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Free AICPA CPA-Auditing Exam Questions (page: 14)

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PDF with 1026 Questions

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

  1. Examine a sample of transactions that occurred since the year-end to verify the effectiveness of computer controls.
  2. Inquire of management whether there have been significant changes in working capital since the year-end.
  3. Recompute depreciation charges for plant assets sold for substantial gains since the year-end.
  4. Reperform the tests of controls that indicated significant deficiencies in the operation of internal control.

Answer(s): B

Explanation:

Choice "b" is correct. In obtaining evidence about subsequent events, the auditor would most likely inquire of management whether there have been significant changes in working capital since year- end.
Such changes could be indicative of a going concern problem, which would require financial statement disclosure.
Choice "a" is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Reviewing a sample of transactions occurring after year-end to verify the effectiveness of computer controls would not be likely to provide information about subsequent events.
Choice "c" is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Recomputing depreciation related to assets sold after year-end is not likely to provide information about subsequent events. Sales occurring after year-end are not considered to be subsequent events. Choice "d" is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Control deficiencies do not fall within this definition, so reperforming tests of controls would not provide evidence about subsequent events.



Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

  1. A lawsuit is resolved that is explained in a separate paragraph of the prior-year's auditor's report.
  2. New information is discovered concerning undisclosed related party transactions of the prior year.
  3. A technological development occurs that affects the entity's ability to continue as a going concern.
  4. The entity sells a subsidiary that accounts for 35% of the entity's consolidated sales.

Answer(s): B

Explanation:

Choice "b" is correct. If an auditor becomes aware of material information that existed at the date of the auditor's report, and which would have affected that report, the auditor needs to take appropriate action.
Since related party transactions should be disclosed in the financial statements, it is likely that the auditor would need to make further inquiries to determine whether the lack of disclosure will affect the previously issued report.
Choice "a" is incorrect. Resolution of a lawsuit that was disclosed in the prior year's audit report would not be likely to affect the audit report, as auditors are not required to update their reports for events occurring after the fact.
Choice "c" is incorrect. A technological development that affects the entity's ability to continue as a going concern would not be likely to affect the previous year's audit report, as auditors are not required to update their reports for events occurring after the fact. Choice "d" is incorrect. Sale of a subsidiary would not be likely to affect the previous year's audit report, as auditors are not required to update their reports for events occurring after the fact.



On February 9, Brown, CPA, expressed an unqualified opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement.
Brown should first:

  1. Request Web's permission to perform substantive procedures that would provide a satisfactory basis for the opinion.
  2. Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements.
  3. Take no additional action because subsequent events have no effect on the financial statements that were reported on.
  4. Assess the importance of the omitted procedures to Brown's present ability to support the opinion.

Answer(s): D

Explanation:

Choice "d" is correct. If an omitted audit procedure is discovered, the auditor should assess the importance of the omitted procedure to the auditor's ability to support the opinion. It might be the case that other audit procedures tended to compensate for the omitted procedure, in which case no further action would be necessary.
Choice "a" is incorrect. The auditor would only request permission to perform substantive procedures if no other procedures compensated for the missing one, and if there were persons relying (or likely to rely) on the financial statements. Choice "b" is incorrect. The auditor would need to determine whether there were persons relying (or likely to rely) on the financial statements, but this would not be done unless it had already been determined that no other audit procedures compensated for the missing one. Choice "c" is incorrect. If the omitted audit procedure impairs the auditor's ability to support the opinion, no other procedures compensated for the missing one, and there were persons relying (or likely to rely) on the financial statements, the auditor would need to apply substantive procedures.
Taking no action would not be an acceptable response.
Reporting on Other Information



Which of the following is not true regarding an engagement to provide a written report on the application of accounting principles?

  1. An accountant is prohibited from providing a report on the application of accounting principles to a transaction not involving the facts and circumstances of a specific entity.
  2. The accountant's written report on the application of accounting principles should include an identification of the specific entity involved.
  3. An accountant is prohibited from providing a report on the application of accounting principles to a proposed future transaction involving the facts and circumstances of a specific entity.
  4. The accountant's written report on the application of accounting principles should include a paragraph restricting the use of the report.

Answer(s): C

Explanation:

Choice "c" is correct. An accountant may report on the application of accounting principles to a proposed future transaction as long as the transaction involves the facts and circumstances of a specific entity.
Choice "a" is incorrect. An accountant is prohibited from providing a report on the application of accounting principles to "hypothetical transactions," which are defined as those not involving the facts and circumstances of a specific entity.
Choices "b" and "d" are incorrect. The accountant's written report on the application of accounting principles should include an identification of the specific entity involved, a description of the transaction(s), a statement of the relevant facts, circumstances, and assumptions (and a statement that any changes therein may change the report), a statement about the source of the information, a statement describing the appropriate accounting principles or type of opinion that may be rendered, the reasons for the accountant's conclusions, a statement regarding management's responsibility, and a restrictive use paragraph.



Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country's accounting principles, an auditor practicing in the U.S. should:

  1. Understand the accounting principles generally accepted in the other country.
  2. Be certified by the appropriate auditing or accountancy board of the other country.
  3. Notify management that the auditor is required to disclaim an opinion on the financial statements.
  4. Receive a waiver from the auditor's state board of accountancy to perform the engagement.

Answer(s): A

Explanation:

Choice "a" is correct. Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country's accounting principles, the auditor practicing in the U.S. should understand the accounting principles generally accepted in the other country. Choice "b" is incorrect. The auditor practicing in the U.S. would be able to report on the financial statements of the U.S. entity without obtaining certification in the other country. Choice "c" is incorrect. The auditor need not disclaim an opinion on the financial statements prepared in conformity with another country's accounting principles. Choice "d" is incorrect. A waiver to perform the engagement is not necessary.



In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of accounting principles to a specific transaction. The accountant's report should include a statement that:

  1. Any difference in the facts, circumstances, or assumptions presented may change the report.
  2. The engagement was performed in accordance with Statements on Standards for Consulting Services.
  3. The guidance provided is for management use only and may not be communicated to the prior or continuing auditors.
  4. Nothing came to the accountant's attention that caused the accountant to believe that the accounting principles violated GAAP.

Answer(s): A

Explanation:

Choice "a" is correct. The accountant's report on the application of accounting principles should include a statement that should any facts or circumstances differ from those presented to the accountant, the accountant's conclusions may change.
Choice "b" is incorrect. The report should state that the engagement was performed in accordance with "AICPA Standards," not statements on Standards for Consulting Services. Choice "c" is incorrect. The report's use is restricted to "specified parties," which may include parties other than management (e.g., the board of directors). Also, the preparers of the financial statements and the reporting accountant should consult with the entity's continuing accountant. Choice "d" is incorrect. The report does not provide negative assurance with respect to GAAP; rather, it may describe the appropriate accounting principles to be applied.



Blue, CPA, has been asked to render an opinion on the application of accounting principles to a specific transaction by an entity that is audited by another CP

  1. Blue may accept this engagement, but should:
  2. Consult with the continuing CPA to obtain information relevant to the transaction.
  3. Report the engagement's findings to the entity's audit committee, the continuing CPA, and management.
  4. Disclaim any opinion that the hypothetical application of accounting principles conforms with generally accepted accounting principles.
  5. Notify the entity that the report is for the general use of all interested parties.

Answer(s): A

Explanation:

Choice "a" is correct.
When rendering an opinion on the application of accounting principles to a specific transaction, the reporting CPA should consult with the continuing CPA to obtain information relevant to the transaction.
Choice "b" is incorrect. The reporting CPA has no obligation to report the engagement's findings to the continuing CPA. Generally, the report would be addressed to the requesting party (e.g., management, the board of directors, etc.).
Choice "c" is incorrect. There is no disclaimer in the report; however, the CPA does state that the preparers of the financial statements are responsible for proper accounting treatment. Choice "d" is incorrect. Use of the report is restricted to specified parties.



The financial statements of KCP America, a U.S. entity, are prepared for inclusion in the consolidated financial statements of its non-U.S. parent. These financial statements are prepared in conformity with the accounting principles generally accepted in the parent's country and are for use only in that country.
How may KCP America's auditor report on these financial statements?

I). A U.S.-style report (unmodified).
II). A U.S.-style report modified to report on the accounting principles of the parent's country.
III). The report form of the parent's country.

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): D

Explanation:

Choice "d" is correct. No - Yes - Yes.
When financial statements are prepared in conformity with the accounting principles generally accepted in the parent's country and are for use only in that country, the auditor may report using either a U.S.-style report modified to report on the accounting principles of the parent's country or the report form of the parent's country. Choices "a", "b", and "c" are incorrect, per the above Explanation.



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