Question 1

Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when
reporting on Tech's audited financial statements for the year ended June 30, 19X4. That doubt has
been removed in 19X5. What is Mead's reporting responsibility if Tech is presenting its financial
statements for the year ended June 30, 19X5, on a comparative basis with those of 19X4?

Accepted Answer

A

Explanation: Choice "a" is correct. If substantial doubt about the entity's ability to continue as a going concern has been removed in the current period, the explanatory paragraph included in the prior period auditor's report should not be repeated, and no description of the reasons or plans for recovery need be included. Choice "b" is incorrect. If doubt about the going concern assumption has been removed in the current period, it is not appropriate to include the explanatory paragraph from the prior year in the auditor's report for the current year. Choice "c" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The auditor does not have to explain the reason for the change. Choice "d" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The entity does not have to describe its plans for the future.

Question 2

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that:

Accepted Answer

B

Explanation: Choice "b" is correct. By vouching to time card data, the auditor is testing the existence assertion for hours worked. Choice "a" is incorrect. Vouching to approved time card data would provide evidence about hours worked, not pay rates. Pay rates would be tested by comparing to personnel records. Choice "c" is incorrect. Vouching to approved time cards does not provide evidence about segregation of duties. Choice "d" is incorrect. Vouching to the approved time cards does not provide evidence about internal controls related to unclaimed paychecks. The auditor would need to observe a payroll distribution to evaluate these controls.

Question 3

Which of the following procedures would an auditor most likely perform to obtain assurance that slowmoving and obsolete items included in inventories are properly identified?

Accepted Answer

C

Explanation: Choice "c" is correct. Examining an analysis of inventory turnover helps identify slow-moving, excess, defective, and obsolete items included in inventories. In order for inventory to be properly valued, these items may need to be written down. Choice "a" is incorrect. Testing shipping and receiving cutoff provides evidence regarding completeness of inventory and rights and obligations related to inventory, but it does not provide evidence regarding the identification and valuation of slow-moving and obsolete items. Choice "b" is incorrect. Confirming inventories at locations outside the entity's premises provides evidence regarding existence and completeness of inventory, but it does not provide evidence regarding the identification and valuation of slow-moving and obsolete items. Choice "d" is incorrect. Tracing inventory observation test counts to perpetual listings provides evidence regarding the completeness of inventory, but it does not provide evidence regarding the identification and valuation of slow-moving and obsolete items.

Question 4

In an audit of an issuer, the auditor must provide an opinion on which of the following? I. The financial statements. II. The audit committee's oversight of financial reporting and internal control. III. The effectiveness of internal control.

Accepted Answer

A

Explanation: Choice "a" is correct. The auditor provides an opinion on the entity's financial statements and on the effectiveness of internal control. The auditor is not required to provide an opinion on the audit committee's oversight (but is required to report to the board when such oversight is ineffective). Choices "b", "c", and "d" are incorrect, based on the Explanation: above.

Question 5

Which of the following characteristics most likely would be indicative of check kiting?

Accepted Answer

C

Explanation: Choice "c" is correct. Kiting occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank. Frequent kiting may result in a high level of deposits coupled with a low average balance. Choice "a" is incorrect. High turnover of employees who have access to cash may be normal in certain industries, or it may be indicative of poor hiring policies, but it would not be indicative of check kiting. Choice "b" is incorrect. More checks may arrive on Mondays simply because Monday's mail includes the mail from over the weekend. This characteristic is not particularly indicative of check kiting. Choice "d" is incorrect. Frequent ATM checking account withdrawals indicate a frequent need for cash, but this situation is not particularly indicative of check kiting.

Question 6

Which of the following procedures most likely could assist an auditor in identifying related party transactions?

Accepted Answer

C

Explanation: Choice "c" is correct. Compensating balance arrangements may be maintained by or for related parties. Choice "a" is incorrect. Performing tests of controls concerning the segregation of duties relates to the allocation of responsibilities among company employees; related party transactions typically relate to transactions with affiliates, owners, or management. Choice "b" is incorrect. Evaluating the reasonableness of management's accounting estimates would not provide any evidence of transactions with affiliates, owners, or management. Choice "d" is incorrect. Related party transactions are more likely to be nonrecurring than recurring.

Question 7

Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows: https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Auditing/page_348_img_1.jpg Lore would use which of the following to determine the average days sales in inventory? https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Auditing/page_348_img_2.jpg

Accepted Answer

B

Explanation: Choice "b" is correct. Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover. Choice "a" is incorrect. The denominator used to determine average days sales in inventory is inventory turnover. Inventory turnover is cost of goods sold divided by average inventory, not simply average inventory. Choice "c" is incorrect. The days sales in inventory calculation uses the cost of goods sold figure, not the sales figure. Choice "d" is incorrect. The days sales in inventory calculation uses 365 in the numerator, not sales divided by 365.

Question 8

The monitoring component of internal control excludes:

Accepted Answer

D

Explanation: Choice "d" is correct. Monitoring is the process of assessing the quality of internal control performance over time and taking necessary corrective actions. Eliminating a control that is not operating effectively would not be an appropriate corrective action. Choice "a" is incorrect. Information derived from external parties (such as customer complaints and regulator comments) may be useful in identifying problems with the internal control structure. Choices "b" and "c" are incorrect. Assessing the quality of internal control performance over time and improving controls that are not operating effectively are part of the monitoring process.

Question 9

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?

Accepted Answer

B

Explanation: Choice "b" is correct. Joint custody by two company officials over assets like cash and marketable securities helps safeguard the assets. Under joint custody, collusion is required for a defalcation to occur. Choice "a" is incorrect. Review of investment decisions made by the treasurer might reduce the probability of poor investment policies, but would not be likely to safeguard marketable securities after purchase. Choice "c" is incorrect. Tracing purchases and sales from the subsidiary ledger to the general ledger would help ensure that all existing securities are recorded in the financial statements, but would not help safeguard marketable securities. Choice "d" is incorrect. An annual count by the chairman of the board might provide a small safeguard, but the infrequent performance of the control makes it a fairly weak one.

Question 10

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:

Accepted Answer

A

Explanation: Choice "a" is correct. Assertions about valuation and allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts, and any resulting valuation adjustments are appropriately recorded. For example, management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value. Choice "b" is incorrect. Assertions about understandability and classification deal with whether financial information is appropriately presented and described, and disclosures are clearly expressed. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "c" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interest of the entity exist at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "d" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.

Question 11

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:

Accepted Answer

A

Explanation: Choice "a" is correct. The auditor would consider the methods used to process accounting information in planning an audit of a new client, because such methods influence the design of internal control. The auditor is required to obtain an understanding of the design of internal control in order to plan the audit and determine the nature, timing, and extent of tests to be performed. Choice "b" is incorrect. The auditor's judgment about materiality levels is based upon the auditor's perception of the needs of a reasonable person who will rely on the financial statements, not on the methods used to process accounting information. Choice "c" is incorrect. The planned audit objectives are based upon the auditor's desire to render an opinion on the fairness of the financial statements. This end goal is not influenced by the methods used by the client to process accounting information. Choice "d" is incorrect. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated. The auditor's only acceptable level of audit risk is low, and this is not affected by the client's methods used to process accounting information.

Question 12

An auditor generally tests the segregation of duties related to inventory by:

Accepted Answer

A

Explanation: Choice "a" is correct. The independent auditor's direct personal knowledge, based on personal inquiry and observation, are auditing procedures commonly used to test segregation of duties. Choice "b" is incorrect. Test counts and cutoff procedures represent substantive tests, and they would not be used to test segregation of duties. Choice "c" is incorrect. Analytical procedures and invoice recomputation represent substantive tests, and they would not be used to test segregation of duties. Choice "d" is incorrect. Document inspection and reconciliation represent substantive tests, and they would not be used to test segregation of duties.

Question 13

Which of the following best describes the auditor's responsibility with respect to fair values?

Accepted Answer

C

Explanation: Choice "c" is correct. The auditor's overall responsibility is to obtain sufficient appropriate audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with GAAP. Choice "a" is incorrect. While it is true that the auditor should determine whether management has the intent and ability to carry out courses of action that may affect fair values, this is just one part of evaluating fair value measurements and not the best description of the auditor's overall responsibility. Choice "b" is incorrect. While it is true that the auditor should assess the risk of material misstatement of fair value measurements, this is done to determine the nature, timing, and extent of audit procedures. It is not the best representation of the auditor's overall responsibility. Choice "d" is incorrect. Management (and not the auditor) should make fair value measurements and disclosures in accordance with GAAP and should identify and support any significant assumptions used.

Question 14

Which of the following strategies would a CPA most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system?

Accepted Answer

A

Explanation: Choice "a" is correct. In a paperless system, the CPA would most likely need to continuously monitor and analyze transaction processing to ensure that controls were operating effectively throughout the period under audit. An embedded audit module is one way to achieve this goal. Choice "b" is incorrect. While segregation of duties is an important control, there would be no reason to increase reliance on such controls in a paperless system. Choice "c" is incorrect. Verification of encrypted digital certificates used to monitor the authorization of transactions would be used in all computerized systems. Choice "d" is incorrect. Testing of firewall boundaries that restrict the recording of outside network traffic by itself does not ensure the completeness and accuracy of the financial data.

Question 15

An auditor's program to examine long-term debt should include steps that require:

Accepted Answer

A

Explanation: Choice "a" is correct. Examination of bond trust indentures should be included in audit program of longterm debt to assure that the client was not in violation of any covenants in the indentures. Choice "b" is incorrect. Inspecting the accounts payable subsidiary ledger relates to accounts payable, a current liability. Choice "c" is incorrect. Long-term debt generates interest expense, not interest income. Choice "d" is incorrect. Generally, the existence of the bondholders of debt is not verified.

Free AICPA CPA-Auditing Actual Exam Questions s