "b" is correct Analytical procedures performed during planning often use data aggregated at a high level Choice "a" is incorrect Analytical procedures cannot replace tests of controls to assess control risk Choice "c" is incorrect Analytical procedures not involve a comparison of management assertions to ratios calculated by the auditor Choice "d" is incorrect Analytical procedures not generally help an auditor develop their preliminary judgment about materiality 2011 AICPA Newly Released Questions – Auditing Which of the following statements is ordinarily correct about the sample size in statistical sampling when testing controls? a b c d The expected population deviation rate has little effect on determining the sample size As the population size doubles, the sample size should also double As the tolerable deviation rate increases, the sample size should also increase The population size has little effect on the sample size Solution: Choice "d" is correct Population size is not an issue in determining a sample size, provided the population is relatively large (i.e., greater than 5,000 items) Choice "a" is incorrect The expected population deviation rate will have a direct impact on the sample size Choice "b" is incorrect Although the population size may have a direct relationship with the sample size, it generally will not be in exact proportion Choice "c" is incorrect As the tolerable deviation rate increases, the sample size will decrease 2011 AICPA Newly Released Questions – Auditing Which of the following statements is correct regarding internal control? a A well-designed internal control environment ensures the achievement of an entity's control objectives b An inherent limitation to internal control is the fact that controls can be circumvented by management override c A well-designed and operated internal control environment should detect collusion perpetrated by two people d Internal control is a necessary business function and should be designed and operated to detect all errors and fraud Solution: Choice "b" is correct Since management generally has the authority to implement and assign responsibilities under the internal controls, they will generally also have the ability to circumvent those internal controls This is an inherent limitation of internal control Choice "a" is incorrect Although the design of an internal control system is important, it needs to be paired with the proper implementation and monitoring, and even then cannot ensure that the entity's internal control objectives will be met Choice "c" is incorrect Internal control structures generally rely in some manner on segregation of duties Because of this, collusion by two or more people can generally destroy this segregation of duties and thus potentially cause circumvention of the internal controls that may not be immediately detected Choice "d" is incorrect No internal control system can guarantee the detection of all errors and fraud The purpose of an internal control system is to significantly reduce the likelihood that errors or fraud will be committed and go undetected 2011 AICPA Newly Released Questions – Auditing General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP Ford may comply with General's request provided the omission is clearly indicated in Ford's report and the: a Distribution of the financial statements and Ford's report is restricted to internal use only b Reason for omitting the disclosures is acknowledged in the notes to the financial statements c Omitted disclosures would not influence any potential creditor's conclusions about General's financial position d Omission is not undertaken with the intention of misleading the users of General's financial statements Solution: Choice "d" is correct The accountant may compile financial statements that omit substantially all disclosures provided that: (1) The accountant's report clearly indicates the omission by including a fourth paragraph disclosing such omissions This paragraph should state that if the disclosures were included, they might influence the user's conclusions, and should indicate that the financial statements are not designed for those who are uninformed about the omitted disclosures; and (2) To the accountant's knowledge, the omission is not intended to mislead any person who might be expected to use such financial statements Choice "a" is incorrect Internal use restriction is not required in such circumstances Choice "b" is incorrect Disclosure of the reason for omission of the disclosures is not a requirement Choice "c" is incorrect This answer discusses only the creditors while the correct answer discusses a broader range of users, in general 2011 AICPA Newly Released Questions – Auditing When assessing internal auditors' objectivity, an independent auditor should: a Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned b Review the internal auditors' reports to determine that their conclusions are consistent with the work performed c Verify that the internal auditors' assessment of control risk is comparable to the independent auditor's assessment d Evaluate the quality of the internal auditors' working paper documentation and their recent audit recommendations Solution: Choice "a" is correct Objectivity is reflected by the organizational level to which an internal auditor reports, as well as by policies prohibiting audits of areas where the internal auditor lacks independence Choice "b" is incorrect Reviewing the internal auditor's conclusions does not lead to the assessment of objectivity This would be part of the supervision and review function Choice "c" is incorrect The fact that the internal auditor's assessment of control risk matches the external auditor's assessment is not relevant to the decision of whether they are objective Choice "d" is incorrect Quality of work does not guarantee the objectivity of an internal auditor 2011 AICPA Newly Released Questions – Auditing During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing: a b c d Tests of controls Yes Yes No No Substantive tests Yes No Yes No Solution: Choice "a" is correct The work of an internal auditor may aid the external auditor in obtaining an understanding of internal control, assessing risk, and performing substantive tests, including tests of controls Choices "b", "c", and "d" are incorrect per above explanation 10 2011 AICPA Newly Released Questions – Auditing AICPA 2011 Released AUD Simulations Task 519_01 52 2011 AICPA Newly Released Questions – Auditing 53 2011 AICPA Newly Released Questions – Auditing 54 2011 AICPA Newly Released Questions – Auditing 55 2011 AICPA Newly Released Questions – Auditing 56 2011 AICPA Newly Released Questions – Auditing 57 2011 AICPA Newly Released Questions – Auditing 58 2011 AICPA Newly Released Questions – Auditing 59 2011 AICPA Newly Released Questions – Auditing 60 2011 AICPA Newly Released Questions – Auditing Explanation: Line 2, Column B – Chip Technology Answer: Exception noted; propose adjustment and request that the controller post it to the accounting records The letter sent to this customer indicated that there was a balance owed to the company in the amount of $95,000 The customer responded that the amount should only be $92,000 The difference of $3,000 was due to the fact that the customer paid $3,000 on December 24th The payment was received by the th th company prior to year-end (on December 28 ), but was not recorded by the company until January Because the payment was received prior to year-end, the auditor should propose an adjustment to update both accounts receivable and cash Line 3, Column B – BiCon Semiconductor Answer: Verify by examining shipping documents and subsequent cash receipts The confirmation was sent to the customer twice and was returned by the post office with no forwarding address Because a confirmation response could not be obtained, the auditor should apply alternative procedures An appropriate alternative procedure to test the existence of this account receivable is to examine the shipping document and any subsequent cash collections A valid shipping document would indicate that the client did indeed ship something to the customer, thus giving rise to an account receivable Subsequent cash collection after year-end would provide evidence that this was a valid account receivable at year-end Line 4, Column B – Whistler’s Computer Warehouse Answer: Exception noted; propose adjustment and request that the controller post it to the accounting records This customer responded that they returned some of the product purchased, which would have reduced the amount they owed to the company Since the A/R Supervisor agreed that the goods were returned, an adjustment the updates both accounts receivable and sales returns will need to be proposed to management Line 5, Column B – Digital Digits Answer: Verify that additional invoices noted on confirmation pertain to the subsequent year This customer believes that it actually owes $760,000 more than the $2,000,000 stated on the confirmation due to other outstanding invoices Since the customer is not sure about the dates of the additional invoices, the auditor needs to determine whether they relate to the period under audit If they do, then an adjustment would be necessary However, it is possible that the invoices relate to the subsequent period, in which case no adjustment would be necessary Line 6, Column B – Rockford’s Answer: Not an exception; no further audit work deemed necessary This customer has indicated that the balance stated by the client is correct and has also notified the company that its name is changing This is not an exception, so no further work is needed 61 2011 AICPA Newly Released Questions – Auditing Line 7, Column B – Jungle Applications Answer: Verify by examining shipping documents and subsequent cash receipts This customer did not respond to the confirmation request because it needed additional information from the company Because a confirmation response could not be obtained, the auditor should apply alternative procedures An appropriate alternative procedure to test the existence of this account receivable is to examine the shipping document and any subsequent cash collections A valid shipping document would indicate that the client did indeed ship something to the customer, thus giving rise to an account receivable Subsequent cash collection after year-end would provide evidence that this was a valid account receivable at year-end 62 2011 AICPA Newly Released Questions – Auditing Tab 1662_01 63 2011 AICPA Newly Released Questions – Auditing 64 2011 AICPA Newly Released Questions – Auditing Explanation: Line 2, Column B & C- This procedure involves examining documentation to review for an approval This would indicate that the procedure is an inspection, which in this case is a test of controls Finding an error would not tell the auditor that an account balance was incorrect, but rather that a control was not operating as designed Line 3, Column B & C– The comparison of an account balance from period to period looking for unusual variances is an analytical procedure This audit procedure is classified as a substantive procedure because it is being used to test expense accounts Line 4, Column B & C – Confirmations are requests of responses directly from customers Confirmations are a substantive procedure generally used to test the existence of an asset such as accounts receivable or cash Line 5, Column B & C – Questioning management about subsequent events is a type of inquiry made during the audit that is classified as a substantive procedure because it provides evidence regarding yearend balances and needed disclosures Line 6, Column B & C – Observing the accounting clerk record the daily deposit of cash receipts is an observation that is classified as a test of controls because the test would provide evidence regarding the operating effectiveness of controls over cash receipts Line 7, Column B & C – The examination of documentation is the procedure known as inspection This procedure is a substantive procedure as the inspection is performed to gather evidence regarding fixed assets Line 8, Column B & C – This procedure involves the auditor reperforming the task that the client staff would have normally completed during the processing of the order The goal is to determine whether the credit approval control is working properly This procedure is reperformance and it is being used as a test of controls Line 9, Column B & C – The auditor asked questions of the client managementabout the design and implementation of a specific control activity This inquiry is being used as a test of controls 65 2011 AICPA Newly Released Questions – Auditing Tab 3733_01 Keywords: Internal auditor and fraud 66 ... 2011 AICPA Newly Released Questions – Auditing When assessing internal auditors'' objectivity, an independent auditor should: a Consider the policies that prohibit the internal auditors from auditing. .. controls Choices "b", "c", and "d" are incorrect per above explanation 10 2011 AICPA Newly Released Questions – Auditing 10 In auditing contingent liabilities, which of the following procedures would... Control risk deals with internal controls, not account balances 21 2011 AICPA Newly Released Questions – Auditing 21 According to the AICPA Code of Professional Conduct, which of the following actions