1. An accountant who accepts an engagement to compile
In auditing related party transactions, an auditor
a financial projection most likely would make the client
aware that the:
a. Projection may not be included in a document
with audited historical financial statements.
b. Accountant's responsibility to update the
projection for future events and circumstances is limited
to one year.
c. Projection omits all hypothetical assumptions
and presents the most likely future financial position.
d. Engagement does not include an evaluation of
the support for the assumptions underlying the
projection.
2. Which of the following audit procedures most likely
would assist an auditor in identifying conditions and
events that may indicate there could be substantial
doubt about an entity's ability to continue as a going
concern?
a. Confirmation of accounts receivable from
principal customers.
b. Reconciliation of interest expense with debt
outstanding.
c. Confirmation of bank balances.
d. Review of compliance with terms of debt
agreements.
3.Which of the following would not be considered an
analytical procedure?
Converting dollar amounts of income statement account
balances to percentages of net sales for comparison with
industry averages.
a. Developing the current year's expected net sales
based on the sales trend of similar entities within the
same industry.
b. Projecting a deviation rate by comparing the
results of a statistical sample with the actual population
characteristics.
c. Estimating the current year's expected expenses
based on the prior year's expenses and the current year's
budget.
4.A principal auditor decides not to refer to the audit of
another CPA who audited a subsidiary of the principal
auditor’s client. After making inquiries about the other
CPA’s professional reputation and independence, the
principal auditor most likely would:
a. Document in the engagement letter that the
principal auditor assumes no responsibility for the other
CPA’s work.
b. Obtain written permission from the other CPA to
omit the reference in the principal auditor’s report.
c. Contact the other CPA and review the audit
programs and working papers pertaining to the
subsidiary.
d. Add an explanatory paragraph to the auditor’s
report indicating that the subsidiary’s financial
statements are not material to the consolidated financial
statements.
5.
ordinarily places primary emphasis on: a. The probability
that related party transactions will recur.
b. Confirming the existence of the related parties.
c. Verifying the valuation of the related party
transactions.
d. The adequacy of the disclosure of the related
party transactions.
6.The inability to complete which of the following
activities most likely would prevent an accountant from
accepting and completing an engagement for a review of
financial statements performed in accordance with
Statements on Standards for Accounting and Review
Services? a. Performing tests of details of major account
balances.
b. Performing inquiries and analytical procedures.
c. Obtaining an understanding of internal control
to assess control risk.
d. Having previous experience in the client's
industry.
7.Obtaining an understanding of an internal control
involves evaluating the design of the control and
determining whether the control has been: a.
Authorized.
b. Implemented.
c. Tested.
d. Monitored.
8.Which of the following procedures most likely would be
performed in a review engagement of a nonissuer's
financial statements in accordance with Statements on
Standards for Accounting and Review Services?
a. Making inquiries of management.
b. Observing a year-end inventory count.
c. Assessing the internal control system.
d. Examining subsequent cash receipts.
9.An auditor should consider which of the following
when evaluating the ability of a company to continue as
a going concern? a. Audit fees.
b. Future assurance services.
c. Management's plans for disposal of assets.
d. A lawsuit for which judgment is not anticipated
for 18 months.
10.In which of the following should an auditor's report
refer to the lack of consistency when there is a change in
accounting principle that is significant? a. The scope
paragraph.
b. The opinion paragraph.
c. An explanatory paragraph following the opinion
paragraph.
d. An explanatory paragraph before the opinion
paragraph.
11.Which of the following is the best way to compensate
for the lack of adequate segregation of duties in a small
organization?
a. Disclosing lack of segregation of duties to the
external auditors during the annual review.
b. Replacing personnel every three or four years.
c. Requiring accountants to pass a yearly c. Introductory paragraph.
background check. d. Explanatory paragraph.
d. Allowing for greater management oversight of
incompatible activities. 18.The understanding with the client regarding a
financial statement audit generally includes which of the
12.Which of the following situations most likely following matters?
represents the highest risk of a misstatement arising a. The expected opinion to be issued.
from misappropriations of assets? b. The responsibilities of the auditor.
a. A large number of bearer bonds on hand. c. The contingency fee structure.
b. A large number of inventory items with low sales d. The preliminary judgment about materiality.
prices.
c. A large number of transactions processed in a 19.Under the Sarbanes-Oxley Act of 2002, exactly how
short period of time. many consecutive years may an audit partner lead an
d. A large number of fixed assets with easily audit for an issuer? a. Four years.
identifiable serial numbers. b. Five years.
c. Six years.
13.Which of the following procedures would an auditor d. Seven years.
most likely perform in the planning stage of an audit? a.
Make a preliminary judgment about materiality. 20.A government internal audit function is presumed to
b. Confirm a sample of the entity's accounts be free from organizational independence impairments
payable with known creditors. for reporting internally when the head of the
c. Obtain written representations from organization: a. Is not accountable to those charged with
management that there are no unrecorded transactions. governance.
d. Communicate management's initial selection of b. Performs auditing procedures that are consistent
accounting policies to the audit committee. with generally accepted accounting principles.
c. Is a line-manager of the unit under audit.
14.An auditor is required to confirm accounts receivable d. Is removed from political pressures to conduct
if the accounts receivable balances are: a. Older than the audits objectively, without fear of political reprisal.
prior year.
b. Material to the financial statements. 21.Each of the following is a type of known
c. Smaller than expected. misstatement, except: a. An inaccuracy in processing
d. Subject to valuation estimates. data.
b. The misapplication of accounting principles.
15.Under which of the following circumstances should an c. Differences between management and the
auditor consider confirming the terms of a large complex auditor's judgment regarding estimates.
sale? d. A difference between the classification of a
a. When the assessed level of control risk over the reported financial statement element and the
sale is low. classification according to generally accepted accounting
b. When the assessed level of detection risk over principles.
the sale is high.
c. When the combined assessed level of inherent 22.An accountant can perform, with preapproval of the
and control risk over the sale is moderate. audit committee of the board of directors, which of the
d. When the combined assessed level of inherent following non-audit services during the audit of an
and control risk over the sale is high. issuer? a. Bookkeeping services.
b. Human resource services.
16.Of which of the following matters is a management c. Tax planning services.
representation letter required to contain specific d. Internal audit outsourcing services.
representations? 23.The controller of a small utility company has
a. Length of a material contract with a new interviewed audit firms proposing to perform the annual
customer. audit of their employee benefit plan. According to the
b. Information concerning fraud by the CFO. guidelines of the Department of Labor (DOL), the
c. Reason for a significant increase in revenue over selected auditor must be:
the prior year. a. The firm that proposes the lowest fee for the
d. The competency and objectivity of the internal work required.
audit department. b. Independent for purposes of examining financial
information required to be filed annually with the DOL.
17.In which of the following paragraphs of an auditor's c. Included on the list of firms approved by the
report does an auditor communicate the nature of the DOL.
engagement and the specific financial statements d. Independent of the utility company and not
covered by the audit? relying on its services.
a. Scope paragraph.
b. Opinion paragraph.
24.An accountant was asked by a potential client to
perform a compilation of its financial statements. The
accountant is not familiar with the industry in which the
client operates. In this situation, which of the following
actions is the accountant most likely to take?
a. Request that management engage an
independent industry expert to consult with the
accountant.
b. Accept the engagement and obtain an adequate
level of knowledge about the industry.
c. Decline the engagement.
d. Postpone accepting the engagement until the
accountant has obtained an adequate level of knowledge
about the industry.
25.To compile financial statements of a nonissuer in
accordance with Statements on Standards for Accounting
and Review Services, an accountant should:
a. Identify material misstatements in the financial
statements.
b. Review bank statement reconciliations.
c. Make inquiries of significant customers, vendors,
and creditors.
d. Obtain a general understanding of the client's
business transactions.
26. A CPA firm would best provide itself reasonable
assurance of meeting its responsibility to offer
professional services that conform with professional
standards by:
a. Establishing an understanding with each client
concerning individual responsibilities in a signed
engagement letter.
b. Assessing the risk that errors and fraud may
cause the financial statements to contain material
misstatements.
c. Developing specific audit objectives to support
management's assertions that are embodied in the
financial statements.
d. Maintaining a comprehensive system of quality
control that is suitably designed in relation to its
organizational structure.
27.An auditor who is unable to form an opinion on a
new client's opening inventory balances may issue an
unqualified opinion on the current year's: a. Income
statement only.
b. Statement of cash flows only.
c. Balance sheet only.
d. Statement of shareholders' equity only.
28.Which of the following procedures would a CPA most
likely perform in the planning phase of a financial
statement audit?
a. Make inquiries of the client’s lawyer concerning
pending litigation.
b. Perform cutoff tests of cash receipts and
disbursements.
c. Compare financial information with nonfinancial
operating data.
d. Recalculate the prior year’s accruals and
deferrals.
29.Zag Co. issues financial statements that present
financial position and results of operations but Zag omits
the related statement of cash flows. Zag would like to
engage Brown, CPA, to audit its financial statements
without the statement of cash flows although Brown's
access to all of the information underlying the basic
financial statements will not be limited. Under these
circumstances, Brown most likely would:
a. Add an explanatory paragraph to the standard
auditor's report that justifies the reason for the omission.
b. Refuse to accept the engagement as proposed
because of the client-imposed scope limitation.
c. Explain to Zag that the omission requires a
qualification of the auditor's opinion.
d. Prepare the statement of cash flows as an
accommodation to Zag and express an unqualified
opinion.
30.Under the ethical standards of the profession, which
of the following is a "permitted loan" regardless of the
date it was obtained?
a. Home mortgage loan.
b. Student loan.
c. Secured automobile loan.
d. Personal loan.
31.In confirming a client's accounts receivable in prior
years, an auditor discovered many differences between
recorded account balances and confirmation replies.
These differences were resolved and were not
misstatements. In defining the sampling unit for the
current year's audit, the auditor most likely would
choose:
a. Customers with credit balances.
b. Small account balances.
c. Individual overdue balances.
d. Individual invoices.
32.An auditor is engaged to report on selected financial
data that are included in a client-prepared document
containing audited financial statements. Under these
circumstances, the report on the selected data should:
a. State that the presentation is a comprehensive
basis of accounting other than GAAP.
b. Restrict the use of the report to those specified
users within the entity.
c. Be limited to data derived from the entity's
audited financial statements.
d. Indicate that the data are subject to prospective
results that may not be achieved.
33.For which of the following audit tests would an
auditor most likely use attribute sampling? a. Inspecting
purchase orders for proper approval by supervisors.
b. Making an independent estimate of recorded
payroll expense.
c. Determining that all payables are recorded at
year end.
d. Selecting accounts receivable for confirmation of
account balances.
34.According to the Code of Professional Conduct of the c. Clerk 3 mails the checks and remittances after
AICPA, for which type of service may a CPA receive a they have been signed.
contingent fee? d. The treasurer uses a stamp for signing checks.
a. Performing an audit of a financial statement.
b. Performing a review of a financial statement. 39.Which of the following management assertions is an
c. Performing an examination of prospective auditor most likely testing if the audit objective states
financial information. that all inventory on hand is reflected in the ending
d. Seeking a private letter ruling. inventory balance? a. The entity has rights to the
inventory.
35.Which of the following controls should prevent an b. Inventory is properly valued.
invoice for the purchase of merchandise from being paid c. Inventory is properly presented in the financial
twice? statements.
a. The check signer accounts for the numerical sequence d. Inventory is complete.
of receiving reports used in support of each payment.
b. An individual independent of cash operations prepares 40.Which of the following activities is an accountant not
a bank reconciliation. responsible for in review engagements performed in
c. The check signer reviews and cancels the accordance with Statements on Standards for Accounting
voucher packets. and Review Services? a. Performing basic analytical
d. Two check signers are required for all checks procedures.
over a specified amount. b. Remaining independent.
c. Developing an understanding of internal control.
36.A client has capitalizable leases but refuses to d. Providing any form of assurance.
capitalize them in the financial statements. Which of the
following reporting options does an auditor have if the 41.Which of the following items should be included in an
amounts pervasively distort the financial statements? auditor's report for financial statements prepared in
a. Qualified opinion. conformity with an other comprehensive basis of
b. Unqualified opinion. accounting (OCBOA)?
c. Disclaimer opinion. a. A sentence stating that the auditor is responsible
d. Adverse opinion. for the financial statements.
b. A title that includes the word "independent."
37.Which of the following items should be included in c. The signature of the company controller.
prospective financial statements issued in an attestation d. A paragraph stating that the audit was
engagement performed in accordance with Statements conducted in accordance with OCBOA.
on Standards for Attestation Engagements?
a. All significant assertions used to prepare the 42.Which of the following statements best describes why
financial statements. an auditor would use only substantive procedures to
b. All significant assumptions used to prepare the evaluate specific relevant assertions and risks?
financial statements. a. The relevant internal control components are
c. Pro forma financial statements for the past two not well documented.
years. b. The internal auditor already has tested the
d. Historical financial statements for the past three relevant controls and found them effective.
years. c. Testing the operating effectiveness of the
relevant controls would not be efficient.
38.A company employs three accounts payable clerks d. The cost of substantive procedures will exceed
and one treasurer. Their responsibilities are as follows: the cost of testing the relevant controls.
Employee Responsibility
Clerk 1 Reviews vendor invoices for proper 43.Which of the following courses of action is the most
signature approval. appropriate if an auditor concludes that there is a high
Clerk 2 Enters vendor invoices into the risk of material misstatement?
accounting system and verifies a. Use smaller, rather than larger, sample sizes.
payment terms. b. Perform substantive tests as of an interim date.
Clerk 3 Posts entered vendor invoices to the c. Select more effective substantive tests.
accounts payable ledger for payment d. Increase of tests of controls.
and mails checks.
Treasurer Reviews the vendor invoices and signs 44.Which of the following procedures would be generally
each check. performed when evaluating the accounts receivable
Which of the following would indicate a weakness in the balance in an engagement to review financial statements
company's internal control? a. Clerk 1 opens all of the in accordance with Statements on Standards for
incoming mail. Accounting and Review Services?
b. Clerk 2 reconciles the accounts payable ledger a. Perform a reasonableness test of the balance by
with the general ledger monthly. computing days' sales in receivables.
b. Vouch a sample of subsequent cash receipts
from customers.
c. Confirm individually significant receivable
balances with customers.
d. Review subsequent bank statements for
evidence of cash deposits.
45.In which of the following circumstances would a
covered member's independence be impaired with
respect to a nonissuer client?
a. The member is designated to serve as guardian
of a friend's children if the need arises, and the friend's
estate, which would be held in trust for the children,
holds significant stock ownership in a client entity.
b. The member's spouse qualifies because of
geographical residence to belong to a client's credit
union, and all transactions with the credit union are
conducted under normal operating practices.
c. The member owns municipal utility bonds issued
by a client, and the bonds are not material to the
member's wealth.
d. The member belongs to a client golf club that
requires members to acquire a share of the club's debt
securities.
d. Consider the reason given for the client's request
and assess whether the request is reasonable.
49.Hart, CPA, is engaged to review the year 2 financial
statements of Kell Co., a nonissuer. Previously, Hart
audited Kell's year 1 financial statements and expressed
a qualified opinion due to a scope limitation. Hart
decides to include a separate paragraph in the year 2
review report because comparative financial statements
are being presented for year 2 and year 1. This separate
paragraph should indicate the: a. Substantive reasons for
the prior-year's qualified opinion.
b. Reason for changing the level of service from an
audit to a review.
c. Consistency of application of accounting
principles between year 2 and year 1.
d. Restriction on the distribution of the report for
internal use only.

46.According to the AICPA Statements on Standards for

Attestation Engagements, a public accounting firm
should establish quality control policies to provide
assurance about which of the following matters related
to agreed-upon procedures engagements? a. Use of the
report is not restricted.
b. The public accounting firm takes responsibility
for the sufficiency of procedures.
c. The practitioner is independent from the client
and other specified parties.
d. The practitioner sets the criteria to be used in
the determination of findings.

47.A cooling-off period of how many years is required

before a member of an issuer's audit engagement team
may begin working for the registrant in a key position? a.
One year.
b. Two years.
c. Three years.
d. Four years.

48.A CPA is engaged to audit the financial statements of

a nonissuer. After the audit begins, the client's
management questions the extent of procedures and
objects to the confirmation of certain contracts. The
client asks the accountant to change the scope of the
engagement from an audit to a review. Under these
circumstances, the accountant should do each of the
following, except:
a. Issue an accountant's review report with a
separate paragraph discussing the change in engagement
scope.
b. Consider the additional audit effort and cost
required to complete the audit.
c. Evaluate the possibility that financial statement
information affected by the limitation on work to be
performed may be incorrect or incomplete.