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

1. 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

2. How does an auditor make the following representations when issuing the standard auditor's report on comparative financial statements? Consistent application of accounting principles Implicitly Explicitly Implicitly Explicitly Examination of evidence on a test basis Explicitly Implicitly Implicitly Explicitly

a. b. c. d.

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

3. 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

4. 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 do not involve a comparison of management assertions to ratios calculated by the auditor. Choice "d" is incorrect. Analytical procedures do not generally help an auditor develop their preliminary judgment about materiality.

2011 AICPA Newly Released Questions Auditing

5. 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

6. 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

7. 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

8. 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

9. 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.

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2011 AICPA Newly Released Questions Auditing

10. In auditing contingent liabilities, which of the following procedures would an auditor most likely perform? a. b. c. d. Confirm the details of outstanding purchase orders. Apply analytical procedures to accounts payable. Read the minutes of the board of directors' meetings. Perform tests of controls on the cash disbursement activities.

Solution: Choice "c" is correct. In auditing contingent liabilities, an auditor would want to review the minutes of meetings of stockholders, board of directors, and other executive committees in order to find out about communication that may have been transmitted on such issues. Choice "a" is incorrect. This step will not likely help to determine if any contingent liabilities exist. Choice "b" is incorrect. This step will not likely help to determine if any contingent liabilities exist. Choice "d" is incorrect. This step will not likely help to determine if any contingent liabilities exist.

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2011 AICPA Newly Released Questions Auditing

11. An auditor believes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to: a. b. c. d. Purchase production facilities currently being leased from a third party. Postpone expenditures to upgrade its information technology system. Pay cash dividends that are in arrears to the preferred stockholders. Increase the useful lives of plant assets for depreciation purposes.

Solution: Choice "b" is correct. When an auditor believes that there is substantial doubt about an entity's ability to continue as a going concern, the auditor is required to consider management's plans for dealing with the conditions or events that led to the auditor's belief, including: i. ii. Plans to borrow money or restructure debt Plans to sell assets

iii. Plans to delay or reduce expenditures iv. Plans to increase ownership equity Choice "a" is incorrect. Making a decision to purchase rather than continue leasing would generally not be a mitigating factor for the concern over whether a company can continue as a going concern. Choice "c" is incorrect. Making a decision to pay cash dividends would generally not be a mitigating factor for the concern over whether a company can continue as a going concern. Choice "d" is incorrect. Making a decision to increase the useful life estimate of capital assets would not be considered a genuine mitigating factor for the concern over whether a company can continue as a going concern. In fact, it would likely concern the auditor that the management was trying to cover up their financial results through the use of an unreasonable estimate.

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2011 AICPA Newly Released Questions Auditing

12. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The entity's financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s): "Except for the effects of such adjustments" Yes Yes No No "Possible discontinuance of the entity's operations" Yes No Yes No

a. b. c. d.

Solution: Choice "d" is correct. The wording of the explanatory paragraph must include the terms "substantial doubt" and "going concern." The phrases in the above question are not required to be used. Choices "a", "b", and "c" are incorrect based on the above explanation.

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2011 AICPA Newly Released Questions Auditing

13. After issuing an auditor's report, an auditor becomes aware of facts that existed at the report date that would have affected the report had the auditor known of the facts at the time. What is the first thing the auditor should do? a. Notify each member of the board of directors that the auditor's report may not be associated with the financial statements from this point forward. b. Issue revised financial statements and auditor's report describing the reason for the revision in a note to the financial statements. c. Determine whether there are persons currently relying on, or likely to rely on, the financial statements and whether those persons would attach importance to the information. d. Notify regulatory agencies having jurisdiction over the client that the auditor's report should not be relied upon from this point forward. Solution: Choice "c" is correct. If an auditor becomes aware of material information that would have affected the report, and that persons are currently relying or are likely to rely on the financial statements covered by the report, the auditor should take appropriate action. In order to do this, the auditor must first determine whether there are indeed persons relying or likely to rely on the financial statements. Choice "a" is incorrect. This step would occur only if necessary after it is determined that there were persons currently relying or likely to rely on the financial statements covered by the report. Choice "b" is incorrect. This step would occur only if necessary after it is determined that there were persons currently relying or likely to rely on the financial statements covered by the report. Choice "d" is incorrect. This step would occur only if necessary it is determined that there were persons currently relying or likely to rely on the financial statements covered by the report.

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2011 AICPA Newly Released Questions Auditing

14. A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods? a. b. c. d. Observation. Confirmation. Calculation. Inspection.

Solution: Choice "b" is correct. The auditor should observe the physical inventory count of goods held in public warehouses if the inventory held therein is significant; otherwise, confirmation of such inventory is sufficient. Choice "a" is incorrect. Although observation would provide the more effective evidence of existence, it would generally not be the most efficient and should only be done if the inventory is significant. Choice "c" is incorrect. Calculation is generally not a step performed to determine existence of inventory. Choice "d" is incorrect. Inspection of inventory, like observation, would provide the more effective evidence of existence; it would generally not be the most efficient method and should only be done if the inventory is significant.

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2011 AICPA Newly Released Questions Auditing

15. A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue without violating independence rules? a. b. c. d. Compilations. Reviews. Audits. Agreed-upon procedures.

Solution: Choice "a" is correct. An accountant who is not independent with respect to an entity, including a member of the board, may compile financial statements for such an entity and issue a report. The last paragraph of the report should disclose this lack of independence. Choice "b" is incorrect. A review would not be allowed in cases where the auditor's independence is impaired, as it would be in this situation. Choice "c" is incorrect. An audit would not be allowed in cases where the auditor's independence is impaired, as it would be in this situation. Choice "d" is incorrect. An agreed upon procedures engagement would not be allowed in cases where the auditor's independence is impaired, as it would be in this situation.

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2011 AICPA Newly Released Questions Auditing

16. A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities are not material to the CPA's wealth but are material to the child's personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA's independence with the client? a. b. c. d. No, because the CPA would not have a direct financial interest in the client. Yes, because the stock would be a direct financial interest and materiality is a factor. Yes, because the stock would be an indirect financial interest and materiality is not a factor. Yes, because the stock would be a direct financial interest and materiality is not a factor.

Solution: Choice "d" is correct. Rule 101 requires that a CPA not have any direct financial interests in the client, regardless of materiality. This rule extends to the covered member's spouse and dependents. Choices "a", "b", and "c" are incorrect per the above explanation.

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2011 AICPA Newly Released Questions Auditing

17. Which of the following analytical procedures most likely would be used during the planning stage of an audit? a. Comparing current-year to prior-year sales volumes. b. Reading the financial statements and notes and considering the adequacy of evidence. c. Comparing the current-year ratio of aggregate salaries paid to the number of employees to the prioryear's ratio. d. Reading the letter from the client's attorney and considering the threat of litigation. Solution: Choice "a" is correct. The comparison of current year to prior year sales volumes would be a good analytical procedure to perform during the planning stage as it would give the auditor information regarding changes in the client's business during the period. Choice "b" is incorrect. This would not be considered an analytical procedure. Choice "c" is incorrect. Although this is an analytical procedure, it would likely be one performed during the specific review of salaries expense, as opposed to one performed during the planning stage. Choice "d" is incorrect. This would not be considered an analytical procedure.

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2011 AICPA Newly Released Questions Auditing

18. Which of the following should an auditor do when control risk is assessed at the maximum level? a. b. c. d. Perform fewer substantive tests of details. Perform more tests of controls. Document the assessment. Document the control structure more extensively.

Solution: Choice "c" is correct. When an auditor assesses control risk at the maximum level, the assessment should be documented and the auditor should make decisions to potentially perform more substantive procedures. Choice "a" is incorrect. When control risk is assessed at the maximum level, more, not fewer substantive tests of details would be performed. Choice "b" is incorrect. All tests of controls should have been performed before assessing the control risk at the maximum level. Choice "d" is incorrect. All control structure documentation should have been performed prior to assessing the control risk at the maximum level.

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2011 AICPA Newly Released Questions Auditing

19. The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may: a. b. c. d. Allow the internal auditor to perform tests of internal controls. Allow the internal auditor to audit a major subsidiary of the company. Not assign any task to the internal auditor because of the internal auditor's lack of independence. Allow the internal auditor to perform analytical procedures, but not be involved with any tests of details.

Solution: Choice "a" is correct. When planning the audit, the auditor should consider the extent of involvement of the client's internal auditors in the performance of the audit. Although they can be involved with tests of controls and of details (i.e., substantive tests), their involvement should generally be limited. Choice "b" is incorrect. When planning the audit, the auditor should consider the extent of involvement of the client's internal auditors in the performance of the audit. Although they can be involved with tests of controls and of details (i.e., substantive tests), their involvement should generally be limited. Choice "c" is incorrect. Independence is not required, nor can it be obtained by an internal auditor. Choice "d" is incorrect. When planning the audit, the auditor should consider the extent of involvement of the client's internal auditors in the performance of the audit. Although they can be involved with tests of controls and of details (i.e., substantive tests), their involvement should generally be limited.

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2011 AICPA Newly Released Questions Auditing

20. An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? a. b. c. d. Incorrect rejection. Incorrect acceptance. Assessing control risk too low. Assessing control risk too high.

Solution: Choice "b" is correct. The risk of incorrect acceptance is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when in fact it is materially misstated (i.e., sample results fail to identify an existing material misstatement). Choice "a" is incorrect. Incorrect acceptance would be the opposite of the above situation. Choice "c" is incorrect. Control risk deals with internal controls, not account balances. Choice "d" is incorrect. Control risk deals with internal controls, not account balances.

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2011 AICPA Newly Released Questions Auditing

21. According to the AICPA Code of Professional Conduct, which of the following actions by a CPA most likely involves an act discreditable to the profession? a. b. c. d. Refusing to provide the client with copies of the CPA's workpapers. Auditing financial statements according to governmental standards despite the client's preferences. Accepting a commission from a nonattest function client. Retaining client records after the client demands their return.

Solution: Choice "d" is correct. Retaining client owned records after the client demands their return is a violation of Rule 501 discreditable acts. Choice "a" is incorrect. As the CPA's workpapers are technically owned by the CPA, there is no requirement to turn them over to the client. Choice "b" is incorrect. This would not be considered a discreditable act. Failure to follow such standards may be considered an act discreditable. Choice "c" is incorrect. This is not a violation, as the client is a nonattest client.

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2011 AICPA Newly Released Questions Auditing

22. When planning a review of an audit client's interim financial statements, which of the following procedures should the accountant perform to update the accountant's knowledge about the entity's business and its internal control? a. Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year end. b. Inquire of the entity's outside legal counsel about the status of any previous pending litigation and any new litigation involving the entity. c. Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation. d. Consider the results of audit procedures performed with respect to the current-year's financial statements. Solution: Choice "d" is correct. Considering the results of audit procedures that have previously been performed and how they correspond to the current year's financial statements is a step that may be performed during the planning stage to update the accountant's knowledge of the client. Choice "a" is incorrect. Analytical procedures performed on specific accounts would more likely be done during the testing stage of the review, not during the planning stage. Choice "b" is incorrect. Inquiry of the client's legal counsel is not required in a review engagement. Choice "c" is incorrect. Examination of supporting documentation for specific transactions would not be performed during a review; this is an audit procedure. A review consists principally of inquiry and analytical procedures.

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2011 AICPA Newly Released Questions Auditing

23. An accountant has been engaged to compile pro forma financial statements. During the accountant's acceptance procedures, it is discovered that the accountant is not independent with respect to the company. What action should the accountant take with regard to the compilation? a. The accountant should discuss the lack of independence with legal counsel to determine whether it is appropriate to accept the engagement. b. The accountant should disclose the lack of independence in the accountant's compilation report. c. The accountant should withdraw from the engagement. d. The accountant should compile the pro forma financial statements but should not provide a compilation report. Solution: Choice "b" is correct. An accountant who is not independent with respect to an entity may compile financial statements for such an entity and issue a report. The last paragraph of the report should disclose this lack of independence and may disclose the reasons for the lack. Choice "a" is incorrect. As there is no requirement for independence in a compilation engagement, there is no need for legal counsel. Choice "c" is incorrect. Withdrawal is not required, as independence is not required in compilation engagements. Choice "d" is incorrect. A compilation report is required if the compilation engagement is completed.

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2011 AICPA Newly Released Questions Auditing

24. In an accountant's review of interim financial information, the accountant typically performs each of the following, except: a. b. c. d. Reading the available minutes of the latest stockholders' meeting. Applying financial ratios to the interim financial information. Inquiring of the accounting department's management. Obtaining corroborating external evidence.

Solution: Choice "d" is correct. When performing a review engagement, the accountant should perform procedures to accumulate evidence to provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. The accountant should use professional judgment to determine the nature, timing and extent of review procedures, which consist primarily of inquiry and analytical procedures. As such, obtaining corroborating external evidence would generally not be required. Choices "a", "b", and "c" are incorrect per the above explanation.

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2011 AICPA Newly Released Questions Auditing

25. According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations? a. The auditor's cousin has an insurance policy obtained from the issuer before it became an audit client. b. The auditor has an automobile loan at standard terms from the audit client that is collateralized by the automobile. c. The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client. d. The auditor's grandparent was in an accounting role at the audit client and ended employment before the period under audit began. Solution: Choice "c" is correct. An investment in an entity that has the ability to exercise significant influence over the audit client would be considered a violation of the Rule 101 independence requirements. Choice "a" is incorrect. A covered member's spouse and dependents are also generally subject to Rule 101; however this does not extend to cousins. Choice "b" is incorrect. Independence is not impaired in a financial institution client by a fully collateralized car loan with a financial institution client. Choice "d" is incorrect. A covered member's spouse and dependents are also generally subject to Rule 101; however this does not extend to grandparents.

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2011 AICPA Newly Released Questions Auditing

26. A primary objective of analytical procedures used in the final review stage of an audit is to: a. b. c. d. Identify account balances that represent specific risks relevant to the audit. Gather evidence from tests of details to corroborate financial statement assertions. Detect fraud that may cause the financial statements to be misstated. Assist the auditor in evaluating the overall financial statement presentation.

Solution: Choice "d" is correct. The purpose of applying analytical procedures during the overall review stage of an audit is to evaluate the overall financial statement presentation, to assess the conclusions reached, and to assist in forming an opinion on whether the financial statements as a whole are free of material misstatement. Choice "a" is incorrect. This description would represent analytical procedures used during the planning stages of the audit. Choice "b" is incorrect. This description would represent analytical procedures used as substantive procedures. Choice "c" is incorrect. This description would represent analytical procedures used as substantive procedures. Also, it is difficult to detect fraud using analytical procedures.

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2011 AICPA Newly Released Questions Auditing

27. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? a. b. c. d. Significant related party transactions are pervasive. Usual trade credit from suppliers is denied. Arrearages in preferred stock dividends are paid. Restrictions on the disposal of principal assets are present.

Solution: Choice "b" is correct. Denial of usual trade credit is one example of a financial difficulty that may be indicative of substantial doubt about an entity's ability to continue as a going concern. Choice "a" is incorrect. Pervasive significant related party transactions, by themselves, are not necessarily indicative of an entity's ability to continue as a going concern. Choice "c" is incorrect. The ability to pay arrearages in preferred stock dividends would be indicative of financial health and would not create substantial doubt about an entity's ability to continue as a going concern. Choice "d" is incorrect. Restrictions on the disposal of principal assets would not cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.

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2011 AICPA Newly Released Questions Auditing

28. Accepting an engagement to compile a financial projection most likely would be inappropriate if the projection is to be distributed to: a. b. c. d. The entity's principal stockholder, to the exclusion of the other stockholders. Potential stockholders in an offering statement. A financial institution in a loan application. A state or federal regulatory agency.

Solution: Choice "b" is correct. Financial projections are appropriate only for limited use. Limited use means that the financial statements will only be used by the responsible party alone or by parties negotiating directly with the responsible party (the issuing company). Choices "a", "c", and "d" are incorrect per the above explanation.

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2011 AICPA Newly Released Questions Auditing

29. Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? a. b. c. d. "We believe that the possible liability to the company is nominal in amount." "We believe that the action can be settled for less than the damages claimed." "We believe that the plaintiff's case against the company is without merit." "We believe that the company will be able to defend this action successfully."

Solution: Choice "b" is correct. This statement seems to give some indication that the lawyer believes that there is at least some likelihood that there may be a known or estimable amount and that the case may actually result in a liability. Choice "a" is incorrect. This statement does not indicate that an amount may be known that would allow the auditor to report anything on the financial statements. Choice "c" is incorrect. This statement seems to indicate a remote likelihood of any liability arising from this case, thus no disclosure would be needed. Choice "d" is incorrect. This statement seems to indicate a remote likelihood of any liability arising from this case, thus no disclosure would be needed.

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2011 AICPA Newly Released Questions Auditing

30. After considering management's plans, an auditor concludes that there is substantial doubt about a client's ability to continue as a going concern for a reasonable period of time. The auditor's responsibility includes: a. Disclaiming an opinion on the financial statements due to the indications of possible financial difficulties. b. Indicating to the client's audit committee whether management's plans for dealing with the adverse effects of the financial difficulties can be effectively implemented. c. Considering the adequacy of disclosure about the client's possible inability to continue as a going concern. d. Issuing a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements. Solution: Choice "c" is correct. When the auditor believes there is substantial doubt about the ability of the entity to continue as a going concern for a reasonable period of time, there is a responsibility to consider the adequacy of the client's disclosure of such circumstances. Choice "a" is incorrect. There is no requirement to disclaim an opinion solely due to a going concern issue. Choice "b" is incorrect. The auditor does not have a responsibility to communicate to the audit committee whether management's plans can or cannot be effectively implemented. Choice "d" is incorrect. A qualified or adverse opinion is only required in situations where there is no adequate disclosure.

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2011 AICPA Newly Released Questions Auditing

31. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? a. b. c. d. Determine whether inventory ordered before the year end was included in the physical count. Inquire about payroll checks that were recorded before year end but cashed after year end. Investigate changes in capital stock recorded after year end. Review tax returns prepared by management after year end.

Solution: Choice "c" is correct. A change in capital stock that is recorded after the year end is an example of a subsequent that might require disclosure in the footnotes to the financial statements. Choice "a" is incorrect. The inventory issue discussed in this solution would not be considered a subsequent event because the inventory was ordered before year-end. Choice "b" is incorrect. If the payroll checks were recorded prior to year end, there is no subsequent event issue. Choice "d" is incorrect. Tax returns prepared after year end would not be considered a subsequent event issue.

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2011 AICPA Newly Released Questions Auditing

32. When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations: a. b. c. d. Copies of the client's shipping documents that support the account balances. Lists of the customers' recent payments that the client has already recorded. Client-prepared statements of account that show the details of the account balances. Copies of the customers' purchase orders that support the account balances.

Solution: Choice "c" is correct. When confirming the total accounts receivable balance, it is beneficial to include a client-prepared statement of account that shows the details of the account balances so that the confirmation recipients can more easily verify the receivable balance. Choice "a" is incorrect. The client's shipping documents would not generally be helpful to allow a respondent to be able to confirm an existing balance. Choice "b" is incorrect. Listing client payments that had already been recorded would generally not be relevant in confirming unpaid invoices. Choice "d" is incorrect. The customer's purchase orders would not generally be helpful to allow a respondent to be able to confirm an existing balance.

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2011 AICPA Newly Released Questions Auditing

33. A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior-year's financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior-year's audited financial statements. This separate paragraph should indicate: a. b. c. d. The type of opinion expressed previously. That the CPA did not update the assessment of control risk. The reasons for the change from an audit to a review. That the audit report should no longer be relied on.

Solution: Choice "a" is correct. When the prior period has been audited, the accountant should issue the current period compilation or review report, and any additional paragraph should indicate: That prior period statements were audited; The date of the previous report(s); The opinions expressed, and, if other than unqualified, the reasons for the modification; and That no auditing procedures have been performed since the previous report date.

Choice "b" is incorrect. The CPA would not mention control risk in the current period review report. Choice "c" is incorrect. There is no requirement that the reasons for the change be documented. Choice "d" is incorrect. There is no requirement that the audit report no longer be relied upon.

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2011 AICPA Newly Released Questions Auditing

34. A CPA started to audit the financial statements of a nonissuer. After completing certain audit procedures, the client requested the CPA to change the engagement to a review because of a scope limitation. The CPA concludes that there is reasonable justification for the change. Under these circumstances, the CPA's review report should include a: a. b. c. d. Statement that a review is substantially less in scope than an audit. Reference to the scope limitation that caused the changed engagement. Description of the auditing procedures that were completed before the engagement was changed. Reference to the CPA's justification for agreeing to change the engagement.

Solution: Choice "a" is correct. As long as the CPA concludes that there is a reasonable justification for the change, there are no additional requirements due to the change. Since the new engagement is a review, it is required that a statement be made that the review is substantially less in scope than an audit. Choice "b" is incorrect. The review report would not contain a reference to the scope limitation that caused the change in engagement. Choice "c" is incorrect. The review report would not mention auditing procedures performed before the engagement was changed. Choice "d" is incorrect. The review report would not reference the justification for the change in engagement.

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35. Before accepting an engagement to audit a new client, a CPA is required to obtain: a. b. c. d. An assessment of fraud risk factors likely to cause material misstatements. An understanding of the prospective client's industry and business. The prospective client's signature to a written engagement letter. The prospective client's consent to make inquiries of the predecessor, if any.

Solution: Choice "d" is correct. In a new client relationship, it is mandatory to make inquiries of the predecessor auditor. Client permission is needed, however. If the client is unwilling to agree to this procedure, the auditor should consider the implications and decide whether to accept the engagement. Choice "a" is incorrect. An assessment of fraud risk factors is not required prior to accepting a new client. Choice "b" is incorrect. An understanding of the client's business would be gained during the planning phase of the audit. Choice "c" is incorrect. The prospective client's signature to a written engagement letter would be obtained upon the acceptance of an engagement, not prior to the acceptance.

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2011 AICPA Newly Released Questions Auditing

36. The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items: a. b. c. d. Represented by tags were included on the listing. Included on the listing were properly counted. Represented by tags were reduced to the lower of cost or market. Included in the listing were properly valued.

Solution: Choice "a" is correct. The directional test of tracing is generally used to test the existence of an asset; in this case this would be noted by whether the inventory items represented by the tags were included on the listing. Choice "b" is incorrect. Recalculation would be the step that would help to determine whether items included on the listing were properly counted. Choice "c" is incorrect. Tracing is not relevant to the valuation determination of whether the lower of cost or market adjustment was properly applied. Choice "d" is incorrect. Tracing is not relevant to any valuation determinations.

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2011 AICPA Newly Released Questions Auditing

37. Which of the following activities is an analytical procedure an auditor would perform in the final overall review stage of an audit to ensure that the financial statements are free from material misstatement? a. b. c. d. Reading the minutes of the board of directors' meetings for the year under audit. Obtaining a letter concerning potential liabilities from the client's attorney. Comparing the current year's financial statements with those of the prior year. Ensuring that a representation letter signed by management is in the file.

Solution: Choice "c" is correct. Analytical procedures performed during the overall final review stage generally include a review of the current and prior year's financial statements. Choice "a" is incorrect. This would not be considered an analytical procedure. Choice "b" is incorrect. This would not be considered an analytical procedure. Choice "d" is incorrect. This would not be considered an analytical procedure.

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38. A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA's independence with respect to the client? a. b. c. d. The CPA records transactions in accordance with classifications determined by management. The CPA prepares financial statements from a trial balance provided by management. The CPA posts adjusting journal entries prepared by management to the trial balance. The CPA authorizes client transactions and reports them to management.

Solution: Choice "d" is correct. Examples of activities with an attestation client that impair independence would include bookkeeping activities that include authorizing, executing or consummating a transaction on behalf of a client or preparing source documents or originating data (e.g., purchase orders) Choice "a" is incorrect. As long as the CPA was following management's orders and not using any of their own judgment or decisions about how to record something, this would not impair the CPA's independence. Choice "b" is incorrect. This scenario represents a compilation, which would not impair the CPAs independence. Choice "c" is incorrect. As long as the CPA was not involved with the actual development of the adjusting entry, this would not impair the CPA's independence.

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2011 AICPA Newly Released Questions Auditing

39. Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards? a. b. c. d. Establish procedures that comply with the standards of the Sarbanes-Oxley Act. Use attributes sampling techniques in testing internal controls. Consider inherent risk and control risk before determining detection risk. Establish policies to ensure that the audit work meets applicable professional standards.

Solution: Choice "d" is correct. A quality control system consists of policies and procedures designed, implemented, and maintained to ensure that the firm complies with professional standards and appropriate legal and regulatory requirements, and that any reports issued are appropriate in the circumstances. Choice "a" is incorrect. Although Sarbanes-Oxley promulgated many legal requirements, this would not be the best all inclusive answer, as there are other professional standards that must be met as well. Choice "b" is incorrect. These steps would be performed to comply with GAAS, but they are not a part of following quality control standards. Choice "c" is incorrect. These steps would be performed to comply with GAAS, but they are not a part of following quality control standards.

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2011 AICPA Newly Released Questions Auditing

40. After an audit report is issued, an auditor discovers that an important audit procedure was not performed. Which of the following procedures is acceptable in this situation? a. b. c. d. No further action is necessary if the audit report can still be supported. Let the current report stand and correct material errors on the next audit report. Immediately notify known users of the omitted audit procedure. Require that the client notify financial statements users of the omitted procedures.

Solution: Choice "a" is correct. The first step in such a situation would be to determine whether any other alternative steps may have been performed that would tend to compensate for the omitted procedures, thus allowing the audit report to stand as supported. Choice "b" is incorrect. This step would not be acceptable, as the auditor would first have to determine whether there are alternative procedures that were performed that would still support the findings of the audit. If not, then the management and audit committee of the company would need to be notified. Choice "c" is incorrect. Users are not immediately notified. The first step in such a situation would be to determine whether any other alternative steps may have been performed that would tend to compensate for the omitted procedures, thus allowing the audit report to stand as supported. Choice "d" is incorrect. This step would only be performed if it was determined that no other alternative steps were performed that may support the audit report.

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41. An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate? a. b. c. d. Observation and inspection of records. Confirmation and reperformance. Inquiry and inspection of records. Analytical procedures and reperformance.

Solution: Choice "c" is correct. The act of interviewing the controller and verifying the proper preparation of a bank reconciliation by reviewing the sign off is most closely related to the procedures of inquiry and inspection of records. Choices "a", "b", and "d" are incorrect per the above explanation.

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42. Which of the following is a definition of control risk? a. The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls. b. The risk that the auditor will not detect a material misstatement. c. The risk that the auditor's assessment of internal controls will be at less than the maximum level. d. The susceptibility of material misstatement assuming there are no related internal control, policies, or procedures. Solution: Choice "a" is correct. Control risk is the risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected (and corrected) on a timely basis by the entity's internal control. Choice "b" is incorrect. This statement describes detection risk. Choice "c" is incorrect. This is not a valid risk related to auditing. Choice "d" is incorrect. This statement describes inherent risk.

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2011 AICPA Newly Released Questions Auditing

43. Which of the following is not a component of internal control? a. b. c. d. Control environment. Control activities. Inherent risk. Monitoring.

Solution: Choice "c" is correct. The five components of internal control are: Control Environment: the overall tone of the organization. Risk Assessment: management's identification of risk. Information and Communication Systems: a means of recording transactions and communicating responsibilities. Monitoring: assessment of internal control performance over time. Existing Control Activities: control policies and procedures

Choices "a", "b", and "d" are incorrect per the above explanation

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2011 AICPA Newly Released Questions Auditing

44. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion? a. b. c. d. Presumptive. Judgmental. Criticizing. Questioning.

Solution: Choice "d" is correct. During an audit, the auditor should maintain an attitude of professional skepticism, which includes a questioning mind and a critical assessment of audit evidence. Choices "a," "b", and "c" are incorrect per the above explanation.

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45. Each of the following types of controls is considered to be an entity-level control, except those: a. b. c. d. Relating to the control environment. Pertaining to the company's risk assessment process. Regarding the company's annual stockholder meeting. Addressing policies over significant risk management practices.

Solution: Choice "c" is correct. Entity level controls include controls related to the control environment, the risk assessment process, and the policies over risk management practices. Controls regarding the company's annual stockholder meeting are controls related to a specific event, rather than the entity as a whole.

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2011 AICPA Newly Released Questions Auditing

46. Which of the following statements would not normally be included in a representation letter for a review of interim financial information? a. To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information. b. We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud. c. We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information. d. We have made available to you all financial records and related data. Solution: Choice "c" is correct. This statement would likely be found in an engagement letter, not a management representation letter. Choice "a" is incorrect. This statement would likely be found in a representation letter from management, thus it is an incorrect answer. Choice "b" is incorrect. This statement would likely be found in a representation letter from management, thus it is an incorrect answer. Choice "d" is incorrect. This statement would likely be found in a representation letter from management, thus it is an incorrect answer.

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2011 AICPA Newly Released Questions Auditing

47. When performing a review of interim financial information, an accountant would typically do each of the following, except: a. b. c. d. Consider the results from the latest audit. Test controls related to the preparation of annual financial information. Perform analytical procedures. Make inquiries of management.

Solution: Choice "b" is correct. A review consists principally of performing analytical procedures and making inquiries about the interim financial information. As such, a test of controls would likely not be performed during a review, although the auditors understanding of the entity's internal control may be updated during the review engagement. Choice "a" is incorrect. An auditor should consider the results from the latest audit when performing an interim review. Choice "c" is incorrect. Analytical procedures are a normal part of a review engagement. Choice "d" is incorrect. Inquiries are a normal part of a review engagement.

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2011 AICPA Newly Released Questions Auditing

48. Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee? a. Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present. b. The firm must address all independence impairment issues on the date of the audit opinion. c. Communications related to independence may occur in any form prior to issuance of the financial statements. d. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence. Solution: Choice "d" is correct. Communication regarding independence must be made in writing prior to accepting the engagement. Choice "a" is incorrect. Oral affirmation is not a proper mode of communication for independence issues. Choice "b" is incorrect. This communication regarding independence must take place prior to accepting the engagement. Choice "c" is incorrect. These communications must be in writing.

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2011 AICPA Newly Released Questions Auditing

49. A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences, except: a. As a principal financial officer, principal accounting officer, controller, public accountant, or auditor. b. Serving on at least one other issuer's audit committee or disclosure committee of the board of directors. c. Actively supervising a principal financial officer or principal accounting officer. d. Assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements. Solution: Choice "b" is correct. Experience on an audit committee or disclosure committee of a board of directors would not enable one to acquire the attributes of a financial expert. Such experience must be acquired through involvement as a principal financial officer, principal accounting officer, controller, public accountant, auditor, or one who actively supervises or assess the performance of one of these financial jobs. Serving on at least one other issuer's audit committee or disclosure committee is not required. Choices "a", "c", and "d" are incorrect per the above explanation.

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2011 AICPA Newly Released Questions Auditing

50. An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions? a. b. c. d. Controller. CFO. CEO. Staff accountant.

Solution: Choice "d" is correct. SEC and SOX rules prohibit an accounting firm from auditing an issuer's financial statements if certain members of management of the issuer (members in financial oversight roles such as the CEO, CFO, or controller) had been members of the accounting firm's audit engagement team within the one-year period preceding the commencement of audit procedures (the required "cooling off" period). A staff accountant would not be considered to be in a financial oversight role, thus could be hired without violating this requirement. Choices "a", "b", and "c" are incorrect per the above explanation.

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2011 AICPA Newly Released Questions Auditing

AICPA 2011 Released AUD Simulations Task 519_01

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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 4 . 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 Whistlers 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 Rockfords 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.

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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.

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Tab 1662_01

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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.

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Tab 3733_01

Keywords: Internal auditor and fraud

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