I85PREP
⌘ K
CPA study materials
CPA study resources

CPA (CPA Exam) practice questions

One question at a time. Build your CPA understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Auditing and Attestation (AUD)

An auditor includes an Emphasis of Matter paragraph in an otherwise unmodified audit report. What is the effect of that paragraph on the auditor's opinion?

  1. The opinion remains unmodified; the paragraph highlights a matter appropriately presented or disclosed in the financial statements. Correct answer.
  2. The opinion is modified to a disclaimer of opinion with respect to the matter highlighted.
  3. The opinion becomes qualified because the matter is disclosed rather than recognized in the financial statements.
  4. The paragraph replaces the Key Audit Matters section required in audits of nonpublic entities.

Explanation

An Emphasis of Matter paragraph is used when the auditor considers it necessary to draw users' attention to a matter appropriately presented or disclosed in the financial statements; it does not modify the opinion. The opinion is changed only when the auditor concludes the financial statements are materially misstated or when sufficient appropriate evidence cannot be obtained.

Question 2Auditing and Attestation (AUD)

An audit partner's spouse holds a direct financial interest in an audit client. How is the firm's independence affected?

  1. Independence is not impaired provided the interest is disclosed to those charged with governance and the amount is not material.
  2. Independence is impaired because a direct financial interest held by an immediate family member is attributed to the auditor. Correct answer.
  3. Independence is not impaired provided the interest is sold before the audit report is issued.
  4. Independence is impaired only if the interest is material relative to the spouse's personal net worth.

Explanation

A direct financial interest in an attest client held by a covered member or an immediate family member creates a self-interest threat that cannot be reduced to an acceptable level by safeguards. Materiality of the interest is irrelevant for direct interests.

Question 3Auditing and Attestation (AUD)

Performance materiality is best described as:

  1. Materiality for the financial statements as a whole multiplied by the number of significant components identified in the group audit.
  2. The maximum amount of misstatement in the financial statements that users could tolerate without changing their economic decisions about the entity, based on the auditor's professional judgment.
  3. The threshold applied when evaluating whether uncorrected misstatements from the prior audit require adjustment.
  4. An amount set below overall materiality to reduce to an appropriately low level the probability that aggregate misstatements exceed overall materiality. Correct answer.

Explanation

Performance materiality is set below materiality for the financial statements as a whole to allow for the possibility that individually immaterial uncorrected and undetected misstatements, taken together, could exceed overall materiality. It is a planning concept applied to the nature, timing, and extent of further audit procedures.

Question 4Auditing and Attestation (AUD)

Which of the following provides the most reliable audit evidence?

  1. A confirmation received directly by the auditor from the client's bank. Correct answer.
  2. A copy of a sales invoice prepared by the client's billing clerk.
  3. A client-prepared aging schedule of accounts receivable.
  4. An oral representation by the client's controller about the cost of inventory.

Explanation

Evidence obtained directly by the auditor from an independent external source is more reliable than client-generated documentation, and written evidence is more reliable than oral evidence. Origin and the auditor's direct oversight are the key attributes.

Question 5Auditing and Attestation (AUD)

Before accepting an engagement to audit a new nonissuer client, the auditor should:

  1. Obtain the predecessor auditor's written consent before submitting the proposal to the client.
  2. Obtain the predecessor auditor's working papers for the prior year's audit engagement.
  3. Communicate with the predecessor auditor, with the client's permission, regarding matters that bear on acceptance. Correct answer.
  4. Review the predecessor auditor's engagement letter to confirm the audit fee charged in the prior year.

Explanation

Client permission is required before the successor auditor communicates with the predecessor auditor, and the discussion ordinarily addresses matters such as disagreements, fraud, and integrity issues that bear on whether to accept the engagement. The predecessor's working papers are the predecessor's property and are not obtainable as a condition of acceptance.

Question 6Auditing and Attestation (AUD)

Under AICPA standards, the auditor should complete the assembly of the final audit file:

  1. Within 90 days after the report release date.
  2. Within 60 days after the report release date. Correct answer.
  3. Before the report release date, with no additions permitted afterward.
  4. Within 30 days after the report release date.

Explanation

AICPA standards require the auditor to assemble the final audit file on a timely basis, ordinarily within 60 days after the report release date. After the assembly period ends, the auditor does not delete or discard documentation before the end of the retention period.

Question 7Auditing and Attestation (AUD)

Nonsampling risk is:

  1. The risk that the auditor selects a sample that is not representative of the population.
  2. The risk that the population tested is not homogeneous with respect to the characteristic being examined.
  3. The risk that the auditor's conclusion based on a sample differs from the conclusion that would be reached using the entire population.
  4. The risk that the auditor reaches an erroneous conclusion for reasons unrelated to sampling, such as applying inappropriate procedures. Correct answer.

Explanation

Nonsampling risk arises from human error, such as using inappropriate procedures, misinterpreting evidence, or failing to recognize a misstatement, and it is present even when the entire population is examined. Sampling risk, by contrast, arises from testing only a subset of the population.

Question 8Auditing and Attestation (AUD)

Primary responsibility for the prevention and detection of fraud in an entity rests with:

  1. The auditor, because the audit is designed to detect material fraud.
  2. Those charged with governance and management. Correct answer.
  3. The internal audit function, which reports to the audit committee.
  4. The engagement quality reviewer assigned to the audit.

Explanation

Management, with oversight from those charged with governance, is responsible for designing and operating controls that prevent and detect fraud. The auditor is responsible for obtaining reasonable assurance that the financial statements are free of material misstatement, whether caused by error or fraud.

Question 9Auditing and Attestation (AUD)

An auditor assesses inherent risk at the maximum and control risk at the maximum for a class of transactions. What is the effect on detection risk?

  1. Detection risk is unaffected because it is determined solely by the sampling approach the auditor selects.
  2. Detection risk may be set at a high level, which reduces the extent of substantive testing.
  3. Detection risk is reduced to zero because the auditor will test every item in the population.
  4. Detection risk must be restricted to a low level, requiring more extensive substantive procedures. Correct answer.

Explanation

Detection risk has an inverse relationship with the assessed risks of material misstatement. When inherent and control risk are both assessed at the maximum, detection risk must be restricted, which is achieved through more effective and extensive substantive procedures.

Question 10Auditing and Attestation (AUD)

When designing a substantive analytical procedure, the auditor should develop an expectation that:

  1. Uses management's budget without adjustment, because budgets are prepared independently.
  2. Is sufficiently precise to identify a difference that could be a material misstatement. Correct answer.
  3. Equals the overall materiality amount applied to that account by the engagement team.
  4. Is limited to the prior year's recorded balance for the account, adjusted for the prior year's known misstatements.

Explanation

The precision of the expectation drives the effectiveness of a substantive analytical procedure; the auditor's expectation must be precise enough that a significant difference would indicate a possible material misstatement. Precision increases with more reliable data, disaggregation, and stronger plausible relationships.

Question 11Auditing and Attestation (AUD)

In evaluating an entity's ability to continue as a going concern, the auditor's evaluation period ordinarily covers:

  1. At least one year from the date of the auditor's report, with no consideration of later events.
  2. At least three months from the date of the auditor's report on the financial statements.
  3. The entire remaining useful life of the entity's long-lived operating assets.
  4. At least twelve months from the date the financial statements are issued or available to be issued. Correct answer.

Explanation

The auditor evaluates management's assessment for a reasonable period, ordinarily at least twelve months from the date the financial statements are issued or available to be issued. Events beyond that minimum period may also require consideration when they are known to the auditor.

Question 12Auditing and Attestation (AUD)

After the date of the auditor's report but before the report is released, the auditor becomes aware of a fact that, had it been known, would have caused a modification of the report. The auditor should:

  1. Take no action, because the auditor's responsibility for subsequent events ends on the date of the auditor's report and cannot be extended.
  2. Issue a revised audit report dated the date the fact became known, without performing any additional audit procedures or contacting those charged with governance.
  3. Discuss the matter with management and, if appropriate, those charged with governance, and perform procedures to determine whether the financial statements need revision. Correct answer.
  4. Withdraw from the engagement immediately and notify the predecessor auditor of the reason for the withdrawal.

Explanation

When the auditor becomes aware of facts that would have changed the report, the auditor discusses the matter with management and, when appropriate, those charged with governance, and determines whether the financial statements need revision. If revision is made, the auditor performs the procedures necessary in the circumstances and addresses the dating of the report.

Question 13Auditing and Attestation (AUD)

A deficiency in internal control over financial reporting exists when:

  1. Management has not purchased the integrated information system that peer companies in the industry have adopted and that the auditor recommended in the prior year.
  2. The auditor identifies a misstatement in the financial statements, regardless of its amount or cause.
  3. A control does not allow management or employees to prevent, or detect and correct, misstatements on a timely basis. Correct answer.
  4. The auditor documents a control but does not test its operating effectiveness during the interim period.

Explanation

A deficiency exists when the design, implementation, or operating effectiveness of a control does not allow management or employees, in the normal course of their duties, to prevent, or detect and correct, misstatements on a timely basis. Deficiencies are classified as either significant deficiencies or material weaknesses based on severity.

Question 14Auditing and Attestation (AUD)

When using attribute sampling to test controls, the auditor's results show an upper deviation rate that exceeds the tolerable deviation rate. The auditor should conclude that:

  1. The population is acceptable and the sample size was simply too small, requiring no further auditor action.
  2. Planned reliance on the control is not supported, so the auditor should increase substantive testing or test a compensating control. Correct answer.
  3. The control operates effectively because the sample deviation rate was below 100 percent and no exceptions were expected.
  4. The financial statements are materially misstated and the auditor is required to issue an adverse opinion on the financial statements.

Explanation

When the upper deviation rate exceeds the tolerable rate, the sample does not support the planned level of reliance on the control. The auditor responds by increasing the assessed risk of material misstatement, expanding substantive procedures, or identifying and testing a compensating control.

Question 15Auditing and Attestation (AUD)

Which of the following is an audit procedure designed to identify related-party relationships and transactions not previously identified by management?

  1. Confirming all related-party balances directly with the related parties as a required procedure in every audit engagement.
  2. Reviewing board minutes and other entity records for indications of related-party transactions not identified by management. Correct answer.
  3. Reporting all related-party transactions to regulators regardless of their size or effect on the statements.
  4. Accepting management's identification of related parties without further inquiry, because management has the best information.

Explanation

The auditor remains alert for related-party relationships and transactions throughout the audit and performs procedures such as reviewing minutes, conflict-of-interest statements, and significant contracts to identify items management has not identified. Management's representations do not relieve the auditor of this responsibility.

Question 16Auditing and Attestation (AUD)

Negative confirmations are appropriate when:

  1. The population consists of a small number of individually material balances that require confirmation.
  2. The auditor has no prior experience with the client and cannot predict the response rate from recipients.
  3. Inherent and control risk are low, many small balances exist, and recipients are expected to respond. Correct answer.
  4. Internal controls are weak and the auditor is concerned that recipients will not respond to the request.

Explanation

Negative confirmations provide less persuasive evidence than positive confirmations and are appropriate only when the combined assessed risk of material misstatement is low, the population consists of many small balances, and the auditor has no reason to believe recipients will disregard the requests.

Question 17Auditing and Attestation (AUD)

In a group audit, the group engagement team:

  1. Must personally perform all audit procedures at every component, because the group engagement team is prohibited from relying on component auditors.
  2. Determines the nature, timing, and extent of its involvement in the work of component auditors, which may include reviewing their work. Correct answer.
  3. May accept the component auditor's conclusions without evaluating the component auditor's competence, capabilities, and independence.
  4. Is precluded from using the work of component auditors whenever the components operate in foreign jurisdictions or use different accounting frameworks.

Explanation

The group engagement team directs and supervises the audit and decides how much involvement in component auditors' work is needed to obtain sufficient appropriate evidence, which can range from reviewing their documentation to performing procedures at the component. Regardless of the approach, the group engagement team remains responsible for the group opinion.

Question 18Auditing and Attestation (AUD)

Which of the following is an example of an IT general control?

  1. Controls over changes to application programs, including testing and approval of changes before implementation. Correct answer.
  2. A reconciliation of the accounts payable subsidiary ledger to the general ledger performed monthly.
  3. A three-way match of purchase order, receiving report, and vendor invoice before payment is approved.
  4. A monthly review of the budget-to-actual variance report by the controller.

Explanation

IT general controls support the consistent operation of automated application controls and include program change management, access controls, and IT operations controls. The other items listed are manual or automated application controls that operate on transaction data.

Question 19Auditing and Attestation (AUD)

Under AICPA standards, how should the auditor communicate significant deficiencies and material weaknesses in internal control identified during a financial statement audit?

  1. Only in audits of issuers, as part of the integrated audit of internal control over financial reporting.
  2. In writing to management and those charged with governance on a timely basis. Correct answer.
  3. Only when management agrees with the auditor's assessment of the deficiency's severity.
  4. Orally, with no requirement that the communication be documented in the auditor's file.

Explanation

The auditor must communicate significant deficiencies and material weaknesses in writing to management and those charged with governance on a timely basis. The written communication describes the deficiencies and their potential effects, and a copy is retained in the audit file.

Question 20Auditing and Attestation (AUD)

Which statement about the audit strategy and the audit plan is correct?

  1. The audit plan is more detailed than the audit strategy and must be completed and approved before the audit strategy is developed.
  2. The audit strategy is prepared by the client's management and approved by the auditor before the more detailed audit plan is developed.
  3. Neither document may be revised once fieldwork begins, because both are approved by those charged with governance.
  4. The audit strategy sets scope, timing, and direction, while the audit plan details the nature, timing, and extent of procedures. Correct answer.

Explanation

The audit strategy establishes the scope, timing, and direction of the audit and guides the development of the more detailed audit plan, which addresses the nature, timing, and extent of audit procedures. Both are updated as the audit progresses when conditions change.

Question 21Auditing and Attestation (AUD)

An auditor is unable to obtain sufficient appropriate audit evidence about a subsidiary whose operations are significant but not pervasive to the consolidated financial statements. The auditor should issue:

  1. A qualified opinion because the possible effects are material but not pervasive. Correct answer.
  2. An adverse opinion because the auditor could not complete all planned procedures.
  3. An unmodified opinion with an Emphasis of Matter paragraph describing the limitation.
  4. A disclaimer of opinion because any scope limitation requires a disclaimer.

Explanation

An inability to obtain evidence is a scope limitation; when its possible effects are material but not pervasive, the auditor expresses a qualified opinion. A disclaimer is required only when the possible effects are both material and pervasive.

Question 22Auditing and Attestation (AUD)

What is the primary purpose of the auditor's retrospective review of management's accounting estimates?

  1. To obtain evidence about the effectiveness of management's estimation process and whether management bias may exist. Correct answer.
  2. To determine whether prior-year financial statements contained uncorrected misstatements that require restatement.
  3. To substitute the auditor's own estimate for management's estimate in the current year's financial statements.
  4. To evaluate whether management's prior-year estimates exceeded the auditor's materiality threshold.

Explanation

A retrospective review compares prior-year estimates with the amounts subsequently realized or resolved, providing evidence about management's estimation process and about possible management bias. Significant differences are evaluated for their effect on the current year's estimates and on the auditor's assessment of management's judgments.

Question 23Auditing and Attestation (AUD)

In a monetary-unit sampling application, tolerable misstatement is $50,000 and the sampling interval is $5,000. The auditor selects an item with a recorded amount of $4,000 and finds it overstated by $1,200. Using the simple projection method (tainting percentage applied to the sampling interval), the projected misstatement for this item is:

  1. $1,200
  2. $1,500 Correct answer.
  3. $6,000
  4. $300

Explanation

The tainting percentage is the misstatement divided by the recorded amount ($1,200 / $4,000 = 30%). Multiplying the tainting percentage by the sampling interval gives the projected misstatement ($5,000 x 30% = $1,500).

Question 24Auditing and Attestation (AUD)

An auditor uses the work of a specialist to value complex derivative instruments. Which statement is correct?

  1. The auditor should evaluate the specialist's competence, capabilities, and objectivity and determine whether the specialist's work is adequate for the auditor's purposes. Correct answer.
  2. The specialist's report is treated as documentation of the client's internal control over financial reporting.
  3. The specialist must be independent of the client, and independence alone is sufficient to support the auditor's reliance on the specialist's work.
  4. The auditor may rely on the specialist's findings without evaluating the assumptions, methods, and source data the specialist used, provided the specialist is unrelated to the client.

Explanation

The auditor remains responsible for the opinion and must evaluate the auditor's specialist's competence, capabilities, and objectivity, obtain an understanding of the specialist's field, and determine whether the specialist's work provides sufficient appropriate evidence. The auditor also considers the assumptions and methods used and whether the findings are consistent with other evidence.

Question 25Auditing and Attestation (AUD)

Under PCAOB standards, a critical audit matter is a matter that:

  1. Represents a deficiency in internal control that is less severe than a material weakness but important enough to merit attention from those charged with governance.
  2. Represents any matter the auditor discussed with management at any point before issuing the audit report.
  3. Was communicated to the audit committee, relates to material accounts or disclosures, and involved especially challenging, subjective, or complex auditor judgment. Correct answer.
  4. Represents any uncorrected misstatement the auditor identified during the audit that remains in the financial statements at the report date.

Explanation

A critical audit matter must meet three elements: it was communicated or required to be communicated to the audit committee, it relates to accounts or disclosures material to the financial statements, and it involved especially challenging, subjective, or complex auditor judgment. Critical audit matters are communicated in the auditor's report but do not modify the opinion.

Question 26Auditing and Attestation (AUD)

Under AICPA auditing standards, professional skepticism requires the auditor to be alert to conditions that may indicate possible misstatement due to error or fraud. This attitude is best described as:

  1. A presumption that management is dishonest unless the evidence proves otherwise.
  2. Conditions that may indicate possible misstatement due to error or fraud. Correct answer.
  3. A requirement to verify every recorded transaction in the population.
  4. An assumption that evidence obtained in electronic form is inherently unreliable.

Explanation

Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence, which keeps the auditor alert to conditions suggesting possible misstatement from either error or fraud. It is not a presumption of dishonesty, nor does it require examining 100% of transactions.

Question 27Auditing and Attestation (AUD)

What is the primary purpose of an audit engagement letter?

  1. To specify every audit procedure the auditor will perform in sufficient detail to eliminate audit risk.
  2. To transfer responsibility for the financial statements from management to the auditor.
  3. To serve as a substitute for written management representations at year-end.
  4. To document the agreed terms of the engagement and reduce the risk of misunderstanding between the parties. Correct answer.

Explanation

The engagement letter records the agreed terms of the engagement, the respective responsibilities of management and the auditor, and the nature and limitations of the engagement, thereby reducing the risk that either party misunderstands the arrangement. It does not shift responsibility for the financial statements.

Question 28Auditing and Attestation (AUD)

Which of the following provides the most reliable audit evidence regarding a customer's receivable balance at year-end?

  1. A confirmation returned directly to the auditor by the customer. Correct answer.
  2. An oral statement from the entity's chief financial officer confirming the balance.
  3. A photocopy of a shipping document retained in the entity's files.
  4. A schedule of receivable balances prepared by the entity's controller.

Explanation

Evidence is more reliable when it is obtained from independent external sources and when it is received directly by the auditor. A confirmation sent directly by the customer to the auditor meets both criteria.

Question 29Auditing and Attestation (AUD)

Which statement describes a compilation engagement performed under Statements on Standards for Accounting and Review Services?

  1. The accountant obtains reasonable assurance that the financial statements are free of material misstatement.
  2. The accountant performs inquiry and analytical procedures to obtain limited assurance on the financial statements.
  3. The accountant assists management in presenting financial statements without obtaining or providing any assurance. Correct answer.
  4. The accountant expresses an opinion on the entity's internal control over financial reporting.

Explanation

A compilation involves assisting management in presenting financial information in the form of financial statements, and the accountant does not obtain or provide any assurance on those statements. Assurance is provided only in review and audit engagements.

Question 30Auditing and Attestation (AUD)

The management representation letter ordinarily should be dated:

  1. As of the date the financial statements are first drafted by management.
  2. As of the entity's fiscal year-end.
  3. As of the date of the auditor's report. Correct answer.
  4. As of the date the auditor accepts the engagement.

Explanation

Written representations are dated as of the date of the auditor's report, which is the date through which management has affirmed the representations covering the periods covered by the report.

Question 31Auditing and Attestation (AUD)

Audit documentation prepared and retained by the auditor:

  1. Belongs to the client, because it records the client's transactions and balances.
  2. Belongs to the auditor and is subject to a duty of confidentiality. Correct answer.
  3. Belongs jointly to the auditor and the client, who may release it to third parties at will.
  4. Is a matter of public record once the audit report has been issued.

Explanation

Audit documentation is the property of the auditor, although the auditor has a professional duty to keep client information confidential and may not disclose it without proper authority.

Question 32Auditing and Attestation (AUD)

Substantive analytical procedures performed near the end of an audit are primarily used to:

  1. Obtain evidence about the entity's compliance with debt covenants in the loan agreement.
  2. Test the operating effectiveness of controls over cash receipts and cash disbursements.
  3. Corroborate conclusions reached on individual elements of the financial statements. Correct answer.
  4. Replace the need for an engagement quality review of the engagement file.

Explanation

Substantive analytical procedures performed near the end of the audit help the auditor corroborate conclusions reached when auditing individual elements and assist in forming an overall conclusion on the financial statements.

Question 33Auditing and Attestation (AUD)

Before accepting an engagement to audit a new client, the auditor should:

  1. Review the predecessor auditor's working papers without obtaining client consent.
  2. Inquire of the predecessor auditor after obtaining client permission. Correct answer.
  3. Report the change of auditors to the appropriate regulatory body.
  4. Obtain the predecessor's consent to reuse prior-year audit documentation.

Explanation

Auditing standards require the successor auditor to make inquiries of the predecessor, but only after obtaining the prospective client's permission to do so.

Question 34Auditing and Attestation (AUD)

The auditor determines performance materiality for an engagement at an amount that is:

  1. Less than materiality for the financial statements as a whole. Correct answer.
  2. Equal to the amount used to evaluate audit differences in the prior year's engagement.
  3. Equal to materiality for the financial statements as a whole.
  4. Greater than overall materiality to allow for the aggregation of undetected misstatements.

Explanation

Performance materiality is set below overall materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

Question 35Auditing and Attestation (AUD)

If the auditor lowers the acceptable level of detection risk for a significant account balance, the auditor should:

  1. Raise the materiality threshold applied to that account balance.
  2. Lower the assessed level of inherent risk for the related significant account balance and assertion.
  3. Reduce the amount of substantive testing performed near year-end.
  4. Increase the extent of substantive procedures and perform them closer to period end. Correct answer.

Explanation

Detection risk is inversely related to the extent and effectiveness of substantive procedures; a lower acceptable detection risk requires more extensive procedures performed closer to the period end.

Question 36Auditing and Attestation (AUD)

The auditor sends positive confirmations for a sample of accounts receivable. Several customers do not respond, and the auditor is unable to obtain a second response. The auditor should:

  1. Exclude the nonresponding accounts from the sample and project misstatement from the remaining items.
  2. Perform alternative procedures, such as examining subsequent cash receipts and shipping documentation. Correct answer.
  3. Treat the nonresponses as a fraud risk factor and report them to those charged with governance.
  4. Reduce the assessed risk of material misstatement for the revenue cycle.

Explanation

When positive confirmation requests are not returned, the auditor performs alternative procedures to obtain evidence about the balance, such as examining subsequent cash receipts or other documentation supporting the balance.

Question 37Auditing and Attestation (AUD)

A customer with a year-end receivable files for bankruptcy shortly before the auditor's report is issued, and the bankruptcy is determined to reflect conditions that existed at year-end. The auditor should conclude that management must:

  1. Only disclose the bankruptcy in the notes, because the receivable was recorded at year-end.
  2. Adjust the financial statements for the uncollectible amount. Correct answer.
  3. Take no action, because the bankruptcy occurred after the end of the reporting period.
  4. Withdraw from the engagement unless prior-year statements are reissued.

Explanation

Events that provide evidence of conditions existing at the date of the financial statements require adjustment of the amounts recognized in the financial statements. A customer's bankruptcy reflecting year-end conditions is such an event.

Question 38Auditing and Attestation (AUD)

Under AICPA auditing standards, the auditor uses an emphasis-of-matter paragraph in the auditor's report to:

  1. Express a modified opinion when the auditor disagrees with management's accounting policy.
  2. Describe the audit procedures the auditor performed on significant risks.
  3. Draw users' attention to a matter appropriately presented or disclosed in the financial statements. Correct answer.
  4. Communicate a material weakness in internal control over financial reporting to those charged with governance.

Explanation

An emphasis-of-matter paragraph draws users' attention to a matter appropriately presented or disclosed in the financial statements that is fundamental to users' understanding of those statements, and it does not modify the opinion.

Question 39Auditing and Attestation (AUD)

In every audit conducted under AICPA auditing standards, the auditor should presume a risk of fraud in:

  1. Management's going concern assessment.
  2. Revenue recognition. Correct answer.
  3. The completeness of accounts payable.
  4. The valuation of intangible assets.

Explanation

Auditing standards require the auditor to presume that there are risks of fraud in revenue recognition and to evaluate which revenue recognition risks could give rise to material misstatement.

Question 40Auditing and Attestation (AUD)

The auditor becomes aware that the entity has violated a law that has a direct and material effect on the financial statements. The auditor should:

  1. Report the violation directly to the relevant regulatory authority without first informing management.
  2. Resign from the engagement and notify the predecessor auditor of the reason for the resignation.
  3. Disclose the violation in an emphasis-of-matter paragraph regardless of management's disclosures.
  4. Obtain an understanding of the act and of its effect on the financial statements, and communicate with those charged with governance. Correct answer.

Explanation

When noncompliance with laws and regulations having a direct effect on the financial statements comes to the auditor's attention, the auditor obtains an understanding of the act and its effect, and communicates the matter to those charged with governance.

Question 41Auditing and Attestation (AUD)

Under AICPA quality management standards, an engagement quality review is required for:

  1. Every review engagement performed for a nonpublic company client.
  2. Every audit in which the auditor plans to use the work of an internal audit function.
  3. Each audit of the financial statements of a listed entity. Correct answer.
  4. Every compilation engagement in which the accountant is not independent.

Explanation

Firms must establish criteria requiring an engagement quality review, and audits of the financial statements of listed entities are among the engagements for which a review is required.

Question 42Auditing and Attestation (AUD)

In determining the extent to which the external auditor may use the work of the internal audit function, the auditor should evaluate:

  1. The number of internal audit staff relative to the size of the external audit team.
  2. Whether the internal auditors report directly to the audit committee, which by itself is sufficient.
  3. The internal auditors' objectivity, competence, and systematic and disciplined approach to their work. Correct answer.
  4. Whether the internal audit function is outsourced to a firm located in the same city as the client.

Explanation

The external auditor evaluates the internal audit function's objectivity, level of competence, and application of a systematic and disciplined approach, including quality control, in deciding whether and how much of its work may be used.

Question 43Auditing and Attestation (AUD)

The auditor's point estimate of an accounting estimate differs from management's recorded amount, but management's amount falls within the auditor's range of reasonable outcomes. The auditor should:

  1. Require management to record the auditor's point estimate as a correction.
  2. Express a qualified opinion because two differing estimates exist.
  3. Treat the difference as a misstatement and accumulate it in the summary of uncorrected misstatements.
  4. Conclude that the estimate is reasonable because the recorded amount is within the range. Correct answer.

Explanation

When the auditor's range of reasonable outcomes includes management's recorded amount, the estimate is considered reasonable and no misstatement is identified, even though the auditor's point estimate differs.

Question 44Auditing and Attestation (AUD)

The auditor tests the operating effectiveness of a control at an interim date and intends to rely on the control through year-end. The auditor should:

  1. Obtain audit evidence about the operating effectiveness of the controls for the remaining period. Correct answer.
  2. Extend the interim conclusions to year-end without obtaining further evidence.
  3. Double the sample size used at the interim date in order to cover the remaining period through year-end.
  4. Restart control testing from the beginning of the year at year-end.

Explanation

When controls are tested at an interim date, the auditor must obtain evidence about the operating effectiveness of those controls for the remaining period, for example through inquiry and, where relevant, testing of monitoring controls.

Question 45Auditing and Attestation (AUD)

Holding all other factors constant, if the auditor increases the expected population deviation rate for a test of controls, the required sample size:

  1. Is unaffected, because the expected deviation rate is not a sampling factor.
  2. Increases. Correct answer.
  3. Decreases.
  4. Doubles regardless of the tolerable deviation rate.

Explanation

A higher expected deviation rate leaves less room between the expected rate and the tolerable rate, so a larger sample is needed to conclude with the desired confidence.

Question 46Auditing and Attestation (AUD)

In evaluating whether the financial statements as a whole are materially misstated, the aggregate of misstatements considered by the auditor should include:

  1. Only misstatements identified during the current year's tests of details.
  2. The effect of uncorrected prior-period misstatements on the current-period financial statements. Correct answer.
  3. Only misstatements that individually exceed the overall materiality level for the financial statements as a whole.
  4. All misstatements identified during the audit, including those management has already corrected.

Explanation

The auditor evaluates the aggregate of misstatements, including the effect of uncorrected misstatements from prior periods on the current-period financial statements, along with current-period identified misstatements.

Question 47Auditing and Attestation (AUD)

Management changes from one acceptable accounting principle to another, discloses the change in the financial statements, and the auditor concurs with the change. The auditor's report should:

  1. Modify the opinion paragraph to state that the prior year's statements are no longer fairly presented.
  2. Describe the change as a critical audit matter in a separate paragraph of the report.
  3. Express a qualified opinion because comparability between periods has been affected.
  4. Include an emphasis-of-matter paragraph that describes the change in accounting principle. Correct answer.

Explanation

When a change in accounting principle has been properly accounted for and disclosed in accordance with the applicable framework, the auditor adds an emphasis-of-matter paragraph describing the change without modifying the opinion.

Question 48Auditing and Attestation (AUD)

The auditor dual-dates the auditor's report in connection with a subsequent event occurring after the original report date. Dual dating indicates that:

  1. The report date has been changed for all purposes to the date of the later event.
  2. Responsibility for events after the original report date is limited to the later event. Correct answer.
  3. The financial statements have been reissued with revised comparative information.
  4. The auditor has performed subsequent events procedures through the later date for the financial statements as a whole.

Explanation

When the auditor dual-dates the report, the auditor's responsibility for subsequent events beyond the original report date is limited to the specific later event, rather than extending to all events occurring after the original date.

Question 49Auditing and Attestation (AUD)

In planning an audit, the auditor may determine a lower materiality amount for a particular class of transactions when:

  1. The class of transactions has a small recorded balance relative to total assets on the balance sheet.
  2. The auditor plans to use a statistical sampling approach to test the class of transactions.
  3. The class of transactions is tested entirely by substantive analytical procedures.
  4. Contractual or regulatory requirements make users particularly sensitive to misstatements in that class. Correct answer.

Explanation

The auditor may set a lower materiality level for particular classes of transactions, account balances, or disclosures when misstatements of lesser amounts could reasonably influence users' decisions, as with amounts subject to contractual or regulatory requirements.

Question 50Auditing and Attestation (AUD)

Using nonstatistical sampling, an auditor selects a sample with a recorded amount of $100,000 from a population with a recorded amount of $1,000,000. The sample contains misstatements of $2,000, and the auditor projects misstatement in proportion to recorded amounts. The projected misstatement is:

  1. $10,000.
  2. $2,000.
  3. $20,000. Correct answer.
  4. $200,000.

Explanation

Projection is made by applying the ratio of sample misstatement to sample recorded amount ($2,000 ÷ $100,000 = 2%) to the population's recorded amount ($1,000,000), producing projected misstatement of $20,000.