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Free AICPA CPA-Auditing Exam Questions (page: 24)

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PDF with 1026 Questions

This question presents independent factual situations an auditor might encounter in conducting an audit. List B represents the report modifications (if any) that would be necessary. Select as the best answer for each item, the action the auditor normally would take. The report modifications in List B may be selected once, more than once, or not at all.
Assume:
· The auditor is independent.
· The auditor previously expressed an unqualified opinion on the prior year's financial statements. · Only single-year (not comparative) statements are presented for the current year. · The conditions for an unqualified opinion exist unless contradicted in the factual situations. · The conditions stated in the factual situations are material. · No report modifications are to be made except in response to the factual situation.
Item to Be Answered
An entity discloses in the notes to the financial statements certain lease obligations. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles.
List B
Report Modifications

  1. Describe the circumstances in an explanatory paragraph preceding the opinion paragraph without modifying the three standard paragraphs.
  2. Describe the circumstances in an explanatory paragraph following the opinion paragraph without modifying the three standard paragraphs.
  3. Describe the circumstances in an explanatory paragraph preceding the opinion paragraph and modify the opinion paragraph.
  4. Describe the circumstances in an explanatory paragraph following the opinion paragraph and modify the opinion paragraph.
  5. Describe the circumstances in an explanatory paragraph preceding the opinion paragraph and modify the scope and opinion paragraphs.
  6. Describe the circumstances in an explanatory paragraph following the opinion paragraph and modify the scope and opinion paragraphs.
  7. Describe the circumstances within the scope paragraph without adding an explanatory paragraph.
  8. Describe the circumstances within the opinion paragraph without adding an explanatory paragraph.
  9. Describe the circumstances within the scope and opinion paragraphs without adding an explanatory paragraph.
  10. Issue the standard auditor's report without modification.

Answer(s): C

Explanation:

Choice "C" is the correct modification. The circumstances should be described in an explanatory paragraph preceding the opinion paragraph and the opinion paragraph should be modified.
Quality Control Standards



The nature and extent of a CPA firm's quality control policies and procedures depend on:

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

Answer(s): A

Explanation:

Choice "a" is correct. The nature and extent of a CPA firm's quality controls depend on a number of factors, such as its size, the degree of operating autonomy allowed its personnel and its practice offices, the nature of its practice, its organization, and appropriate cost-benefit considerations. Choices "b", "c", and "d" are incorrect, based on the above Explanation.



Would the following factors ordinarily be considered in planning an audit engagement's personnel requirements?

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

Answer(s): A

Explanation:

Choice "a" is correct.
When assigning personnel to an engagement, the firm should consider the following factors in achieving a balance of engagement manpower requirements, personnel skills, and individual development and utilization: 1) engagement size and complexity, 2) personnel availability, 3) special expertise required, 4) timing of the work to be performed, 5) continuity and periodic rotation of personnel, and 6) opportunities for on-the-job training. Choices "b", "c", and "d" are incorrect, based on the above Explanation.



After fieldwork audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up review of the audit documentation. This second review usually focuses on:

  1. The fair presentation of the financial statements in conformity with GAAP.
  2. Fraud involving the client's management and its employees.
  3. The materiality of the adjusting entries proposed by the audit staff.
  4. The communication of internal control weaknesses to those charged with governance.

Answer(s): A

Explanation:

Choice "a" is correct. The primary purpose of a second partner review is to ensure that the financial statements are presented in accordance with GAAP.
Choice "b" is incorrect. A search for fraud is typically not part of a second partner review. Choice "c" is incorrect. The materiality of adjusting entries proposed by the audit staff may be reviewed by a second partner, but they are not the primary focus of such a review. Choice "d" is incorrect. The communication of internal control weaknesses to those charged with governance is not a primary focus of a second partner review.



The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to:

  1. Enable the CPA firm to attest to the reliability of the client.
  2. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
  3. Minimize the likelihood of association with clients whose management lacks integrity.
  4. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.

Answer(s): C

Explanation:

Choice "c" is correct. Policies and procedures should be established for deciding whether to accept or continue a client in order to minimize the likelihood of association with a client whose management lacks integrity.
Choice "a" is incorrect. Suggesting that there should be procedures to decide whether to accept a client does not imply that a firm vouches for the integrity or reliability of a client. Choice "b" is incorrect. Suggesting that there should be procedures to decide whether to accept a client does not imply that a firm has a duty to anyone but itself with respect to the acceptance, rejection, or retention of clients.
Choice "d" is incorrect. The decision to express an unqualified opinion should be made after the completion of the audit, not upon client acceptance.



A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to which of the following prescribed standards:

  1. Professional ethics.
  2. Supervision and review.
  3. Accounting and review services.
  4. Quality control.

Answer(s): D

Explanation:

Choice "d" is correct. The AICPA's Statements on Quality Control Standards assert that professional development policies and procedures should be established by the firm in order to provide reasonable assurance that personnel will have the knowledge required to perform their work and progress within the firm.
Choice "a" is incorrect. The auditors' responsibility is to the public and is defined in the "AICPA Code of Professional Conduct," which includes a set of mandatory rules and which derives its authority from the bylaws of the AICPA.
Choice "b" is incorrect. Supervision and review are part of GAAS fieldwork standards. Choice "c" is incorrect. Accounting and review services pertain to the unaudited financial statements of a nonpublic company.



The primary purpose of establishing quality control policies and procedures for deciding whether to accept new clients is to:

  1. Minimize the likelihood of association with clients whose management lacks integrity.
  2. Monitor significant deficiencies in the design and operation of the client's internal control.
  3. Identify noncompliance with aspects of contractual agreements that affect the financial statements.
  4. Provide reasonable assurance that personnel will be adequately trained to fulfill their assigned responsibilities.

Answer(s): A

Explanation:

Choice "a" is correct. Policies and procedures should be established for deciding whether to accept a new client in order to minimize the likelihood of association with a client whose management lacks integrity.
Choice "b" is incorrect. Policies and procedures established for deciding whether to accept a new client would not aid in monitoring internal control deficiencies. A review of internal control would not occur until after a new client was accepted.
Choice "c" is incorrect. Policies and procedures established for deciding whether to accept a new client would not aid in identifying noncompliance with contractual agreements. Reviewing the terms of contractual agreements would not occur until after a new client was accepted. Choice "d" is incorrect. Policies and procedures established for deciding whether to accept a new client would not aid in the adequate training of personnel. Personnel management policies would be used to ensure that training needs are met.



Jackson & Company, CPAs, plan to audit the financial statements of Perigee Technologies, an issuer as defined under the Sarbanes-Oxley Act of 2002.
Which of the following situations would impair Jackson's independence?

  1. Provision of personal tax services to Johnson, the accounts payable manager of Perigee.
  2. Preparation of Perigee's routine annual tax return, where Jackson's fee will be calculated as a percentage of the tax refund obtained.
  3. An audit of Perigee's internal control is performed contemporaneously with the annual financial statement audit.
  4. Discovering that Lowe, the chief financial officer of Perigee, started his accounting career ten years earlier as a staff accountant for Jackson & Company, and continues to maintain ties with current partners at the firm.

Answer(s): B

Explanation:

Choice "b" is correct. The provision of services involving contingent fee arrangements impairs the auditor's independence.
Choice "a" is incorrect. Personal tax services provided to employees do not impair the auditor's independence; however, personal tax services provided to corporate officers or their families would impair independence.
Choice "c" is incorrect. Independence is not impaired by the performance of an audit of Perigee's internal control; in fact, such services are required by PCAOB Auditing Standard No. 5 (covered in a later class).
Choice "d" is incorrect. The prohibition against auditing companies whose corporate officers worked for the auditing firm only applies if those officers worked on the audit during the preceding year.



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