AICPA CPA-Auditing CPA Exam Practice Test Instant Access

Question 1

The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits.

Which of the following is a supplemental reporting standard for governmental financial audits?

AAuditors should report the scope of their testing of compliance with laws and regulations and of internal controls.

BMaterial indications of illegal acts should be reported in a document distributed only to the entity's senior officials.

CAll changes in the audit program from the prior year should be reported to the entity's audit committee.

DAny privileged or confidential information discovered should be reported to the organization that arranged for the audit.

Answer : A

Choice 'a' is correct. The auditor's report on compliance and on internal control over financial recording (based on an audit) must include the scope of testing of compliance and internal control.

Choice 'b' is incorrect. Material indications of illegal acts are not only reported to the members of the governing body of the audited entity and their senior staff officials but, in some circumstances, auditors should report illegal acts directly to external parties (such as the grantor agency).

Choice 'c' is incorrect. Although GAO standards require that the auditor communicate information regarding the nature, timing and extent of planned testing to officials of the audited entity and to individuals contracting for the audit, reporting of all changes is not required. (For example, immaterial changes to the audit program need not be reported.)

Choice 'd' is incorrect. Certain privileged or confidential information may be prohibited from general disclosure and should not be included in the audit report. The report should, however, disclose the nature of the information omitted and the requirement that makes an opinion necessary.

Question 2

With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's management and those charged with governance because they represent:

AManipulation or falsification of accounting records or documents from which financial statements are prepared.

BDisclosures of information that significantly contradict the auditor's going concern assumption.

CMaterial irregularities or illegal acts perpetrated by high-level management.

DDeficiencies in the design or operation of internal control that could reasonably be expected to cause a non-inconsequential misstatement in the financial statements.

Answer : D

Choice 'd' is correct. Significant deficiencies in the design or operation of internal control should be communicated to management and those charged with governance because there is more than a remote likelihood that they will result in a financial statement misstatement that is more than inconsequential.

Choice 'a' is incorrect. Manipulation or falsification of accounting records may not represent an internal control deficiency (e.g., if such fraud occurs through collusion).

Choice 'b' is incorrect. Information indicative of a going concern problem is not an internal control deficiency.

Choice 'c' is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if such acts occur through collusion).

Question 3

Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?

AThe sampling distribution should approximate the normal distribution.

BOverstated units have a lower probability of sample selection than units that are understated.

CThe auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.

DThe sampling interval is calculated by dividing the number of physical units in the population by the sample size.

Answer : C

Choice 'c' is correct. In PPS sampling, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. The inputs for PPS are tolerable error, risk of incorrect acceptance, number of errors allowed, and the recorded amount of the population being sampled.

Choice 'a' is incorrect. The sampling distribution does not have to approximate the normal distribution in order for PPS sampling to be used.

Choice 'b' is incorrect. Overstated units have a higher (not lower) probability of sample selection than units that are understated, because with PPS sampling, each item is given a probability of selection in proportion to its recorded amount (probability-proportional-to-size).

Choice 'd' is incorrect. In PPS sampling, the sampling interval is calculated by dividing the recorded amount of the population (not the number of physical units) by the sample size.

Question 4

To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the:

AExpected deviation rate.

BUpper deviation rate.

CRisk of incorrect acceptance.

DRisk of incorrect rejection.

Answer : A

Choice 'a' is correct. When determining the sample size for a test of controls, the auditor should consider the expected deviation rate (which is the auditor's best estimate of the deviation rate in the population before the sampling plan is executed), the tolerable deviation rate, and the allowable risk of assessing control risk too low.

Choice 'b' is incorrect. The upper deviation rate is used to evaluate a balance after a sampling plan has been performed, not to determine the sample size for a test of controls.

Choices 'c' and 'd' are incorrect. The risk of incorrect acceptance and risk of incorrect rejection are considered in direct tests of balances (i.e., substantive tests), not in tests of controls.

Question 5

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

AThis communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.

BIf matters are communicated in writing, the report is appropriate for general use.

CIf matters are communicated in writing, the report is required to be distributed to both those charged with governance and management.

DThis communication is required to occur before the auditor's report on the financial statements is issued.

Answer : A

Choice 'a' is correct. An auditor is required to communicate certain matters to those charged with governance, including disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.

Choice 'b' is incorrect. Written communications should include a limitation on the use of the communication.

Choice 'c' is incorrect. The auditor is not required to distribute the report to management, especially since certain matters might be inappropriate for discussion with management.

Choice 'd' is incorrect. The auditor is not required to make the communication before the auditor's report on the financial statements is finalized, as long as the communication occurs on a timely basis. (Note, however, that for audits of issuers, the communication must be made before the auditor's report is filled with the SEC.)

Question 6

Which of the following matters most likely would be included in a management representation letter?

AAn assessment of the risk factors concerning the misappropriation of assets.

BAn evaluation of the litigation that has been filed against the entity.

CA confirmation that the entity has complied with contractual agreements.

DA statement that all material internal control weaknesses have been corrected.

Answer : C

Choice 'c' is correct. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that the company has complied with all aspects of contractual agreements that may materially affect the financial statements.

Choice 'a' is incorrect. As part of planning the audit, the auditor must assess the risk that misappropriation of assets may occur, and may cause a material misstatement in the financial statements. While management may also assess this risk for its own purposes, the auditor would not be able to rely on management's assessment, and therefore would not typically request a representation regarding this matter.

Choice 'b' is incorrect. The auditor will typically request that the client's attorney evaluate pending litigation, as the attorney is more knowledgeable in such areas than is management.

Choice 'd' is incorrect. The management representation letter typically includes information regarding the financial statements, the completeness of information, recognition, measurement, and disclosure, and subsequent events. Representations regarding internal control are not typically included in a management representation letter.

Question 7

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?

AInspect legal documents in the possession of the client's lawyer that are relevant to pending litigation and unasserted claims and assessments.

BDiscuss with the client's lawyer its philosophy of defending litigation, claims, and assessments that have a high probability of being resolved unfavorably.

CConfirm directly with the client's lawyer that all litigation, claims, and assessments have been properly recorded in the financial statements.

DObtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.

Answer : D

Choice 'd' is correct. The auditor should obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.

Choice 'a' is incorrect. The auditor should examine documents in the client's possession concerning litigation, claims, and assessments, including correspondence and invoices from lawyers. The auditor does not generally examine documents held by the client's lawyer.

Choice 'b' is incorrect. If the lawyer has indicated that there is a high probability of a litigation, claim, or assessment being resolved unfavorably, the auditor would use this information, together with an estimate of the range of potential loss (if available), to evaluate management's financial statement presentation.

The auditor would not generally discuss with the client's lawyer its defense philosophy regarding such matters.

Choice 'c' is incorrect. It is the auditor's responsibility (not the lawyer's) to determine whether litigation, claims, and assessments have been adequately recorded or disclosed in the financial statements.

AICPA CPA-Auditing CPA Auditing and Attestation CPA Exam Practice Test