2013 auditing AICPA released questions

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...

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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

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AICPA QUESTIONS RATED MODERATE DIFFICULTY

1 CPA-8140

Which of the following types of audit evidence provides the least assurance of reliability?

a Receivable confirmations received from the client's customers

b Prenumbered receiving reports completed by the client's employees

c Prior months' bank statements obtained from the client

d Municipal property tax bills prepared in the client's name

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2 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 The results of alternative procedures that were performed compensate for the omission

b The auditor's assessed level of detection risk is low

c The omission is documented in a communication with the audit committee

d No individual investment is material to the financial statements taken as a whole

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

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3 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 Prior years' depreciation expenses were erroneously understated

b Current year's depreciation expense was erroneously understated

c The estimated remaining useful lives of plant assets were revised upward

d 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

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4 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 Control environment factors that affect the organizational structure

b Correlation of detection risk and inherent risk

c Effectiveness of the entity's internal control activities

d Possible effects on the entity's financial statements

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5 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 Bring the matter to the attention of the board of directors or audit committee

b Withdraw the auditor's report from those persons currently relying on it

c Perform alternative procedures to verify account balances

d 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 do 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

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:

1 A description of the OCBOA, including a summary of significant accounting policies and

description of the primary differences from GAAP

2 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

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7 CPA-08146

Which of the following factors should an external auditor obtain updated information about when

assessing an internal auditor's competence?

a The reporting status of the internal auditor within the organization

b The educational level and professional experiences of the internal auditor

c Whether policies prohibit the internal auditor from auditing areas where relatives are employed

d Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor

c Rights and obligations

d 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

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9 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 Issue a report on findings based on specified procedures performed

b Assess whether the procedures meet the needs of the parties

c Express negative assurance on findings of work performed

d 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

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10 CPA-08149

When the operating effectiveness of a control is not evidenced by written documentation, an auditor

should obtain evidence about the control's effectiveness by:

Choice "c" is incorrect Analytical procedures do not provide evidence about the operating effectiveness

of a control However, analytical procedures may be used in the testing phase of the audit as a

substantive procedure to provide evidence about the dollar balance of an account

Choice "d" is incorrect Recalculation related to the balance of accounts is a substantive procedure Recalculation related to a control would help the auditor obtain evidence of the control's effectiveness

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11 CPA-08150

An auditor is evaluating a client's internal controls Which of the following situations would be the most difficult internal control issue for an auditor to detect?

a The accounting staff neglects the control, due to increased transactions to be processed

b The technology department writes a program that does not properly implement the control, due to a

lack of understanding

c Two employees, who work in different departments, are circumventing an internal control

d Someone erroneously disables edit checks in a software program designed to identify control exceptions

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12 CPA-08151

Inherent risk and control risk differ from detection risk in which of the following ways?

a Inherent risk and control risk are calculated by the client

b Inherent risk and control risk exist independently of the audit

c Inherent risk and control risk are controlled by the auditor

d Inherent risk and control risk exist as a result of the auditor's judgment about materiality

Choice "c" is incorrect The auditor can control detection risk, not inherent risk or control risk

Choice "d" is incorrect Inherent risk and control risk are assessed based on the entity and its

environment, not as a result of the auditor's judgment about materiality

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13 CPA-08152

Which of the following matters does an auditor usually include in the engagement letter?

a Arrangements regarding fees and billing

b Analytical procedures that the auditor plans to perform

c Indications of negative cash flows from operating activities

d Identification of working capital deficiencies

Solution:

Choice "a" is correct An engagement letter typically includes information regarding fees and billing Choice "b" is incorrect An engagement letter may include overall audit strategy, but typically would not include specific audit procedures

Choice "c" is incorrect Indications of negative cash flows from operating activities would be included in the audit workpapers, but typically would not be included in the engagement letter

Choice "d" is incorrect Identification of working capital deficiencies would be included in the audit workpapers, but typically would not be included in the engagement letter

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14 CPA-08153

Which of the following is an important consideration when deciding the nature of tests to use in a financial statement audit?

a Tests of details typically provide a low level of assurance

b Analytical procedures are an inefficient means of obtaining assurance

c The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment

d The use of tests of controls should be considered without regard to the level of assurance required

Choice "d" is incorrect The use of test of controls should be considered when deciding the level of

assurance required and the nature of tests to be used For example, if test of controls indicate that controls are not operating effectively, this will result in a lower detection risk As the acceptable level of detection risk decreases, the assurance provided from substantive procedures should increase In this case, the auditor may change the nature of substantive tests from a less effective to more effective procedure

b Obtaining a detailed fixed-asset register and ensuring items are appropriately capitalized

c Obtaining a listing of current-year additions and verifying that items are recorded in the proper period

d Obtaining a detailed fixed-asset register and ensuring depreciation methods are applied consistently

Solution:

Choice "a" is correct Existence is verified by vouching from the records and statements back to the supporting documents Therefore, to test the existence assertion of property, plant, and equipment, an auditor most likely would obtain a listing of all current-year additions (records), vouching significant additions to original invoices (source), and determining that they have been placed in service (source) Choice "b" is incorrect An auditor would typically review the related repair and maintenance expense accounts in order to locate items that should have been capitalized

Choice "c" is incorrect Obtaining a listing of current-year additions and verifying that items are recorded

in the proper period is typically used to test the cutoff assertion

Choice "d" is incorrect Obtaining a detailed fixed-asset register and ensuring depreciation methods are applied consistently is typically used to test the valuation, allocation, and accuracy assertion

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16 CPA-08155

Which of the following is correct regarding a compilation of financial statements engagement in

accordance with Statement on Standards for Accounting and Review Services?

a If the accountant's independence is impaired, a qualified opinion must be issued

b The accountant may not base the report on information obtained from prior engagements with the

same client

c The accountant is not required to make inquiries nor perform procedures to corroborate the

information provided by the client

d The accountant should perform analytical procedures to financial data

Solution:

Choice "c" is correct An accountant is not required to make inquiries nor perform procedures to

corroborate the information provided by the client in a compilation engagement These procedures are required in an audit engagement

Choice "a" is incorrect Independence is not required in a compilation engagement nor is an opinion rendered in a compilation engagement

Choice "b" is incorrect An accountant may base the report on information obtained from prior

engagements For example, knowledge gained from prior engagements may make the accountant aware that the information supplied by the entity is incorrect, incomplete, or otherwise unsatisfactory

Choice "d" is incorrect An accountant should perform analytical procedures related to financial data in a review or audit Performing analytical procedures is not required in a compilation

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17 CPA-08156

What is the primary objective of the fraud brainstorming session?

a Determine audit risk and materiality

b Identify whether analytical procedures should be applied to the revenue accounts

c Assess the potential for material misstatement due to fraud

d Determine whether the planned procedures in the audit program will satisfy the general audit

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18 CPA-08157

While performing an audit of the financial statements of a company for the year ended December 31, Year 1, the auditor notes that the company's sales increased substantially in December, Year 1, with a corresponding decrease in January, Year 2 In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue?

a There is a broad indication of misappropriation of assets

b There is an indication of theft of the entity's assets

c There is an indication of embezzling cash receipts

d There is a broad indication of financial reporting fraud

Solution:

Choice "d" is correct Misstatements arising from fraudulent financial reporting are intentional

misstatements or omissions of amounts or disclosures in financial statements designed to deceive

financial statement users where the effect causes the financial statements not to be presented, in all material respects, in conformity with GAAP

A substantial increase in sales in December, Year 1, with a corresponding decrease in January, Year 2, is

a broad indication of financial reporting fraud The auditor should obtain additional information and evidence regarding the significant increase and corresponding decrease in sales

Choice "a" is incorrect There is a broad indication of financial reporting fraud, not misappropriation of assets Misappropriation of assets involves the theft of an entity's assets

Choice "b" is incorrect There is no indication of theft of the entity's assets

Choice "c" is incorrect Embezzling cash receipts is an example of misappropriation of assets There is

no indication of misappropriation of assets

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19 CPA-08158

According to the Sarbanes-Oxley Act of 2002, which of the following non-audit services can be provided

by a registered public accounting firm to the client contemporaneously with the audit when preapproval is granted by audit committee action?

a Internal audit outsourcing services

b Tax services

c Actuarial services related to the audit

d Advice on financial information system design

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20 CPA-08159

Which of the following situations would not impair objectivity, integrity, or independence with respect to

an audit client?

a An auditor takes the client's audit committee to Las Vegas for the weekend

b An out-of-town client takes the audit engagement team out to dinner at a renowned local restaurant

c An auditor provides client management with box seats for the season at a major league baseball franchise

d A client takes the audit engagement team on a two-day ski trip after the audit team worked for two consecutive weekends

Solution:

Choice "b" is correct Objectivity, integrity, or independence would not be impaired if a client takes the audit engagement team out to dinner at a renowned local restaurant Of the choices, this appears to be the most reasonable based on the circumstance, and clearly insignificant to the recipient

Objectivity or integrity is considered impaired if a member offers or accepts gifts or entertainment to or from a client, unless the gift or entertainment is reasonable in the circumstances Relevant facts and circumstances would include, but are not limited to:

• The nature of the gift or entertainment

• The occasion giving rise to the gift or entertainment

• The cost or value of the gift or entertainment

Independence would be considered to be impaired if the member's firm or member on the attest

engagement or in a position to influence the attest engagement accepts a gift from an attest client, if the value is clearly more than a token gift

Choice "a" is incorrect Objectivity, integrity, and independence appear to be impaired if an auditor takes the client's audit committee to Las Vegas for the weekend

Choice "c" is incorrect Objectivity, integrity, and independence appear to be impaired if an auditor provides client management with box seats for the season at a major league baseball franchise

Choice "d" is incorrect Objectivity, integrity, and independence appear to be impaired if a client takes the audit engagement team on a two-day ski trip after the audit team worked for two consecutive weekends

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21 CPA-08160

When a PCAOB auditing standard indicates that an auditor "could" perform a specific procedure, how should the auditor decide whether and how to perform the procedure?

a By comparing the PCAOB standard with related AICPA auditing standards

b By exercising professional judgment in the circumstances

c By soliciting input from the issuer's audit committee

d By evaluating whether the audit is likely to be subject to inspection by the PCAOB

Solution:

Choice "b" is correct The words "may," "might," and "could" describe actions and procedures that auditors have a responsibility to consider Matters described in this fashion require the auditor's attention and understanding How and whether the auditor implements these matters in the audit will depend on the exercise of professional judgment in the circumstances consistent with the objectives of the standard Choice "a" is incorrect "Could" does not mean that the auditor should compare the PCAOB standard with the related AICPA standards

Choice "c" is incorrect The auditor should not solicit input from the issuer's audit committee, as audit procedure decisions need to be made by the auditor

Choice "d" is incorrect Whether the audit is likely to be subject to inspection by the PCAOB should not

be a factor on the auditor's decision to perform a procedure

a Agree to recommend the appropriate accounting treatment after performing sufficient research on weather hedges

b Refuse to conduct the research and make a recommendation, because of insufficient experience

c Refuse to conduct the research and make a recommendation, because of a conflict of interest

d Agree with the accounting treatment recommended by the company's hedge fund trader

recommended by the company's hedge fund trader

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23 CPA-08162

According to the SEC, members of an issuer's audit committee may not:

a Establish procedures for employees to anonymously report fraud

b Be responsible for the compensation of any registered public accounting firm employed by the

registrant to provide an audit report

c Accept any consulting, advisory, or other compensatory fee from the registrant for services other than

as a member of the board

d Engage independent counsel as deemed necessary to carry out their duties

Solution:

Choice "c" is correct According to the SEC, members of an issuer's audit committee may not accept any consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board

Choice "a" is incorrect Members of an issuer's audit committee may establish procedures for employees

to anonymously report fraud

Choice "b" is incorrect Members of an issuer's audit committee are typically responsible for the

compensation of the public accounting firm employed by the registrant to provide an audit report

Choice "d" is incorrect Members of an issuer's audit committee may engage independent counsel as deemed necessary to carry out their duties

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24 CPA-08163

Which of the following would not be included in an accountant's documentation of a compilation of a

client's financial statements?

a Discussion with the client regarding the proper presentation of gross cash flows for investment purchases

b An engagement letter

c A memo to the CFO about a potentially significant fraud revealed during compilation procedures

d A review of the segregation of duties in the cash disbursement process

Solution:

Choice "d" is correct Documentation provides the support that the accountant compiled with SSARS when performing the compilation engagement SSARS does not require internal control procedures, such as review of segregation of duties, to be performed in a compilation engagement

Choice "a" is incorrect Significant issues, such as discussing with the client the proper presentation of investment purchases, which relate to the financial statements should be included in the documentation

of a compilation

Choice "b" is incorrect An engagement letter should be included in the documentation of a compilation Choice "c" is incorrect Written communications with management regarding fraud that came to the accountant's attention during a compilation should be included in the documentation of a compilation

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25 CPA-08164

If requested to perform a compilation engagement for a nonissuer in which an accountant has an

immaterial direct financial interest, the accountant is:

a Independent because the financial interest in the nonissuer is immaterial

b Not independent and, therefore, may not be associated with the financial statements

c Not independent and, therefore, may not issue a compilation report

d Not independent and, therefore, may issue a compilation report, but may not issue a review report

Solution:

Choice "d" is correct An accountant who has a direct financial interest, no matter how small, is

considered to not be independent Independence is not required for a compilation engagement since no assurance is given However, a review engagement provides limited assurance, and therefore requires independence Consequently, a review report may not be issued when the accountant is not

independent

Choice "a" is incorrect An accountant who has any direct financial interest, even if immaterial, is

considered to not be independent

Choice "b" is incorrect A compilation engagement permits an accountant to be associated with the financial statements even if the accountant lacks independence

Choice "c" is incorrect An accountant who is not independent of the entity may compile financial

statements for such an entity and issue a compilation report This is permitted as long as the accountant discloses their lack of independence in the report

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AICPA QUESTIONS RATED HARD DIFFICULTY

26 CPA-08165

When there has been a change in accounting principles, but the effect of the change on the comparability

of the financial statements is not material, the auditor should:

a Not refer to the change in the auditor's report

b Refer to the note in the financial statements that discusses the change

c Refer to the change in an emphasis-of-matter paragraph

d Explicitly state whether the change conforms with GAAP

Solution:

Choice "a" is correct If the change in accounting principles has an immaterial effect on the comparability

of financial statements, no revision to the audit report is necessary

Choice "b" is incorrect The auditor's report would not need to be modified when the effect of the change

on comparability is immaterial, therefore, the auditor does not need to refer to the note in the financial statements that discusses the change

Choice "c" is incorrect A change in accounting principles, which has a material effect on the

comparability of financial statements, would refer to the change in an emphasis-of-matter paragraph Choice "d" is incorrect The auditor does not need to explicitly state whether the change conforms with GAAP because the effect of the change is immaterial The auditor's standard report implies that the auditor is satisfied that the comparability of financial statements between periods has not been materially affected by changes in accounting principles, and that such principles have been consistently applied between or among periods because either (a) no change in accounting principles has occurred, or (b) there has been a change in accounting principles or in the method of their application, but the effect of the change on the comparability of the financial statements is not material

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27 CPA-08166

An entity prepares its financial statements on its income tax basis A description of how that basis differs from GAAP should be included in the:

a Notes to the financial statements

b Auditor's engagement letter

c Management representation letter

d Introductory paragraph of the auditor's report

Choice "c" is incorrect The management representation letter would likely include management's acknowledgement of their responsibility for the fair presentation of the financial statements in accordance with the applicable financial reporting framework However, it is unlikely that the management

representation letter would include a description of how that basis differs from GAAP

Choice "d" is incorrect The introductory paragraph of the auditor's report identifies the financial

statements audited, but does not include a description of how the other comprehensive basis of

accounting differs from GAAP

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28 CPA-08167

When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:

a Disclaims any form of assurance on the historical financial statements

b Expresses limited assurance that the results will be within the projected range

c Describes the limitations on the usefulness of the projection

d Evaluates the hypothetical assumptions used to prepare the projection

Solution:

Choice "c" is correct A compilation of a financial projection report describes the limitations on the usefulness of the projection by including a caveat that the prospective results may not be achieved Choice "a" is incorrect A compilation of a financial projection report disclaims any assurance on the projected, not historical, financial statements

Choice "b" is incorrect No assurance is provided in a compilation of projected financial statements Choice "d" is incorrect An examination, not a compilation, of a financial projection evaluates the hypothetical assumptions used to prepare the projection

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29 CPA-08168

Which of the following would be considered an analytical procedure?

a Testing purchasing, shipping, and receiving cutoff activities

b Comparing inventory balances to recent sales activities

c Projecting the deviation rate of a statistical sample to the population

d Reconciling physical counts to perpetual records and general ledger balances

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30 CPA-08169

Which of the following statements should be included in a practitioner's report on the application of agreed-upon procedures?

a A statement that the practitioner performed an examination of prospective financial statements

b A statement of scope limitation that will qualify the practitioner's opinion

c A statement referring to standards established by the AICPA

d A statement of negative assurance based on procedures performed

Solution:

Choice "c" is correct A statement referring to standards established by the AICPA should be included in

a practitioner's report on the application of agreed-upon procedures

Choice "a" is incorrect Agreed-upon procedure reports state that the practitioner did not conduct an

examination of the subject matter

Choice "b" is incorrect No opinion is rendered in an agreed-upon procedure engagement An opinion is rendered in an examination or audit engagement

Choice "d" is incorrect Agreed-upon procedure engagements do not provide any assurance