AICPA CPA-Auditing CPA Exam Practice Test Instant Access

Question 1

Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control structure. Lake is considering Cope's report on EDP's internal control structure in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion?

ALake may refer to Cope only if Lake is satisfied as to Cope's professional reputation and independence.

BLake may refer to Cope only if Lake relies on Cope's report in restricting the extent of substantive tests.

CLake may refer to Cope only if Lake's report indicates the division of responsibility.

DLake may not refer to Cope under the circumstances above.
Explanation
Choice 'd' is correct. The user auditor should not make reference to the report of the service auditor as a basis, in part, for his or her own opinion on the user organization's financial statements. Since the service auditor is not responsible for the examination of any part of the user organization's financial statements, division of responsibility would be inappropriate.
Choices 'a', 'b', and 'c' are incorrect, based on the above explanation.

Answer : D

Question 2

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client Explanation: s would satisfy the auditor?

AA greater percentage of accounts receivable are listed in the 'more than 120 days overdue' category than in the prior year.

BInternal control activities over the recording of cash receipts have been improved since the end of the prior year.

CThe client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

DThe client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

Answer : C

Choice 'c' is correct. If a second, similar retail outlet were opened, one would expect sales and accounts receivable to double. As long as the collection rates for the new outlet's receivables were expected to be similar to those of the original outlet, the allowance for doubtful accounts as a percentage of accounts receivable would remain the same.

Choice 'a' is incorrect. If more receivables are potentially uncollectible in the current year (as opposed to the prior year), the allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level of estimated bad debts.

Choice 'b' is incorrect. Improved control activities related to the recording of cash receipts might result in a decrease in accounts receivable in the current year as compared to the prior year, not an increase. In addition, improving such controls would not be likely to affect the allowance for doubtful accounts as a percentage of receivables.

Choice 'd' is incorrect. If the client sold less merchandise to customers with poor credit ratings, the allowance for doubtful accounts as a percentage of receivables should decrease to reflect the lower level of estimated bad debts.

Question 3

The concept of materiality would be least important to an auditor when considering the:

AAdequacy of disclosure of a client's illegal act.

BDiscovery of weaknesses in a client's internal control.

CEffects of a direct financial interest in the client on the CPA's independence.

DDecision whether to use positive or negative confirmations of accounts receivable.

Answer : C

Choice 'c' is correct. Any direct financial interest in a client impairs independence, even if it is immaterial.

Choice 'a' is incorrect. A material illegal act may require disclosure in or adjustment to the financial statements, whereas an immaterial illegal act may not require disclosure.

Choice 'b' is incorrect. A material weakness in internal control will affect the nature, timing, and extent of audit procedures, whereas an immaterial weakness in internal control may have little impact on the audit.

Choice 'd' is incorrect. An auditor is likely to use positive confirmations for material accounts receivable, but may consider negative confirmations for immaterial receivable balances.

Question 4

After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of:

AOption A

BOption B

COption C

DOption D

Answer : C

Choice 'c' is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management's assertion that accounts receivable are collectible

(allocation and valuation). Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion.

Choices 'a', 'b', and 'd' are incorrect, based on the above Explanation: .

Audit Documentation

Question 5

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?

AThe internal auditor did not sign the form.

BThe form was mailed by the controller.

CThe form was prepared by the internal auditor.

DThe account was closed, so the balance was zero.

Answer : B

Choice 'b' is correct. The auditor should control the mailing of independent confirmations.

Choice 'a' is incorrect. It is appropriate for a member of management, such as the controller, to sign the confirmation request.

Choice 'c' is incorrect. It is acceptable for an internal auditor to provide direct assistance to the external auditor, such as by preparing confirmation forms.

Choice 'd' is incorrect. Confirmations may be sent to accounts that show a zero balance, to test for understatement errors or to obtain information about loans.

Question 6

What is an auditor's responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?

ALabel the information as unaudited and expand the auditor's report to include a disclaimer on the information.

BAdd an explanatory paragraph to the auditor's report and refer to the information as 'required supplementary information.'

CApply limited procedures to the information and report deficiencies in, or the omission of, the information.

DAudit the required supplementary information in accordance with generally accepted governmental auditing standards.

Answer : C

Choice 'c' is correct. With respect to supplementary information required by the GASB that is placed outside the basic financial statements, the auditor should apply limited procedures to the information (to determine that it is consistent with the basic audited financial statements) and report deficiencies in or the omission of the information (via an explanatory paragraph).

Choice 'a' is incorrect. If the information is labeled 'unaudited,' a disclaimer generally would not be necessary.

Choice 'b' is incorrect. The explanatory paragraph is only added if the supplemental information required by the GASB is deficient, omitted entirely, if the auditor cannot complete procedures, or if there is doubt about conformity with guidelines.

Choice 'd' is incorrect. The supplementary information required by the GASB is not required to be audited since it is placed outside of the basic financial statements; however, an opinion is permitted.

Question 7

An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the:

AValuation of marketable equity securities.

BClassification of gains and losses on the disposal of securities.

CCompleteness of recorded investment income.

DExistence and ownership of investments.

Answer : C

Choice 'c' is correct. Analytical review is generally used to ascertain the reasonableness of investment income in relationship to the amount invested.

Choice 'a' is incorrect. Valuation would be verified using listed prices (NYSE, etc.).

Choice 'b' is incorrect. Classification of gains or losses would be evaluated based upon appropriate accounting principles.

Choice 'd' is incorrect. Existence and ownership is generally evaluated by inspection of securities, review of brokerage statements, or confirmation with an outside independent custodian.

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