Volume A

QUESTION: 1
Several sources of GAAP consulted by an auditor are in conflict as to the application of an
accounting principle. Which of the following should the auditor consider the most authoritative?

A. FASB Technical Bulletins.
B. AICPA Accounting Interpretations.
C. FASB Statements of Financial Accounting Concepts.
D. AICPA Technical Practice Aids.

Answer(s): A
Explanation:
Choice "a" is correct. In accordance with the GAAP hierarchy, FASB Technical Bulletins are
considered the most authoritative of the sources listed in the question. Choice "b" is incorrect.
Of the sources listed, AICPA Accounting Interpretations would be considered the second most
authoritative.
Choice "c" is incorrect. FASB Statements of Financial Accounting Concepts are among the least
authoritative sources of GAAP available to auditors.
Choice "d" is incorrect. AICPA Technical Practice Aids are among the least authoritative
sources of GAAP available to auditors.
QUESTION: 2
For an entity's financial statements to be presented fairly in conformity with generally accepted
accounting principles, the principles selected should:

A. Be applied on a basis consistent with those followed in the prior year.
B. Be approved by the Auditing Standards Board or the appropriate industry subcommittee.
C. Reflect transactions in a manner that presents the financial statements within a range of
acceptable limits.
D. Match the principles used by most other entities within the entity's particular industry.

Answer(s): C
Explanation:
Choice "c" is correct. Financial statements are presented fairly in conformity with GAAP when
there are no material misstatements included therein. The fact that there may occasionally be
immaterial misstatements means that the financial statements are correct "within a range of
acceptable limits." Choice "a" is incorrect. Accounting principles may change from year to year.
As long as such changes are properly accounted for, the financial statements are stil in
conformity with GAAP. Choice "b" is incorrect. The AICPA and the FASB determine GAAP, not
the Auditing Standards Board. Choice "d" is incorrect. There is no requirement that an entity's
financial statements be prepared in accordance with prevalent industry practices in order to be
in conformity with GAAP.
QUESTION: 3
Which of the following statements is correct concerning an auditor's responsibilities regarding
financial statements?
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