2013 Auditing Aicpa Released Mc Questions and Sims With Explanations

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Transcript of 2013 Auditing Aicpa Released Mc Questions and Sims With Explanations

  • 2013 AICPA Newly Released Questions Auditing

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    Following are multiple choice questions and simulations recently released by the

    AICPA. These questions were released by the AICPA with letter answers only. Our

    editorial board has provided the accompanying explanation.

    Please note that the AICPA generally releases questions that it does NOT intend to use

    again. These questions and content may or may not be representative of questions you

    may see on any upcoming exams.

  • 2013 AICPA Newly Released Questions Auditing

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    AICPA QUESTIONS RATED MODERATE DIFFICULTY 1. CPA-8140 Which of the following types of audit evidence provides the least assurance of reliability?

    a. Receivable confirmations received from the client's customers. b. Prenumbered receiving reports completed by the client's employees. c. Prior months' bank statements obtained from the client. d. Municipal property tax bills prepared in the client's name. Solution: Choice "b" is correct. Prenumbered receiving reports completed by the client's employees are considered internal evidence and are the least reliable of the items listed.

    Choice "a" is incorrect. Receivable confirmations received from client's customers, which are considered external evidence, are more reliable than internal evidence.

    Choice "c" is incorrect. Prior months' bank statements obtained from the client, which are considered external evidence, are more reliable than internal evidence.

    Choice "d" is incorrect. Municipal property tax bills prepared in the client's name, which are considered external evidence, are more reliable than internal evidence.

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    2. CPA-08141

    An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if:

    a. The results of alternative procedures that were performed compensate for the omission. b. The auditor's assessed level of detection risk is low. c. The omission is documented in a communication with the audit committee. d. No individual investment is material to the financial statements taken as a whole. Solution: Choice "a" is correct. If other audit procedures compensate for an omitted procedure, the auditor does not need to perform the omitted procedure.

    Choice "b" is incorrect. If an auditor's assessed level of detection risk is low, this would provide a further reason to perform the omitted procedure or an alternative procedure to confirm the investment balance.

    Choice "c" is incorrect. An auditor would still need to apply the omitted procedure (or alternative procedure) even if the omission is documented in a communication with the audit committee.

    Choice "d" is incorrect. An auditor would need to perform the omitted procedure or an alternative procedure, as the aggregate amount of investments may be material to the financial statements taken as a whole.

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    3. CPA-08142

    Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to accumulated depreciation accounts in the current year?

    a. Prior years' depreciation expenses were erroneously understated. b. Current year's depreciation expense was erroneously understated. c. The estimated remaining useful lives of plant assets were revised upward. d. Plant assets were retired during the current year. Solution: Choice "d" is correct. The explanation that plant assets were retired during the year would most likely satisfy an auditor who questions management about significant debits to accumulated depreciation accounts made during the year. The journal entry to retire an asset includes a debit to accumulated depreciation and a credit to the asset account.

    Choice "a" is incorrect. If prior years' depreciation expense was erroneously understated, the auditor would expect a debit to retained earnings and a credit to accumulated depreciation for the error correction.

    Choice "b" is incorrect. Typically, accumulated depreciation is debited when there is total and permanent impairment, and when an asset is sold, retired, or otherwise disposed of. If the current year's depreciation expense was erroneously understated, this would not typically result in debits to accumulated depreciation. Instead, the auditor would expect smaller amounts credited to accumulated depreciation.

    Choice "c" is incorrect. A change in useful life is handled prospectively. An increase in the remaining useful lives of assets would result in smaller amounts of depreciation expense being credited to accumulated depreciation.

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    4. CPA-08143

    An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the:

    a. Control environment factors that affect the organizational structure. b. Correlation of detection risk and inherent risk. c. Effectiveness of the entity's internal control activities. d. Possible effects on the entity's financial statements. Solution: Choice "d" is correct. If an auditor has substantial doubt about the entity's ability to continue as a going concern, the auditor would be most concerned about the possible effects on the entity's financial statements.

    Choice "a" is incorrect. The control environment factors that affect the organizational structure do not directly relate to going concern.

    Choice "b" is incorrect. The auditor is concerned about the correlation between detection risk and inherent risk when deciding the nature, extent, and timing of audit procedures.

    Choice "c" is incorrect. When the auditor is concerned about an entity's ability to continue as a going concern, the auditor is concerned about the effects on the entity's financial statements and will identify conditions and events that may be indicative of substantive doubt. The effectiveness of internal controls would not typically provide evidence of substantial doubt.

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    5. CPA-08144

    Subsequent to issuing a report on audited financial statements, a CPA discovers that the accounts receivable confirmation process omitted a number of accounts that are material, in the aggregate. Which of the following actions should the CPA take immediately?

    a. Bring the matter to the attention of the board of directors or audit committee. b. Withdraw the auditor's report from those persons currently relying on it. c. Perform alternative procedures to verify account balances. d. Discuss the potential financial statement adjustments with client management. Solution: Choice "c" is correct. If an auditor omits a procedure, the auditor should first determine whether other audit procedures compensate for the omitted audit procedures. If so, no further action is necessary. If other procedures do not compensate for the omitted audit procedure and there are people relying on the report, the auditor should promptly apply the omitted procedure or perform alternative procedures.

    Choice "a" is incorrect. The auditor would first need to apply the procedure or alternative procedure to determine the account balance. If the procedure indicated the account was materially misstated, then the auditor would bring the matter to the attention of the board of directors or audit committee.

    Choice "b" is incorrect. The auditor would first need to apply the procedure or alternative procedure to determine the account balance. The auditor would withdraw the auditor's report if the client refuses to adjust the financial statements.

    Choice "d" is incorrect. The auditor would first need to apply the procedure or alternative procedure to determine the account balance. If adjustments were necessary, the auditor would then talk to the client about the potential adjustments.

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    6. CPA-08145

    An entity engaged an accountant to review its financial statements in accordance with Statements on Standards for Accounting and Review Services. The accountant determined that the entity maintained its accounts on a comprehensive basis of accounting other than generally accepted accounting principles (GAAP). In this situation, the accountant most likely would have taken which of the following actions?

    a. Withdrawn from the engagement because the entity has not been following GAAP. b. Advised management to make the adjustments necessary for the account balances to conform with

    GAAP. c. Modified the review report to reflect the fact that the financial statements were presented on another

    comprehensive basis of accounting. d. Requested that management justify the use of the other comprehensive basis of accounting in the

    management representation letter. Solution: Choice "c" is correct. An accountant asked to review financial statements on a comprehensive basis of accounting other than generally accepted accounting principles should modify the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting.

    Choice "a" is incorrect. An accountant is permitted to review financial statements that are prepared on a comprehensive basis of accounting other than GAAP.

    Choice "b" is incorrect. Financial statements are allowed to be prep