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Becker Professional Education

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Question CPA-02332

Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency?

I.The likelihood that a control will fail to prevent or detect a misstatement.

II. The magnitude of the misstatement that could result from the deficiency.

a.I only.

b.II only.

c.Both I and II.

d.Neither I nor II.

Explanation

Choice "c" is correct. When evaluating whether a control deficiency is a significant deficiency or a material weakness, the auditor should consider both the likelihood and magnitude of any potential misstatement.

Choices "a", "b", and "d" are incorrect, based on the explanation above.

2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved.

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Question CPA-02470

Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer?

a.An auditor is required to search for significant deficiencies during an audit.

b.All significant deficiencies are also considered to be material weaknesses.

c.An auditor may communicate significant deficiencies during an audit or after the audit's completion.

d.An auditor may report that no significant deficiencies were noted during an audit.

Explanation

Choice "c" is correct. Because timely communication may be important, the auditor may choose to communicate significant deficiencies during the course of the audit rather than after the audit is concluded.

Choice "a" is incorrect. The auditor is not obligated to search for significant deficiencies.

Choice "b" is incorrect. All material weaknesses are significant deficiencies, but not all significant deficiencies are material weaknesses.

Choice "d" is incorrect. Because of the potential for misinterpretation, the auditor should not issue a written report representing that no significant deficiencies were noted during the audit.

2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved.

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Question CPA-02496

Significant deficiencies are control deficiencies that come to an auditor's attention that are:

a.Disclosures of information that significantly contradict the auditor's going concern assumption.

b.Material fraud or illegal acts perpetrated by high-level management.

c.Important enough to merit attention by those charged with governance.

d.Manipulation or falsification of accounting records or documents from which financial statements are prepared.

Explanation

Choice "c" is correct. Significant deficiencies in the design or operation of internal control are control weaknesses that are important enough to merit attention by those charged with governance.

Choice "a" is incorrect. Information that significantly contradicts the auditor's going concern assumption is not considered a significant deficiency.

Choice "b" is incorrect. Fraud perpetrated by high-level managers should be reported to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control.

Choice "d" is incorrect. Fraud should be reported to an appropriate level of management, and sometimes to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control.

2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved.

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Question CPA-02508

Which of the following matters would an auditor most likely communicate to those charged with governance?

a.A list of negative trends that may lead to working capital deficiencies and adverse financial ratios.

b.The level of responsibility assumed by management for the preparation of the financial statements.

c.Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables.

d.The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance.

Explanation

Choice "d" is correct. The auditor should communicate the initial selection of, and changes in, significant accounting policies to those charged with governance.

Choice "a" is incorrect. Negative trends and adverse financial ratios are evaluated by an auditor when considering an entity's ability to continue as a going concern. These trends and ratios are not required to be communicated to those charged with governance.

Choice "b" is incorrect. The auditor's communications to those charged with governance include the level of responsibility that the auditor is assuming regarding matters of interest to those charged with governance, not the level of responsibility assumed by management.

Choice "c" is incorrect. The auditor is required to inform the audit committee about difficulties encountered with management during the audit. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables generally would not be communicated to those charged with governance, since such difficulties are not related to management.

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Question CPA-02513

Which of the following should be included as a written representation from management?

a.The belief that misstatements identified by the auditor and not corrected are immaterial.

b.The belief that misstatements identified by the auditor and corrected are material.

c.The belief that the auditor is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles.

d.The belief that the financial statements are completely accurate in all respects.

Explanation

Choice "a" is correct. The representation letter should include management's belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

Choice "b" is incorrect. If the misstatements have been corrected, there is no need for management to make representations regarding their materiality.

Choice "c" is incorrect. Management (and not the auditor) is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles.

Choice "d" is incorrect. Management states its belief that the financial statements are fairly presented in conformity with GAAP. Fair presentation does not mean that the financial statements are completely accurate in all respects, but that they are accurate in all material respects.

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Question CPA-02524

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:

a.Report on internal control.

b.Special report.

c.Management representation letter.

d.Letter for underwriters.

Explanation

Choice "c" is correct. The statement concerning communications with regulatory agencies is made by management to the auditor as written confirmation of a matter for which corroborating evidence can only be obtained from inquiry of management. The statement would appear in the management representation letter.

Choice "a" is incorrect. As a representation of management, the statement concerning communications with regulatory agencies would not appear in the auditor's report on internal control.

Choice "b" is incorrect. As a representation of management, the statement concerning communications with regulatory agencies would not appear in the auditor's special report.

Choice "d" is incorrect. A statement concerning communications with regulatory agencies generally would not appear in an auditor's letter for underwriters.

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Question CPA-02527

In identifying matters for communication with those charged with governance, an auditor most likely would ask management whether:

a.The turnover in the accounting department was unusually high.

b.It consulted with another CPA firm about accounting matters.

c.There were any subsequent events of which the auditor was unaware.

d.It agreed with the auditor's assessed level of control risk.

Explanation

Choice "b" is correct. The auditor is required to communicate to those charged with governance regarding certain matters, including management consultation with other auditors. Consequently, the auditor must ask management about this matter.

Choice "a" is incorrect. Unusually high turnover in the accounting department is a negative factor in assessing control risk, but it is not a matter that needs to be communicated to those charged with governance.

Choice "c" is incorrect. Inquiry of management concerning any subsequent events of which the auditor is unaware is a required audit procedure, which would also be confirmed as part of the management representation letter, but it is not a matter that needs to be communicated to those charged with governance. (They should already know!)

Choice "d" is incorrect. The auditor alone has responsibility for judgments regarding the assessed level of control risk, and the auditor would not generally discuss this assessment with management.

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Question CPA-02530

Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance?

a.Management's failure to renegotiate unfavorable long-term purchase commitments.

b.Recurring operating losses that may indicate going concern problems.

c.Evidence of a lack of objectivity by those responsible for accounting decisions.

d.Management's current plans to reduce its ownership equity in the entity.

Explanation

Choice "c" is correct. A lack of objectivity by those responsible for accounting decisions represents a significant internal control deficiency because it may result in financial statements that are biased rather than being presented fairly. This is a matter that would merit attention by those charged with governance.

Choice "a" is incorrect. Management's failure to renegotiate unfavorable long-term purchase commitments does not represent a significant deficiency in internal control.

Choice "b" is incorrect. Going concern problems do not represent a significant deficiency in internal control.

Choice "d" is incorrect. Management's plan to reduce its ownership equity in the entity does not represent a significant deficiency in internal control.

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Question CPA-02533

Which of the following matters would an auditor most likely include in a management representation letter?

a.Communications with those charged with governance concerning weaknesses in internal control.

b.The completeness and availability of minutes of stockholders' and directors' meetings.

c.Plans to acquire or merge with other entities in the subsequent year.

d.Management's acknowledgment of its responsibility for the detection of employee fraud.

Explanation

Choice "b" is correct. The purpose of the management representation letter is to confirm management's oral evidence supplied during the engagement. Specific written representations obtained by the auditor should include acknowledgment as to the completeness and availability of minutes of stockholders' and directors' meetings.

Choice "a" is incorrect. Communications with those charged with governance are generally not included in the management representation letter, whereas communications from regulatory agencies regarding noncompliance with, or deficiencies in, financial reporting practices would be included.

Choice "c" is incorrect. Management's subsequent plans need not be included in the management representation letter, unless they will affect the carrying value or classification of assets and liabilities.

Choice "d" is incorrect. Management acknowledges its responsibility for the fair presentation of the financial statements and states that they are unaware of any employee fraud, but does not acknowledge responsibility for the detection of employee fraud.

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Question CPA-02540

Which of the following statements is correct about an auditor's required communication with those charged with governance? Assume those charged with governance are not involved in managing the entity.

a.Any matters communicated to those charged with governance also are required to be communicated to the entity's management.

b.The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.

c.Disagreements with management about the application of accounting principles are not required to be communicated to those charged with governance if they have been appropriately resolved.

d.Significant deficiencies in internal control previously reported to those charged with governance that have not been corrected need not be communicated again.

Explanation

Choice "b" is correct. If those charged with governance are not involved with managing the entity, the auditor should communicate material, corrected misstatements brought to management's attention as a result of the audit.

Choice "a" is incorrect. Certain matters communicated to those charged with governance, such as those related to the competence and integrity of management, might not be appropriate for discussion with management.

Choice "c" is incorrect. The auditor should communicate disagreements with management, whether or not resolved.

Choice "d" is incorrect. Previously communicated significant deficiencies that have not been corrected should be communicated again, in writing, during the current audit.

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Question CPA-02542

An auditor's letter issued on significant deficiencies relating to a nonissuer's internal control observed during a financial statement audit should:

a.Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses.

b.Indicate that the significant deficiencies should be disclosed in the annual report to the entity's shareholders.

c.Include a paragraph describing management's assertion concerning the effectiveness of internal control.

d.Indicate that the audit's purpose was to report on the financial statements and not to provide assurance on internal control.

Explanation

Choice "d" is correct. Conditions noted by the auditor that are significant deficiencies or material weaknesses should be reported in writing. Any report issued on such conditions should (1) indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control; (2) include the definition of materials weakness and, if applicable, significant deficiency; (3) include a restriction on use (i.e., the report is intended solely for the information and use of management, those charged with governance, etc.).

Choice "a" is incorrect. During an audit, the auditor is not required to design tests specifically to detect significant deficiencies in internal control.

Choice "b" is incorrect. Significant deficiencies in internal control are not generally disclosed in the annual report, and the auditor's letter on such conditions observed during a financial statement audit is intended solely for the information and use of management, those charged with governance, and others within the organization.

Choice "c" is incorrect. Management does not provide an assertion concerning the effectiveness of internal control as part of a financial statement audit of a nonissuer (but would provide such an assertion in a separate engagement related to internal control).

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Question CPA-02543

An auditor would least likely initiate a discussion with those charged with governance concerning:

a.The methods used to account for significant unusual transactions.

b.The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

c.Indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor.

d.Disagreements with management as to accounting principles that were resolved during the current year's audit.

Explanation

Choice "b" is correct. The auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. Materiality assessments are not typically discussed with those charged with governance.

Choice "a" is incorrect. The auditor should communicate with those charged with governance about the appropriateness of significant accounting policies, such as the methods used to account for significant unusual transactions.

Choice "c" is incorrect. The auditor should inform those charged with governance of illegal acts that come to the auditor's attention during the course of the audit. Fraud involving senior management should also be reported directly to those charged with governance.

Choice "d" is incorrect. The auditor should discuss with those charged with governance any disagreements with management, whether or not they were satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity's financial statements or the auditor's report.

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Question CPA-02551

In reporting on a nonissuer's internal control over financial reporting in an attest engagement, a practitioner should include a paragraph that describes the:

a.Documentary evidence regarding the control environment factors.

b.Changes in internal control since the prior report.

c.Potential benefits from the practitioner's suggested improvements.

d.Inherent limitations of any internal control.

Explanation

Choice "d" is correct. In reporting on a nonissuer's internal control over financial reporting in an attest engagement (not an audit), the practitioner's report should include a paragraph stating that, because of inherent limitations of any internal control, errors or fraud may occur and not be detected.

Choice "a" is incorrect. Documentary evidence need not be provided in the practitioner's report.

Choice "b" is incorrect. The practitioner need not mention any changes in internal control since the last report.

Choice "c" is incorrect. The practitioner should not describe any potential benefits that might result from the practitioner's suggested improvements.

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Question CPA-02552

To which of the following matters would materiality limits not apply in obtaining written management representations?

a.The availability of minutes of stockholders' and directors' meetings.

b.Losses from purchase commitments at prices in excess of market value.

c.The disclosure of compensating balance arrangements involving related parties.

d.Reductions of obsolete inventory to net realizable value.

Explanation

Choice "a" is correct. Management's representations may be limited to matters that are considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding of the limits of materiality for this purpose. Such limitations would not apply to those representations that are not directly related to amounts included in the financial statements, such as management's acknowledgment of its responsibility for the financial statements, availability of financial records, and completeness and availability of minutes.

Choice "b" is incorrect. Losses from purchase commitments are directly related to amounts in the financial statements and thus are subject to materiality limits.

Choice "c" is incorrect. The disclosure of compensating balances is directly related to amounts in the financial statements and thus is subject to materiality limits.

Choice "d" is incorrect. The reduction of obsolete inventory to net realizable value is directly related to amounts in the financial statements and thus is subject to materiality limits.

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Question CPA-02555

Which of the following conditions is necessary for a practitioner to accept an attest engagement to examine and report on a nonissuer's internal control over financial reporting?

a.The practitioner anticipates relying on the entity's internal control in a financial statement audit.

b.Management presents its written assertion about the effectiveness of internal control.

c.The practitioner is a continuing auditor who previously has audited the entity's financial statements.

d.Management agrees not to present the practitioner's report in a general-use document to stockholders.

Explanation

Choice "b" is correct. In order for a practitioner to examine and report on management's assertion about the effectiveness of an entity's internal control, management must present its written assertion about the effectiveness of internal control.

Choice "a" is incorrect. There is no requirement that the practitioner rely on internal control.

Choice "c" is incorrect. No requirement for previous engagement experience exists in order to report on a client's internal control. However, the attestation examination must be integrated with an audit of the entity's financial statements.

Choice "d" is incorrect. The practitioner's report is considered appropriate for general distribution.

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Question CPA-02556

The date of the management representation letter should coincide with the date of the:

a.Balance sheet.

b.Latest interim financial information.

c.Auditor's report.

d.Latest related party transaction.

Explanation

Choice "c" is correct. Because the auditor is concerned with events occurring through the date of the audit report that may require adjustment to or disclosure in the financial statements, the management representation letter should be dated as of the date of the auditor's report.

Choice "a" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is generally after the balance sheet date.

Choice "b" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is unrelated to the date of the latest interim financial information.

Choice "d" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is unrelated to the dates of related party transactions.

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Question CPA-02558

Which of the following statements is correct concerning an auditor's required communication of significant deficiencies in internal control noted during a financial statement audit of a nonissuer?

a.A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation.

b.An auditor should perform tests of controls on significant deficiencies before communicating them to the client.

c.An auditor's report on significant deficiencies should include a restriction on the distribution of the report.

d.An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.

Explanation

Choice "c" is correct. The report should state that the communication is intended solely for the use of management, those charged with governance, and others within the organization.

Choice "a" is incorrect. Significant deficiencies may represent a conscious decision by management to accept that degree of risk because of cost or other considerations. The auditor may elect to use a primarily substantive approach to test balances, so internal control deficiencies do not necessarily constitute a scope limitation.

Choice "b" is incorrect. No requirement to perform tests of controls exists. Significant deficiencies may be identified through the consideration of internal control, the application of audit procedures to balances or transactions, or otherwise during the course of the audit.

Choice "d" is incorrect. Significant deficiencies may be communicated during or after the audit.

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Question CPA-02563

Snow, CPA, was engaged by Master Co., a nonissuer, to examine and report on management's written assertion about the effectiveness of Master's internal control over financial reporting. Snow's report should state that:

a.Because of its inherent limitations, internal control may not prevent, or detect and correct misstatements.

b.Management's assertion is based on criteria established by the American Institute of Certified Public Accountants.

c.The results of Snow's tests of controls will form the basis for Snow's opinion on the fairness of Master's financial statements in conformity with GAAP.

d.The purpose of the engagement is to enable Snow to plan an audit and determine the nature, timing, and extent of tests to be performed.

Explanation

Choice "a" is correct. The practitioner's report should include a paragraph stating that because of its inherent limitations, internal control may not prevent, or detect and correct misstatements.

Choice "b" is incorrect. The examination is performed in accordance with standards established by the AICPA, but management's assertion may be based on criteria established by some other recognized body.

Choice "c" is incorrect. Tests of controls do not provide a sufficient basis for an opinion on the fairness of the financial statements.

Choice "d" is incorrect. An examination of management's assertion on the effectiveness of an entity's internal control over financial reporting is performed solely to report on that assertion, and not to plan an audit.

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Question CPA-02567

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

a.This communication is required to occur before the auditor's report on the financial statements is issued.

b.This communication should include management changes in the application of significant accounting policies.

c.Any significant matter communicated to those charged with governance also should be communicated to management.

d.Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance.

Explanation

Choice "b" is correct. The auditor should determine that those charged with governance are informed about the initial selection of and changes in significant accounting policies or their application.

Choice "a" is incorrect. The communication is incidental to the audit; accordingly, it is not required to occur before the issuance of the auditor's report as long as the communication occurs on a timely basis. (Note, however, that for audits of issuers, the communication must be made before the auditor's report is filed with the SEC.)

Choice "c" is incorrect. Communication with management is not required.

Choice "d" is incorrect. Unless all those charged with governance are also involved with managing the entity, the auditor should inform those charged with governance about adjustments that could, either individually or in the aggregate, have a significant effect on the entity's financial reporting process, regardless of whether the adjustment was recorded.

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Question CPA-02568

Which of the following best describes a CPA's engagement to report on a nonissuer's internal control over financial reporting?

a.An attestation engagement to examine and report on management's written assertion about the effectiveness of its internal control.

b.A review engagement to render limited assurance on the entity's internal control.

c.A prospective engagement to project, for a period of time not to exceed one year, and report on the expected benefits of the entity's internal control.

d.A consulting engagement to provide constructive advice to the entity on its internal control.

Explanation

Choice "a" is correct. An engagement to report on an entity's internal control is best described as an attestation engagement to examine and report on management's written assertion about the effectiveness of its internal control.

Choice "b" is incorrect. Attestation standards do not permit a review engagement to be performed on a nonissuer's internal controls.

Choice "c" is incorrect. A prospective engagement is not appropriate for a report on internal control. In fact, the CPA's report includes an "inherent limitations" paragraph stating that projections of the internal control evaluation to the future are risky, since conditions or the degree of compliance may change.

Choice "d" is incorrect. In a consulting engagement, the practitioner develops findings, conclusions, and recommendations, but does not report on an assertion that is the responsibility of another party. When a CPA reports on an entity's internal control, he or she is in effect reporting on management's assertion.

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Question CPA-02570

When communicating internal control related matters noted in an audit of a nonissuer, an auditor's report issued on significant deficiencies should indicate that:

a.Errors or fraud may occur and not be detected because there are inherent limitations in any internal control.

b.The issuance of an unqualified opinion on the financial statements may be dependent on corrective follow-up action.

c.A material weakness exists when the deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions.

d.The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

Explanation

Choice "d" is correct. Any report issued on significant deficiencies should indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

Choice "a" is incorrect. A statement that errors or irregularities may occur and not be detected due to inherent limitations in internal control is included in the report when an auditor is engaged to express an opinion on internal control, not when the auditor is reporting as part of an audit.

Choice "b" is incorrect. The issuance of an unqualified opinion on the financial statements is never dependent on corrective follow-up action.

Choice "c" is incorrect. A control deficiency (and not necessarily a material weakness) exists when deficiencies are not detected within a timely period by employees in the normal course of performing their assigned functions.

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Question CPA-02571

"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a (an):

a.Client engagement letter.

b.Report on compliance with laws and regulations.

c.Management representation letter.

d.Attestation report on internal control.

Explanation

Choice "c" is correct. The written representation obtained by the auditor from management will ordinarily include information regarding any violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.

Choice "a" is incorrect. A client engagement letter is used to document the understanding between the client and the auditor. The letter is generally sent from the auditor to the client, although the client may be requested to sign it. The statement, "There are no violations or possible violations of laws or regulations..." should come from management. It would not be appropriate to include this in an engagement letter, which is often sent before the year has even ended.

Choice "b" is incorrect. An auditor would prepare a report on compliance with laws and regulations. The statement, "There are no violations or possible violations of laws or regulations..." should come from management.

Choice "d" is incorrect. An auditor would prepare an attestation report on internal control. The statement, "There are no violations or possible violations of laws or regulations..." should come from management.

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Question CPA-02572

A letter issued on significant deficiencies relating to an entity's internal control observed during an audit of the financial statements of a nonissuer should include a:

a.Restriction on the use of the report.

b.Description of tests performed to search for material weaknesses.

c.Statement of compliance with applicable laws and regulations.

d.Paragraph describing management's evaluation of the effectiveness of internal control.

Explanation

Choice "a" is correct. Any report issued on significant deficiencies noted during an audit should (1) indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control, (2) include the definition of significant deficiencies, and (3) include a restriction on the use of the report.

Choice "b" is incorrect. Because the auditor does not search for material weaknesses, a description of tests performed in this regard would not be included in a written report.

Choice "c" is incorrect. There is no required statement of compliance with applicable laws and regulations in a letter issued on significant deficiencies.

Choice "d" is incorrect. There is no paragraph describing management's evaluation in a letter issued on significant deficiencies.

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Question CPA-02576

Which of the following matters is an auditor required to communicate to those charged with governance?

a.The basis for his or her assessment of control risk.

b.The process used by management in formulating sensitive accounting estimates.

c.The auditor's preliminary judgments about materiality levels.

d.The justification for performing substantive procedures at interim dates.

Explanation

Choice "b" is correct. The auditor should ensure that those charged with governance are informed about the process used by management in formulating particularly sensitive accounting estimates and about the basis for the auditor's conclusions regarding the reasonableness of the estimates.

Choices "a", "c", and "d" are incorrect. The basis for assessing control risk, preliminary judgments about materiality levels, and the justification for performing substantive procedures at interim dates are matters of auditor judgment that need not be shared with those charged with governance.

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Question CPA-02577

Which of the following statements might be included among additional written client representations obtained by the auditor?

a.Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.

b.Management acknowledges responsibility for illegal actions committed by employees.

c.Sufficient audit evidence has been made available to permit the issuance of an unqualified opinion.

d.Management acknowledges that there are no material weaknesses in internal control.

Explanation

Choice "a" is correct. The purpose of the management representation letter is to confirm management's oral evidence supplied during the engagement. Specific written representations obtained by the auditor might include acknowledgment that all compensating balances or other restrictions on cash have been disclosed.

Choice "b" is incorrect. Management acknowledges responsibility for the fair presentation of the financial statements, not for illegal actions committed by employees.

Choice "c" is incorrect. The auditor must decide whether there is sufficient audit evidence available to permit the issuance of an unqualified opinion, and does not request management confirmation of this decision.

Choice "d" is incorrect. Management is responsible for the design and maintenance of internal control of the company, but it is the auditor who must determine whether material weaknesses in internal control exist.

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Question CPA-02579

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.

 

 

 

 

Audit Specifications

 

 

Characteristics of

as to a Sample from

 

 

Population 1

Population 1 Relative

 

 

Relative to

to a Sample from

 

 

Population 2

Population 2

 

 

 

 

 

Specified

 

 

 

 

Specified

Risk of

 

 

 

 

Tolerable

Incorrect

 

 

Size

Variability

Misstatement

Acceptance

 

Case 1

Equal

Equal

Equal

Lower

 

Case 2

Equal

Larger

Larger

Equal

Case 3

Larger

Equal

Smaller

Higher

Case 4

Smaller

Smaller

Equal

Higher

Case 5

Larger

Equal

Equal

Lower

You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.

In case 1 the required sample size from population 1 is:

a.Larger than the required sample size from population 2.

b.Equal to the required sample size from population 2.

c.Smaller than the required sample size from population 2.

d.Indeterminate relative to the required sample size from population 2.

Explanation

Choice "a" is correct. A lower risk of incorrect acceptance requires a greater sample size. Choices "b", "c", and "d" are incorrect, based on the above explanation.

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Question CPA-02580

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.

 

 

 

 

Audit Specifications

 

 

Characteristics of

as to a Sample from

 

 

Population 1

Population 1 Relative

 

 

Relative to

to a Sample from

 

 

Population 2

Population 2

 

 

 

 

 

Specified

 

 

 

 

Specified

Risk of

 

 

 

 

Tolerable

Incorrect

 

 

Size

Variability

Misstatement

Acceptance

 

Case 1

Equal

Equal

Equal

Lower

 

Case 2

Equal

Larger

Larger

Equal

Case 3

Larger

Equal

Smaller

Higher

Case 4

Smaller

Smaller

Equal

Higher

Case 5

Larger

Equal

Equal

Lower

You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.

In case 2 the required sample size from population 1 is:

a.Larger than the required sample size from population 2.

b.Equal to the required sample size from population 2.

c.Smaller than the required sample size from population 2.

d.Indeterminate relative to the required sample size from population 2.

Explanation

Choice "d" is correct. The effect on sample size cannot be determined, because there is more than one change occurring. In this case, the increase in population variability results in an increase in sample size, whereas the larger tolerable misstatement results in a decrease in sample size. The overall effect on sample size will depend on which of the two effects is greater, but this cannot be determined from the information provided.

Choices "a", "b", and "c" are incorrect, based on the above explanation.

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Question CPA-02581

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.

 

 

 

 

Audit Specifications

 

 

Characteristics of

as to a Sample from

 

 

Population 1

Population 1 Relative

 

 

Relative to

to a Sample from

 

 

Population 2

Population 2

 

 

 

 

 

Specified

 

 

 

 

Specified

Risk of

 

 

 

 

Tolerable

Incorrect

 

 

Size

Variability

Misstatement

Acceptance

 

Case 1

Equal

Equal

Equal

Lower

 

Case 2

Equal

Larger

Larger

Equal

Case 3

Larger

Equal

Smaller

Higher

Case 4

Smaller

Smaller

Equal

Higher

Case 5

Larger

Equal

Equal

Lower

You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.

In case 3 the required sample size from population 1 is:

a.Larger than the required sample size from population 2.

b.Equal to the required sample size from population 2.

c.Smaller than the required sample size from population 2.

d.Indeterminate relative to the required sample size from population 2.

Explanation

Choice "d" is correct. The effect on sample size cannot be determined, because there is more than one change occurring. In this case, the smaller tolerable misstatement results in an increase in sample size, but the higher risk of incorrect acceptance results in a decrease in sample size. The overall effect on sample size will depend on which of the two effects is greater, but this cannot be determined from the information provided. Note that the number of items in the population is generally assumed to have virtually no effect on sample size.

Choices "a", "b", and "c" are incorrect, based on the above explanation.

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Question CPA-02582

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.

 

 

 

 

Audit Specifications

 

 

Characteristics of

as to a Sample from

 

 

Population 1

Population 1 Relative

 

 

Relative to

to a Sample from

 

 

Population 2

Population 2

 

 

 

 

 

Specified

 

 

 

 

Specified

Risk of

 

 

 

 

Tolerable

Incorrect

 

 

Size

Variability

Misstatement

Acceptance

 

Case 1

Equal

Equal

Equal

Lower

 

Case 2

Equal

Larger

Larger

Equal

Case 3

Larger

Equal

Smaller

Higher

Case 4

Smaller

Smaller

Equal

Higher

Case 5

Larger

Equal

Equal

Lower

You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.

In case 4 the required sample size from population 1 is:

a.Larger than the required sample size from population 2.

b.Equal to the required sample size from population 2.

c.Smaller than the required sample size from population 2.

d.Indeterminate relative to the required sample size from population 2.

Explanation

Choice "c" is correct. There are two changes occurring, but they both have the same effect on sample size. A decrease in population variability and an increase in the risk of incorrect acceptance both result in a decrease in the required sample size. Note that the number of items in the population is generally assumed to have virtually no effect on sample size.

Choices "a", "b", and "d" are incorrect, based on the above explanation.

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Question CPA-02583

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.

 

 

 

 

Audit Specifications

 

 

Characteristics of

as to a Sample from

 

 

Population 1

Population 1 Relative

 

 

Relative to

to a Sample from

 

 

Population 2

Population 2

 

 

 

 

 

Specified

 

 

 

 

Specified

Risk of

 

 

 

 

Tolerable

Incorrect

 

 

Size

Variability

Misstatement

Acceptance

 

Case 1

Equal

Equal

Equal

Lower

 

Case 2

Equal

Larger

Larger

Equal

Case 3

Larger

Equal

Smaller

Higher

Case 4

Smaller

Smaller

Equal

Higher

Case 5

Larger

Equal

Equal

Lower

You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.

In case 5 the required sample size from population 1 is:

a.Larger than the required sample size from population 2.

b.Equal to the required sample size from population 2.

c.Smaller than the required sample size from population 2.

d.Indeterminate relative to the required sample size from population 2.

Explanation

Choice "a" is correct. A lower risk of incorrect acceptance results in an increase in sample size. Note that the number of items in the population is generally assumed to have virtually no effect on sample size.

Choices "b", "c", and "d" are incorrect, based on the above explanation.

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Question CPA-02584

In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:

a.$1,000

b.$2,000

c.$5,000

d.$10,000

Explanation

Choice "b" is correct. The sample error of $1,000 ($5,000 - $4,000) is projected to the entire interval through use of a "tainting factor" of 20% ($1,000/$5,000). If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be 20% of $10,000, or $2,000.

Choice "a" is incorrect, as the sample error of $1,000 needs to be projected to the entire interval. Choices "c" and "d" are incorrect, per the above explanation.

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Question CPA-02585

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:

a.There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.

b.There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements.

c.The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.

d.The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.

Explanation

Choice "a" is correct. Selection of every twentieth item results in a sample that is 5% (1/20 = .05) of the population. The sample results indicate a net overstatement of $3,500 (= $3,700 − $200), which is then

projected to the total population as $70,000 (= $3,500 / .05). (Alternatively, 3,500 × 20 = 70,000). Since the projected misstatement of $70,000 exceeds the tolerable misstatement of $60,000, there is an unacceptably high risk that the actual misstatement in the population will exceed the tolerable misstatement.

Choice "b" is incorrect. Tolerable misstatement is compared to the projected misstatement, not to the actual error in the sample.

Choices "c" and "d" are incorrect. The asset account is not fairly stated because the projected misstatement exceeds the tolerable misstatement.

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Question CPA-02586

An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider:

 

The average

The allowable risk

 

dollar value of the

of assessing

 

check requests

control risk too low

a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

Explanation

Choice "c" is correct. The sample size in an attribute sampling application is affected by the allowable risk of assessing control risk too low, the tolerable deviation rate, and the expected deviation rate. The average dollar value of the check requests has no effect on the sample size.

Choices "a", "b", and "d" are incorrect, per the above explanation.

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Question CPA-02587

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the:

 

Variability in the

Risk of

 

dollar amounts of

incorrect

 

inventory items

acceptance

a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

Explanation

Choice "a" is correct. The sample size in a variables sampling application is affected by the variability in the population (generally represented by the standard deviation), the acceptable level of risk (i.e., the risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement.

Choices "b", "c", and "d" are incorrect, per the above explanation.

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Question CPA-02588

For which of the following audit tests would an auditor most likely use attribute sampling?

a.Selecting accounts receivable for confirmation of account balances.

b.Inspecting employee time cards for proper approval by supervisors.

c.Making an independent estimate of the amount of a LIFO inventory.

d.Examining invoices in support of the valuation of fixed asset additions.

Explanation

Choice "b" is correct. Attribute sampling is used to test controls. Inspecting employee time cards for proper approval by supervisors is a test of controls. Controls often relate to authorization, validity, completeness, accuracy, appropriate classification, accounting in conformity with GAAP, and proper period. Look for these terms in identifying which option is a test of controls. Words such as account balance, amount, valuation, presentation, and disclosure are more likely to relate to substantive tests.

Choice "a" is incorrect. Selecting accounts receivable for confirmation of accounts balances is a substantive test.

Choice "c" is incorrect. Making an independent estimate of the amount of a LIFO inventory is a substantive test.

Choice "d" is incorrect. Examining invoices in support of the valuation of fixed asset additions is a substantive test.

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Question CPA-02590

The diagram below depicts an auditor's estimated maximum deviation rate compared with the tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate.

As a result of tests of controls, the auditor assesses control risk too low and thereby decreases substantive testing. This is illustrated by situation:

a.I.

b.II.

c.III.

d.IV.

Explanation

Choice "c" is correct. If the auditor assesses control risk too low, then the true population deviation rate exceeds the auditor's tolerable rate while the auditor's estimate of the maximum deviation rate (based on sample results) was less than the tolerable rate. Only cell III represents this set of conditions.

Choices "a", "b", and "d" are incorrect, per the above explanation.

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Question CPA-02592

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the:

a.Allowable risk of tolerable misstatement.

b.Preliminary estimates of materiality levels.

c.Efficiency of the audit.

d.Effectiveness of the audit.

Explanation

Choice "d" is correct. Both the risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement.

Choice "a" is incorrect. Allowable risk of tolerable misstatement does not exist.

Choice "b" is incorrect. The risk of incorrect acceptance and risk of assessing control risk too low are unrelated to preliminary estimates of materiality.

Choice "c" is incorrect. The efficiency of the audit is related to the risk of incorrect rejection and the risk of assessing control risk too high.

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Question CPA-02594

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the:

a.Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate.

b.Sample rate of deviation is less than the expected rate of deviation used in planning the sample.

c.Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation.

d.Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

Explanation

Choice "d" is correct. The auditor will reduce reliance on a control if the upper deviation rate exceeds the tolerable rate. The upper deviation rate consists of the sample deviation rate plus an allowance for sampling risk. Therefore, if the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate, that is equivalent to the upper deviation rate exceeding the tolerable rate.

Choice "a" is incorrect. If the sample deviation rate plus the allowance for sampling risk equals the tolerable rate, the auditor may still place the planned amount of reliance on the control.

Choice "b" is incorrect. Whether the actual sample deviation rate is less than the expected deviation rate is irrelevant for making decisions about planned reliance levels.

Choice "c" is incorrect. If the tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation, then the upper deviation rate is less than the tolerable rate. This situation supports the planned reliance, and no reduction in planned reliance would be necessary.

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Question CPA-02596

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was:

a.The only deviation discovered in the sample.

b.Identical to a deviation discovered during the prior year's audit.

c.Caused by an employee's misunderstanding of instructions.

d.Initially concealed by a forged document.

Explanation

Choice "d" is correct. The auditor should consider both the qualitative and the quantitative aspects of deviations in tests of controls. Qualitative aspects might include whether deviations are indicative of an error or fraud. Such an evaluation is important because fraud is intentional, has implications beyond the direct monetary effect, and requires consideration of the implications for other aspects of the audit. Thus, a deviation initially concealed by a forged document is very serious and deserves broader consideration than a deviation of the same dollar amount due to an error.

Choice "a" is incorrect. The fact that a deviation was the only one discovered would have no importance beyond its impact on the computation of the upper deviation rate.

Choice "b" is incorrect. Discovery of a deviation identical to one discovered during the prior year's audit is not necessarily cause for additional concern.

Choice "c" is incorrect. Employee misunderstanding of instructions is an inherent limitation of internal control and is not necessarily cause for concern.

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Question CPA-02597

Which of the following factors is (are) considered in determining the sample size for a test of controls?

 

Expected

Tolerable

 

deviation rate

deviation rate

a.

Yes

Yes

b.

No

No

c.

No

Yes

d.

Yes

No

Explanation

Choice "a" is correct. To determine the number of items to be selected for a particular sample for a test of controls, the auditor should consider the tolerable rate of deviation from the controls being tested, the likely rate of deviations (expected deviation rate), and the allowable risk of assessing control risk too low.

Choices "b", "c", and "d" are incorrect, per the above explanation.

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Question CPA-02599

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?

Increase in tolerable

Increase in assessed

misstatement

level of control risk

a.Increase sample size

b.Increase sample size

c.Decrease sample size

d.Decrease sample size

Explanation

Increase sample size Decrease sample size Increase sample size Decrease sample size

Choice "c" is correct. An increase in tolerable misstatement results in a smaller sample size. An increase in the assessed level of control risk leads to an increase in sample size.

Choices "a", "b", and "d" are incorrect, per the above explanation.

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Question CPA-02600

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to:

a.Eliminate the risk of nonsampling errors.

b.Reduce the level of audit risk and materiality to a relatively low amount.

c.Measure the sufficiency of the audit evidence obtained.

d.Minimize the failure to detect errors and fraud.

Explanation

Choice "c" is correct. Statistical sampling helps the auditor to measure the sufficiency of the audit evidence because the auditor can quantify the audit risk, thus assisting in limiting it to an acceptable level.

Choice "a" is incorrect. Nonsampling errors relate to the improper evaluation of evidence by the auditor and are not dependent on the sampling method used.

Choice "b" is incorrect. Audit risk can be reduced to a relatively low level with non-statistical sampling. Materiality is not affected by the sampling method used.

Choice "d" is incorrect. The use of statistical sampling does not necessarily minimize the failure to detect errors and fraud.

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Question CPA-02602

As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was:

a.Less than the risk of assessing control risk too low, based on the auditor's sample.

b.Less than the deviation rate in the auditor's sample.

c.More than the risk of assessing control risk too low, based on the auditor's sample.

d.More than the deviation rate in the auditor's sample.

Explanation

Choice "d" is correct. If the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be understated, since the control will be less effective than sample results would indicate.

Choice "a" is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low.

Choice "b" is incorrect. If the true deviation rate is lower than the deviation rate in the sample, control risk may be assessed at a rate that is too high, potentially leading to audit inefficiencies.

Choice "c" is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low.

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Question CPA-02603

In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and the:

a.Tolerable deviation rate.

b.Risk of incorrect acceptance.

c.Nature and cause of deviations.

d.Population size.

Explanation

Choice "a" is correct. The auditor should consider the tolerable rate of deviation from the control structure policies or procedures being tested, the likely rate of deviations, and the allowable risk of assessing control risk too low.

Choice "b" is incorrect. The risk of incorrect acceptance is relevant for substantive tests of details rather than tests of controls.

Choice "c" is incorrect. The nature and cause of the deviation is not considered in determining a sample size for tests of controls.

Choice "d" is incorrect. The population size is generally not considered in determining a sample size for tests of controls.

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Question CPA-02605

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

a.Can more easily convert the sample into a dual-purpose test useful for substantive testing.

b.Eliminate the need to use judgment in determining appropriate sample sizes.

c.Afford greater assurance than a nonstatistical sample of equal size.

d.Provide an objective basis for quantitatively evaluating sample risk.

Explanation

Choice "d" is correct. By using statistical sampling, the auditor can quantify sampling risk to assist in limiting it to a level considered acceptable.

Choice "a" is incorrect. Statistical sampling does not provide any advantage with respect to converting the test into a dual-purpose test.

Choice "b" is incorrect. Statistical sampling still requires judgment to determine sample sizes. The tolerable rate of deviation, the likely rate of deviation, and the allowable risk of assessing control risk too low are all determined by the auditor's professional judgment.

Choice "c" is incorrect. Statistical sampling does not afford greater assurance than a nonstatistical sample of the same size. It only provides the auditor with a better measure of the sufficiency of the evidence found, and helps to evaluate the results found.

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Question CPA-02607

In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if:

a.Probability proportional to size (PPS) sampling is used.

b.The population has highly variable recorded amounts.

c.The auditor's estimated tolerable misstatement is extremely small.

d.The standard deviation of recorded amounts is relatively small.

Explanation

Choice "b" is correct. The auditor may be able to reduce the required sample size by separating items subject to sampling into relatively homogenous groups on the basis of some characteristic related to the specific audit objective.

Choice "a" is incorrect. While PPS sampling results in a stratified sample, it is a result of the sampling method employed and does not require the auditor to perform stratification since it occurs automatically.

Choice "c" is incorrect. The estimated tolerable misstatement does not affect the decision to stratify.

Choice "d" is incorrect. The standard deviation of the recorded amounts represents the population's variability. Therefore, the auditor would be most likely to stratify when the standard deviation is high, not low.

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Question CPA-02609

The use of the ratio estimation sampling technique is most effective when:

a.The calculated audit amounts are approximately proportional to the client's book amounts.

b.A relatively small number of differences exist in the population.

c.Estimating populations whose records consist of quantities, but not book values.

d.Large overstatement differences and large understatement differences exist in the population.

Explanation

Choice "a" is correct. Ratio estimation is most effective if there is a correlation between book values and audit amounts.

Choice "b" is incorrect. A relatively small number of differences do not improve the effectiveness of ratio estimation sampling relative to other techniques.

Choice "c" is incorrect. Whether populations are stated in terms of quantities or book values is irrelevant in determining the effectiveness of ratio estimation.

Choice "d" is incorrect. Large overstatement and understatement errors do not give the ratio estimation sampling technique an advantage in effectiveness relative to other sampling techniques.

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Question CPA-02611

Which of the following statements is correct concerning statistical sampling in tests of controls?

a.As the population size increases, the sample size should increase proportionately.

b.Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.

c.There is an inverse relationship between the expected population deviation rate and the sample size.

d.In determining tolerable rate, an auditor considers detection risk and the sample size.

Explanation

Choice "b" is correct. Deviations from control activities do not necessarily result in misstatements. Therefore, deviations from pertinent control activities at a given rate would ordinarily be expected to result in misstatements at a lower rate.

Choice "a" is incorrect. In tests of controls, population size has virtually no effect on sample size unless the population is small.

Choice "c" is incorrect. There is a direct relationship between expected deviation rate and sample size.

Choice "d" is incorrect. Detection risk and sample size are not factors in determining the tolerable deviation rate in a test of controls. The tolerable rate is simply the maximum rate that the auditor is willing to accept without altering his or her planned level of reliance.

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Question CPA-02613

The likelihood of assessing control risk too high is the risk that the sample selected to test controls:

a.Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.

b.Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes.

c.Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist in the balance or class as a whole.

d.Does not support the tolerable error for some or all of management's assertions.

Explanation

Choice "a" is correct. The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control.

Choice "b" is incorrect. Tests of controls are not designed to directly detect misstatements. Tests of controls directed toward the operating effectiveness of an internal control are concerned with how the control was applied, the consistency with which it was applied during the audit period, and by whom it was applied.

Choice "c" is incorrect. The risk that the sample contains proportionately fewer monetary errors or deviations than exist in the class as a whole is the risk of assessing control risk too low.

Choice "d" is incorrect. Tolerable misstatements (errors) are related to the results of substantive tests of details, not tests of controls.

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Question CPA-02615

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

a.Attribute sampling.

b.Stop-or-go sampling.

c.Variables sampling.

d.Random-number sampling.

Explanation

Choice "c" is correct. Variables sampling is normally used to estimate a numerical measurement of a population.

Choice "a" is incorrect. Attribute sampling is used when testing controls as part of the auditor's evaluation of a company's internal control.

Choice "b" is incorrect. Stop-or-go sampling is a type of attribute sampling used when testing controls. Choice "d" is incorrect. Random number sampling is a technique used to select a sample.

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Question CPA-02616

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?

a.Set the tolerable rate of deviation at a lower level than originally planned.

b.Stratify the cash disbursements population so that the unusually large disbursements are selected.

c.Increase the sample size to reduce the effect of the unusually large disbursements.

d.Continue to draw new samples until all the unusually large disbursements appear in the sample.

Explanation

Choice "b" is correct. Stratification involves the grouping of transactions sharing some characteristic (such as recorded amounts). The goal of stratification is to ensure selection of items for which potential misstatements may individually equal or exceed tolerable misstatement. Thus, the auditor should stratify the sample such that the unusually large transactions are selected.

Choice "a" is incorrect. The tolerable rate of deviation refers to test of controls, rather than substantive tests.

Choice "c" is incorrect. Certain items should be individually examined; for example, the auditor should examine those items for which potential misstatements may individually equal or exceed tolerable misstatement. Stratifying the sample is more efficient than increasing the sample size.

Choice "d" is incorrect. By stratifying the sample, the auditor can examine each of the unusual transactions and also reduce the sample size.

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Question CPA-02617

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?

 

Expected

Measure of

 

amount of

tolerable

 

misstatements

misstatement

a.

No

No

b.

Yes

Yes

c.

No

Yes

d.

Yes

No

Explanation

Choice "b" is correct. When planning a particular sample for a substantive test of details, the auditor should consider how much monetary misstatement in the account might exist without causing the financial statements to be materially misstated (tolerable misstatement) as well as the expected size and frequency of misstatements.

Choices "a", "c", and "d" are incorrect, per the above explanation.

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Question CPA-02618

For which of the following audit tests would an auditor most likely use attribute sampling?

a.Making an independent estimate of the amount of a LIFO inventory.

b.Examining invoices in support of the valuation of fixed asset additions.

c.Selecting accounts receivable for confirmation of account balances.

d.Inspecting employee time cards for proper approval by supervisors.

Explanation

Choice "d" is correct. Attribute sampling examines the rate of occurrence in a sample: the attribute either exists or does not exist. Therefore, attribute sampling is more useful for tests of controls, such as the examination of time cards for proper approval.

Choice "a" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate.

Choice "b" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate.

Choice "c" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate.

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Question CPA-02620

While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:

a.Assessing control risk too high.

b.Assessing control risk too low.

c.Incorrect rejection.

d.Incorrect acceptance.

Explanation

Choice "c" is correct. Erroneously concluding that an account balance is materially misstated is an example of incorrect rejection.

Choice "a" is incorrect. The assessment of control risk relates to tests of controls, not to tests of details (substantive testing).

Choice "b" is incorrect. The assessment of control risk relates to tests of controls, not to tests of details (substantive testing).

Choice "d" is incorrect. If the auditor had concluded that the account was fairly presented when, in fact, it was not, it would be an example of incorrect acceptance.

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Question CPA-02621

The sample size of a test of controls varies inversely with:

 

Expected population

Tolerable

 

deviation rate

rate

a.

Yes

Yes

b.

No

No

c.

Yes

No

d.

No

Yes

Explanation

Choice "d" is correct. The sample size for a test of controls varies directly with the expected deviation rate and inversely with the tolerable rate. If the auditor expects more errors, he or she would increase sample size; conversely, if the tolerable rate of deviation increases, not as many items need to be selected.

Choices "a", "b", and "c" are incorrect, per the above explanation.

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Question CPA-02623

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that:

a.The deviation rates of both the auditor's sample and the population exceed the tolerable rate.

b.The deviation rates of both the auditor's sample and the population is less than the tolerable rate.

c.The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.

d.The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.

Explanation

Choice "c" is correct. The situation given is an example of sampling risk, or the probability that the sample chosen is not representative of the population as a whole. This is illustrated by the fact that the sample deviation rate is less than the tolerable rate, but the true deviation rate exceeds the tolerable rate.

Choice "a" is incorrect. If both the deviation rates of the sample and the population exceed the tolerable rate, the auditor would assess control risk at the appropriate level.

Choice "b" is incorrect. If both the deviation rates of the sample and the population are less than the tolerable rate, the auditor would assess control risk at the appropriate level.

Choice "d" is incorrect. If the sample deviation rate exceeds the tolerable rate, but the deviation rate in the population does not, this would also result in sampling risk. In this case, however, the auditor would assess control risk at a level higher than appropriate.

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Question CPA-02624

In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?

a.Variables.

b.Stratified.

c.Ratio.

d.Attributes.

Explanation

Choice "d" is correct. Attributes sampling is the statistical sampling method used when testing controls. Choice "a" is incorrect. Variables sampling is used in substantive testing, not in tests of controls.

Choice "b" is incorrect. Stratified sampling is used in conjunction with variables sampling, and is therefore used in substantive testing, not in tests of controls.

Choice "c" is incorrect. Ratio estimation is used in conjunction with variables sampling, and is therefore used in substantive testing, not in tests of controls.

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Question CPA-02626

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

a.An estimate of the standard deviation of the population's recorded amounts is not required.

b.The auditor rarely needs the assistance of a computer program to design an efficient sample.

c.Inclusion of zero and negative balances generally does not require special design considerations.

d.Any amount that is individually significant is automatically identified and selected.

Explanation

Choice "c" is correct. Inclusion of zero and negative balances requires special design considerations with PPS sampling, but it does not require special design considerations with classical variables sampling.

Choice "a" is incorrect. An estimate of the standard deviation of the population's recorded amounts is required for classical variables sampling, but not for PPS sampling.

Choice "b" is incorrect. The auditor is less likely to need a computer program to design an efficient sample for PPS sampling than for classical variables sampling.

Choice "d" is incorrect. Any amount that is individually significant is more likely to be identified and selected when using PPS sampling than when using classical variables sampling.

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Question CPA-02718

A written client representation letter most likely would be an auditor's best source of corroborative information of a client's plans to:

a.Terminate an employee pension plan.

b.Make a public offering of its common stock.

c.Settle an outstanding lawsuit for an amount less than the accrued loss contingency.

d.Discontinue a line of business.

Explanation

Choice "d" is correct. A written client representation letter should include representations regarding matters that may affect recognition, measurement, and disclosure. Management's plans to discontinue a line of business may affect financial statement disclosure, since the results of operations of a component classified as "held for sale" would be reported separately in the income statement under "discontinued operations."

Choice "a" is incorrect. A client's plan to terminate an employee pension plan would not affect recognition, measurement, or disclosure in the current period financial statements.

Choice "b" is incorrect. A client's plans to make a public offering of its common stock would not affect recognition, measurement, or disclosure in the current period financial statements.

Choice "c" is incorrect. A letter from the client's attorney most likely would be an auditor's best source of corroborative information of a client's plans to settle an outstanding lawsuit for an amount less than the accrued loss contingency.

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Question CPA-02720

A limitation on the scope of an auditor's examination sufficient to preclude an unqualified opinion will always result when management:

a.Engages the auditor after the year-end physical inventory count is completed.

b.Fails to correct a material internal control weakness that had been identified during the prior year's audit.

c.Refuses to furnish a management representation letter to the auditor.

d.Prevents the auditor from reviewing the audit documentation of the predecessor auditor.

Explanation

Choice "c" is correct. Management's refusal to furnish a written representation letter constitutes a limitation on the scope sufficient to preclude an unqualified opinion.

Choice "a" is incorrect. Engaging the auditor after the year-end physical count is completed need not preclude an unqualified opinion if the auditor can apply satisfactory alternative audit procedures.

Choice "b" is incorrect. Failure to correct a material internal accounting control weakness that had been identified during the prior year's audit need not preclude an unqualified opinion, although it may require the auditor to apply extended auditing procedures.

Choice "d" is incorrect. Inability to review the predecessor's prior year audit documentation may cause the successor auditor more work but need not preclude an unqualified opinion in the current year.

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Question CPA-02722

To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations?

a.Disclosure of compensating balance arrangements involving restrictions on cash balances.

b.Information concerning related party transactions and related amounts receivable or payable.

c.The absence of errors and unrecorded transactions in the financial statements.

d.Fraud involving employees with significant roles in the internal control structure.

Explanation

Choice "d" is correct. When obtaining specific written client representations, an auditor would not apply materiality limits to fraud involving employees with significant roles in the internal control structure, because even fraud that causes an immaterial effect on the financial statements may have serious implications with respect to the integrity of the employees involved.

Choice "a" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to disclosure of compensating balance arrangements involving restrictions on cash balances, because immaterial amounts need not be considered.

Choice "b" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to information concerning related party transactions and related amounts receivable or payable, because immaterial amounts need not be considered.

Choice "c" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to the absence of errors and unrecorded transactions in the financial statements, because immaterial amounts need not be considered.

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Question CPA-02724

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices." The foregoing passage is most likely from a:

a.Special report.

b.Management representation letter.

c.Letter for an underwriter.

d.Report on internal controls.

Explanation

Choice "b" is correct. In a management (client) representation letter, the client will generally confirm that there have been no communications from regulatory agencies.

Choice "a" is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a special report.

Choice "c" is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a letter for an underwriter (i.e., a comfort letter).

Choice "d" is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a report on internal controls.

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Question CPA-02726

To which of the following matters would materiality limits not apply when obtaining written client representations?

a.Losses from sales commitments.

b.Unasserted claims and assessments.

c.Fraud involving management.

d.Noncompliance with contractual agreements.

Explanation

Choice "c" is correct. Materiality limits would not apply when obtaining written client representations regarding irregularities involving management, because even immaterial instances of fraud may have serious implications with respect to management's integrity.

Choices "a", "b", and "d" are incorrect. An auditor would apply materiality limits to matters that might affect recognition, measurement, and disclosure in the financial statements, including losses from sales commitments, unasserted claims and assessments, and noncompliance with contractual agreements.

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Question CPA-02727

A purpose of a management representation letter is to reduce:

a.Audit risk to an aggregate level of misstatement that could be considered material.

b.An auditor's responsibility to detect material misstatements only to the extent that the letter is relied on.

c.The possibility of a misunderstanding concerning management's responsibility for the financial statements.

d.The scope of an auditor's procedures concerning related party transactions and subsequent events.

Explanation

Choice "c" is correct. A purpose of a management representation letter is to reduce the possibility of a misunderstanding concerning management's responsibility for the financial statements. The first representation made in the letter states "we are responsible for the fair presentation in the financial statements of financial position, results of operations and cash flows in conformity with GAAP."

Choice "a" is incorrect. The management representation letter confirms oral representations made by management but does not have an effect on audit risk.

Choice "b" is incorrect. The management letter is important audit evidence but it does not reduce the auditor's responsibility to detect material misstatements.

Choice "d" is incorrect. The management letter is important audit evidence but it does not reduce the scope of an auditor's procedures concerning related party transactions and subsequent events (or any other generally accepted audit procedure).

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Question CPA-02730

Which of the following matters is an auditor required to communicate to those charged with governance?

 

Significant

Changes in

 

audit

significant

 

adjustments

accounting policies

a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

Explanation

Choice "a" is correct. Yes - Yes. Unless all of those charged with governance are also involved with managing the entity, the auditor is required to communicate significant audit adjustments. The auditor is always required to communicate changes in significant accounting policies.

Choices "b", "c", and "d" are incorrect, based on the above explanation.

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Question CPA-02733

Should an auditor communicate the following matters to those charged with governance of a public entity?

 

 

Management's

 

 

consultation with

 

Significant audit

other accountants

 

adjustments recorded

about significant

 

by the entity

accounting matters

a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

Explanation

Choice "a" is correct. Unless all of those charged with governance are also involved with managing the entity, significant audit adjustments and significant matters relating to consultation with other accountants should be communicated to those charged with governance.

Choices "b", "c", and "d" are incorrect, based on the above explanation.

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Question CPA-02737

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

a.This communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.

b.If matters are communicated in writing, the report is appropriate for general use.

c.If matters are communicated in writing, the report is required to be distributed to both those charged with governance and management.

d.This communication is required to occur before the auditor's report on the financial statements is issued.

Explanation

Choice "a" is correct. An auditor is required to communicate certain matters to those charged with governance, including disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.

Choice "b" is incorrect. Written communications should include a limitation on the use of the communication.

Choice "c" is incorrect. The auditor is not required to distribute the report to management, especially since certain matters might be inappropriate for discussion with management.

Choice "d" is incorrect. The auditor is not required to make the communication before the auditor's report on the financial statements is finalized, as long as the communication occurs on a timely basis. (Note, however, that for audits of issuers, the communication must be made before the auditor's report is filled with the SEC.)

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Question CPA-02836

During consideration of internal control in a financial statement audit, an auditor is not obligated to:

a.Search for all significant deficiencies in the operation of internal control.

b.Understand the internal control environment and the accounting system.

c.Determine whether the control activities relevant to audit planning have been implemented.

d.Perform procedures to understand the design of internal control.

Explanation

Choice "a" is correct. During consideration of internal control in a financial statement audit, an auditor is not obligated to search for all significant deficiencies in the operation of internal control, but should communicate any such situations noted to management and those charged with governance.

Choice "b" is incorrect. The auditor is required to obtain an understanding of each of the five components of internal control, including the control environment and the (accounting) information system.

Choices "c" and "d" are incorrect. As part of planning, the auditor is required to obtain an understanding of the design of relevant controls and to determine whether they have been implemented.

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Question CPA-02851

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the:

a.Risk of overreliance.

b.Tolerable rate.

c.Expected population deviation rate.

d.Sample size.

Explanation

Choice "d" is correct. A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the sample size.

Choices "a", "b", and "c" are incorrect. The risk of overreliance, the tolerable rate, and the expected population deviation rate are factors considered in determining a statistical sample size.

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Question CPA-02853

When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should:

a.Be related to the auditor's business risk.

b.Not be adjusted for qualitative factors.

c.Be related to preliminary judgments about materiality levels.

d.Not be changed during the audit process.

Explanation

Choice "c" is correct. Tolerable misstatement is the maximum monetary misstatement in an account balance that may exist without causing the financial statements to be materially misstated. Tolerable misstatement is a planning concept related to the auditor's preliminary judgments about materiality levels.

Choice "a" is incorrect. The auditor's overall business risk is not related to the tolerable misstatement used in planning a sample for a substantive test of details.

Choice "b" is incorrect. The tolerable misstatement should be adjusted for both qualitative and quantitative factors.

Choice "d" is incorrect. The auditor should modify his or her consideration of tolerable misstatement if, during the audit process, information used to determine the initial level of tolerable misstatement changes.

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Question CPA-02857

Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually:

a.May be applied to populations where many monetary errors are expected to occur.

b.Produces an estimate having a desired level of precision with a smaller sample size.

c.Increases the variability among items in a stratum by grouping sampling units with similar characteristics.

d.Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population.

Explanation

Choice "b" is correct. A stratified sample generally is more efficient than an unstratified sample since the population is classified in a manner that emphasizes the higher dollar value items. The result is an estimate having a desired level of precision with a smaller sample size.

Choice "a" is incorrect. Both stratified and unstratified MPU may be used for populations where many monetary errors are expected to occur.

Choice "c" is incorrect. Stratified sampling reduces the variability among items in a stratum.

Choice "d" is incorrect. Standard deviations measure variability, and stratification would tend to reduce the strata standard deviations as compared to the overall standard deviation of the population.

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Question CPA-02870

To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the:

a.Expected deviation rate.

b.Upper deviation rate.

c.Risk of incorrect acceptance.

d.Risk of incorrect rejection.

Explanation

Choice "a" is correct. When determining the sample size for a test of controls, the auditor should consider the expected deviation rate (which is the auditor's best estimate of the deviation rate in the population before the sampling plan is executed), the tolerable deviation rate, and the allowable risk of assessing control risk too low.

Choice "b" is incorrect. The upper deviation rate is used to evaluate a balance after a sampling plan has been performed, not to determine the sample size for a test of controls.

Choices "c" and "d" are incorrect. The risk of incorrect acceptance and risk of incorrect rejection are considered in direct tests of balances (i.e., substantive tests), not in tests of controls.

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Question CPA-02873

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.

In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:

a.Tolerable rate (7%) was less than the upper deviation rate (8%).

b.Expected deviation rate (7%) was more than the percentage of errors in the sample (3.5%).

c.Upper deviation rate (8%) was more than the percentage of errors in the sample (3.5%).

d.Expected deviation rate (2.5%) was less than the tolerable rate (7%).

Explanation

Choice "a" is correct. The auditor decided to increase the level of the preliminary assessment of control risk because the 7% tolerable rate (maximum rate of deviations that an auditor would be willing to accept without altering his/her planned reliance on the control) was less than the 8% upper deviation rate.

Choice "b" is incorrect. The expected deviation rate was 2.5%, not 7%.

Choice "c" is incorrect. The upper deviation rate is always more than the percentage of errors in the sample since the sum of the percentage of the errors and the allowance for sampling risk equals the upper deviation rate.

Choice "d" is incorrect. The expected deviation rate is not used in evaluating the sample. It is the upper deviation rate that is compared to the tolerable rate in evaluating a sample.

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Question CPA-02877

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.

The allowance for sampling risk was:

a.5.5%

b.4.5%

c.3.5%

d.1%

Explanation

Choice "b" is correct. The allowance for sampling risk is the excess of the 8% upper deviation rate over the 3.5% (= 7 ÷ 200) sample deviation rate, or 4.5%.

Choices "a", "c", and "d" are incorrect, based on the above explanation.

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Question CPA-02879

Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?

a.The sampling distribution should approximate the normal distribution.

b.Overstated units have a lower probability of sample selection than units that are understated.

c.The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.

d.The sampling interval is calculated by dividing the number of physical units in the population by the sample size.

Explanation

Choice "c" is correct. In PPS sampling, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. The inputs for PPS are tolerable error, risk of incorrect acceptance, number of errors allowed, and the recorded amount of the population being sampled.

Choice "a" is incorrect. The sampling distribution does not have to approximate the normal distribution in order for PPS sampling to be used.

Choice "b" is incorrect. Overstated units have a higher (not lower) probability of sample selection than units that are understated, because with PPS sampling, each item is given a probability of selection in proportion to its recorded amount (probability-proportional-to-size).

Choice "d" is incorrect. In PPS sampling, the sampling interval is calculated by dividing the recorded amount of the population (not the number of physical units) by the sample size.

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Question CPA-02880

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as:

a.Precision.

b.Reliability.

c.Projected error.

d.Standard deviation.

Explanation

Choice "a" is correct. The statistical concept of precision is used to describe the auditor's evaluation of sampling results by calculating the possible error in either direction.

Choice "b" is incorrect. Reliability measures how frequently the procedure used will yield differences between the estimated value and the population value.

Choice "c" is incorrect. Projected error is the auditor's best estimate of the error in the total population based upon evaluating the actual error rate in the sample results. The auditor then adds an allowance for sampling risk to develop a "precision interval" within which the population is expected to fall.

Choice "d" is incorrect. Standard deviation is a measure of the variability of a frequency distribution about its mean.

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Question CPA-02881

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

a.Discovery sampling.

b.Numerical sampling.

c.Sampling for attributes.

d.Sampling for variables.

Explanation

Choice "d" is correct. Variables sampling is used to estimate a numerical measurement of a population, such as the dollar value or the dollar value of errors in the population.

Choice "a" is incorrect. Discovery sampling is a special case of sampling for "attributes" (errors) where the auditor's initial estimate of error occurrence is zero or near zero. It does not sample for dollar value.

Choice "b" is incorrect. The term "numerical sampling" is not used in statistical sampling and is merely a well- designed distractor.

Choice "c" is incorrect. Attribute sampling is sampling for errors (or some other attribute). The auditor determines whether the attribute appears or not, but does not try to estimate a numerical measurement of the population.

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Question CPA-02882

In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be:

a.$1,000

b.$2,000

c.$4,000

d.$5,000

Explanation

Recorded

 

Audit

 

Tainting

Sample

Projected

Amount

−

Amount

=

Percentage ×

Interval =

Error

$10,000

−

$8,000

=

N/A

N/A

$2,000

N/A = not applicable, as the actual difference of $2,000 is used when the recorded amount is larger than the sample interval.

Choice "b" is correct. There is a $2,000 projected error in this PPS sample. Choices "a", "c", and "d" are incorrect, based on the above explanation.

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Question CPA-02887

The diagram below depicts the auditor's estimated maximum deviation rate compared with the tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate.

As a result of tests of controls, the auditor assesses control risk higher than necessary and thereby increases substantive testing. This is illustrated by situation:

a.I.

b.II.

c.III.

d.IV.

Explanation

Choice "b" is correct. If, as a result of test of controls, the auditor assesses control risk higher than necessary, then the maximum deviation rate (auditor's estimate) exceeds the tolerable rate (putting us in row 2) and the deviation rate (true state of the population) is less than the tolerable rate (putting us in column 1). The intersection of column 1 and row 2 puts us in box II.

Choice "a" is incorrect. The auditor estimates that the maximum deviation rate is more than the tolerable rate.

Choice "c" is incorrect. The question states that the auditor assessed control risk "higher than necessary." This implies that the deviation rate (true state of the population) is actually less than the tolerable rate.

Choice "d" is incorrect. The question states that the auditor assessed control risk "higher than necessary." This implies that the deviation rate (true state of the population) is actually less than the tolerable rate.

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Question CPA-02891

Which of the following statements is correct concerning statistical sampling in tests of controls?

a.Deviations from control procedures at a given rate usually result in misstatements at a higher rate.

b.As the population size doubles, the sample size should also double.

c.The qualitative aspects of deviations are not considered by the auditor.

d.There is an inverse relationship between the sample size and the tolerable rate.

Explanation

Choice "d" is correct. As the auditor's tolerable rate decreases (the auditor cannot accept as large an error rate), the sample size increases and vice-versa. Therefore, there is an inverse relationship between the sample size and the tolerable rate.

Choice "a" is incorrect. Deviations from control procedures at a given rate usually result in misstatements at a lower rate (i.e., not every deviation from an internal control procedure will necessarily result in a misstatement in the financial statements).

Choice "b" is incorrect. When using statistical sampling for tests of controls, changing the size of the population has very little effect on the sample size (unless the population is very small).

Choice "c" is incorrect. Consideration should be given to the qualitative aspects of deviations, including the nature and cause of deviations and the possible relationship of the deviations to other phases of the audit.

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Question CPA-02892

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%.

a.Modify the planned assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate.

b.Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

c.Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate.

d.Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

Explanation

Choice "d" is correct. The auditor's evaluation would be to modify the planned assessed level of control risk because the sample deviation rate of 6% (3/50) plus the allowance for sampling risk of 2% (the sum of which is called the upper deviation rate) exceeded the tolerable rate of 7%.

Choice "a" is incorrect. This option does not consider the actual results of the sample. The sample deviation rate plus the allowance for sampling risk is compared to the tolerable rate.

Choice "b" is incorrect. The sample results cannot be accepted because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

Choice "c" is incorrect. The tolerable rate (7%) less the allowance (2%) should be compared to the actual deviation rate (6%).

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Question CPA-02894

An auditor may decide to decrease the acceptable level of risk when:

a.Increased reliability from the sample is desired.

b.Many differences (audit value minus recorded value) are expected.

c.Initial sample results do not support the planned level of control risk.

d.The cost and effort of selecting additional sample items is low.

Explanation

Choice "d" is correct. Decreasing the acceptable level of risk will result in a larger sample size, which the auditor might not want to do unless the cost and effort of selecting additional sample items is low.

Choice "a" is incorrect. Decreasing the acceptable level of risk doesn't increase the reliability of a given sample. It does, however, result in selection of a larger sample, which in turn makes it less likely that the auditor will make an incorrect decision.

Choice "b" is incorrect. The auditor's acceptable level of risk is not affected by the extent to which differences are expected.

Choice "c" is incorrect. The auditor should determine the acceptable level of risk prior to selecting and evaluating the sample.

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Question CPA-02896

In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the:

I.Likely rate of deviations.

II. Allowable risk of assessing control risk too high.

a.I only.

b.II only.

c.Both I and II.

d.Either I or II.

Explanation

Choice "a" is correct. In determining the number of sample items to select in a test of controls, the auditor would also consider the likely rate of deviations. The higher the expected rate, the greater the number of items selected.

Choices "b", "c", and "d" are incorrect. The process of establishing the number of sample items to select in a test of controls would include the consideration of the allowable risk of assessing control risk too low, not too high.

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Question CPA-02904

With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's management and those charged with governance because they represent:

a.Manipulation or falsification of accounting records or documents from which financial statements are prepared.

b.Disclosures of information that significantly contradict the auditor's going concern assumption.

c.Material irregularities or illegal acts perpetrated by high-level management.

d.Deficiencies in the design or operation of internal control that are important enough to merit attention by those responsible for oversight of the company's financial reporting.

Explanation

Choice "d" is correct. Significant deficiencies in the design or operation of internal control should be communicated to management and those charged with governance because they are important enough to merit attention by those responsible for oversight of the company's financial reporting.

Choice "a" is incorrect. Manipulation or falsification of accounting records may not represent an internal control deficiency (e.g., if such fraud occurs through collusion).

Choice "b" is incorrect. Information indicative of a going concern problem is not an internal control deficiency.

Choice "c" is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if such acts occur through collusion).

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Question CPA-03066

With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention, which should be communicated to an entity's management and those charged with governance because they represent:

a.Material irregularities or illegal acts perpetrated by high-level management.

b.Deficiencies in the design or operation of internal control that are important enough to merit attention by those responsible for oversight of the company's financial reporting.

c.Flagrant violations of the entity's documented conflict-of-interest policies.

d.Intentional attempts by client personnel to limit the scope of the auditor's fieldwork.

Explanation

Choice "b" is correct. Significant deficiencies in the design or operation of internal control should be communicated to management and those charged with governance because they are important enough to merit attention by those responsible for oversight of the company's financial reporting.

Choice "a" is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if such acts occur through collusion).

Choice "c" is incorrect. Significant deficiencies do not necessarily involve violations of an entity's conflict-of- interest policies.

Choice "d" is incorrect. Interfering with the auditor's procedures would not constitute a significant deficiency, since such interference would not affect the financial statements.

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Question CPA-03071

How do the scope, procedures, and purpose of tests of controls in an examination of the internal control of a nonissuer compare to those for obtaining an understanding of internal control and assessing control risk as part of a financial statement audit of a nonissuer?

 

Scope

Procedures

Purpose

a.

Similar

Different

Similar

b.

Different

Similar

Similar

c.

Different

Different

Different

d.Different Similar Different

Explanation

Choice "d" is correct. In an engagement to express a separate opinion on an entity's internal control, the scope is extensive, and the purpose is directed primarily toward the internal control report. In an audit, the scope is less extensive, and the purpose is to determine the nature, timing, and extent of auditing procedures. Similar procedures generally would be used in both types of engagements.

Choices "a", "b", and "c" are incorrect, based on the above explanation.

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Question CPA-03074

When engaged to express an opinion on a nonissuer's internal control, an accountant should:

a.Obtain management's written assertions regarding whether the company has maintained effective internal control.

b.Qualify any opinion concerning management's assertion that the cost of correcting any weaknesses exceeds the benefits.

c.Keep informed of events subsequent to the date of the report that might have affected the accountant's opinion.

d.Disclaim an opinion on whether the system taken as a whole is sufficient to prevent or detect material errors or irregularities.

Explanation

Choice "a" is correct. An auditor should obtain management's written assertion about the effectiveness of the entity's internal control.

Choice "b" is incorrect. The accountant should disclaim (not qualify) an opinion on management's assertions that the cost of correcting weaknesses exceeds the benefits.

Choice "c" is incorrect. The accountant has no responsibility to evaluate the effect of subsequent events. In fact, the report on an entity's internal control specifically states that projections of the internal control evaluation to future periods is inappropriate.

Choice "d" is incorrect. The accountant provides an opinion (and not a disclaimer) on the effective operation of internal control.

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Question CPA-03079

Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?

a.An auditor need not identify and communicate material weaknesses separately from significant deficiencies.

b.All material weaknesses are significant deficiencies.

c.An auditor should report immediately material weaknesses and significant deficiencies discovered during an audit.

d.All significant deficiencies are material weaknesses.

Explanation

Choice "b" is correct. Since a material weakness in internal control is important enough to merit attention by those charged with governance, it would also be considered a significant deficiency.

Choice "a" is incorrect. The auditor is required to separately identify and communicate significant deficiencies and material weaknesses.

Choice "c" is incorrect. Significant deficiencies and material weaknesses are generally communicated to the appropriate parties after the audit is complete. They may, at the auditor's discretion, be communicated during the audit, but there is no requirement for immediate communication.

Choice "d" is incorrect. A material weakness is a significant deficiency that results in a reasonable likelihood that a material misstatement in the financial statements will not be prevented or detected/corrected. Not all significant deficiencies will meet this description.

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Question CPA-03084

The management of Cain Company, a nonissuer, engaged Bell, CPA, to express an opinion on Cain's internal control. Bell's report described several material weaknesses and potential errors and irregularities that could occur. Subsequently, management included Bell's report in its annual report to the Board of Directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should:

a.Disclaim an opinion as to management's cost-benefit statement.

b.Advise the Board that Bell either agrees or disagrees with management's statement.

c.Advise management that Bell's report was restricted for use only by management.

d.Advise both management and the Board that Bell was withdrawing the opinion.

Explanation

Choice "a" is correct. The auditor should disclaim an opinion as to management's cost-benefit statement (i.e., "We do not express an opinion or any other form of assurance on management's cost-benefit statement.").

Choice "b" is incorrect. The CPA should disclaim an opinion regarding management's representation. Choice "c" is incorrect. The CPA's report on internal control is not restricted as to use.

Choice "d" is incorrect. The CPA does not need to withdraw the opinion as long as a disclaimer on management's cost-benefit statement is presented.

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Question CPA-03085

An auditor's communication of internal control related matters noted in an audit usually should be addressed to:

a.Management and those charged with governance.

b.The director of internal auditing.

c.The chief financial officer.

d.The chief accounting officer.

Explanation

Choice "a" is correct. An auditor's communication of internal control related matters noted in an audit usually should be addressed to management and those charged with governance.

Choices "b", "c", and "d" are incorrect. The director of internal auditing, the chief financial officer, and the chief accounting officer all would have access to the letter; however, it would not be addressed to them since they do not have the same level of authority and responsibility to the shareholders as management and those charged with governance.

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Question CPA-03093

When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements of a nonissuer, the auditor should include a:

a.Description of tests performed to search for material weaknesses.

b.Statement of positive assurance on internal control.

c.Paragraph describing the inherent limitations of internal control.

d.Restriction on the use of the report.

Explanation

Choice "d" is correct. When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements, the auditor should include a restriction on the use of the report.

Choice "a" is incorrect. The auditor would not include a description of tests performed to search for material weaknesses since the auditor is not in fact obligated to search for them.

Choices "b" and "c" are incorrect. An auditor would make a statement of positive assurance on internal control and include a paragraph describing the inherent limitations of internal control in conjunction with an engagement to report on internal control. These comments would not be made when reporting on an entity's internal control in conjunction with an audit of the financial statements of a nonissuer.

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Question CPA-03099

In a financial statement audit of a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:

a.Only if the deficiency has a material effect on the auditor's assessment of control risk.

b.Unless the entity accepts that degree of risk because of cost-benefit considerations.

c.Only if the deficiency is considered a material weakness.

d.In writing, during the current audit.

Explanation

Choice "d" is correct. A previously communicated significant deficiency that has not been corrected ordinarily should be communicated again in writing, during the current audit.

Choices "a" and "c" are incorrect. The auditor is required to communicate significant deficiencies each year, regardless of whether the deficiency has a material effect on the auditor's assessment of control risk or the deficiency is considered a material weakness.

Choice "b" is incorrect. The auditor is required to communicate significant deficiencies each year, even if the entity accepts that degree of risk because of cost-benefit considerations.

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Question CPA-03102

An engagement to express an opinion on the internal control of a nonissuer will generally:

a.Require procedures that duplicate those already applied in assessing control risk during a financial statement audit.

b.Increase the reliability of the financial statements that are being audited.

c.Be more extensive in scope than the assessment of control risk made during a financial statement audit.

d.Be more limited in scope than the assessment of control risk made during a financial statement audit.

Explanation

Choice "c" is correct. An engagement to express an opinion on internal control will generally be more extensive in scope than the assessment of control risk made during a financial statement audit of a nonissuer. This occurs because assessing control risk is the primary purpose of an engagement to express an opinion on internal control, whereas it is an incidental result of an audit of a nonissuer.

Choice "a" is incorrect. Since examination of internal control should be integrated with the financial statement audit, it is unlikely that the auditor would duplicate procedures that were already applied.

Choice "b" is incorrect. It is unlikely that the reliability of the financial statements would be increased if an engagement to express an opinion on internal control is performed; however, the audit might be more efficient due to the integration of the two audits.

Choice "d" is incorrect. An engagement to express an opinion on internal control is more extensive in scope than the control risk assessment performed during an audit of a nonissuer.

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Question CPA-03105

Which of the following statements is correct concerning significant deficiencies noted in an audit of a nonissuer?

a.Significant deficiencies are material weaknesses in the design or operation of specific internal control components.

b.The auditor is obligated to search for significant deficiencies that could adversely affect the entity's ability to record and report financial data.

c.Significant deficiencies should not be re-communicated each year if management has acknowledged its understanding of such deficiencies.

d.The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.

Explanation

Choice "d" is correct. The auditor should separately identify significant deficiencies and material weaknesses. Choice "a" is incorrect. Not all significant deficiencies are material weaknesses.

Choice "b" is incorrect. The auditor is not obligated to search for significant deficiencies. The auditor is obligated to communicate to the client any significant deficiencies identified while auditing the financial statements.

Choice "c" is incorrect. The auditor is obligated to re-communicate significant deficiencies each year, even if management has acknowledged its understanding of such deficiencies.

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Question CPA-03109

Which of the following statements concerning an auditor's communication of significant deficiencies identified during the audit of a nonissuer is correct?

a.The auditor should request a meeting with management one level above the source of the significant deficiencies to discuss suggestions for remedial action.

b.Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit.

c.Significant deficiencies discovered and communicated at an interim date should be reexamined with tests of controls before completing the engagement.

d.Suggestions concerning administration efficiencies and business strategies should not be communicated in the same report with significant deficiencies.

Explanation

Choice "b" is correct. Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit.

Choice "a" is incorrect. The auditor should communicate significant deficiencies to management and those charged with governance, but is not required to request a meeting with management one level above the source of the significant deficiencies, to discuss suggestions for remedial action.

Choice "c" is incorrect. Significant deficiencies discovered and communicated at an interim date do not need to be reexamined with tests of controls before completing the engagement.

Choice "d" is incorrect. Suggestions concerning administration efficiencies and business strategies may be communicated in the same report with significant deficiencies (the significant deficiencies must be separately identified, however).

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Question CPA-03112

Which of the following representations should not be included in a report on internal control related matters noted in an audit of a nonissuer?

a.Significant deficiencies related to internal control design exist, but there are no material weaknesses.

b.There are no significant deficiencies in the design or operation of internal control.

c.Corrective follow-up action is recommended due to the relative significance of material weaknesses discovered during the audit.

d.The auditor's consideration of internal control would not necessarily disclose all significant deficiencies that exist.

Explanation

Choice "b" is correct. A report on internal control related matters noted in an audit should not state that there are no significant deficiencies in internal control, since this statement might erroneously imply that the auditor searched for such conditions.

Choice "a" is incorrect. The auditor is permitted to state that no material weaknesses were identified during the audit. Typically this occurs in reports submitted to governmental authorities.

Choice "c" is incorrect. The auditor may suggest that corrective follow-up action should be taken due to the relative significance of material weakness discovered.

Choice "d" is incorrect. The auditor's report may state that his or her consideration of internal control would not necessarily disclose all significant deficiencies that exist.

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Question CPA-03115

In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to:

a.Determine whether the control activities have been implemented.

b.Perform procedures to understand the design of internal control.

c.Document the understanding of the entity's internal control components.

d.Search for significant deficiencies in the operation of internal control.

Explanation

Choice "d" is correct. When obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to search for significant deficiencies in the operation of internal control.

Choice "a" is incorrect. In order to determine the nature, timing and extent of tests to be performed, an auditor must determine whether the control activities have been implemented.

Choice "b" is incorrect. An auditor is required to perform procedures to confirm his/her understanding of the internal control systems' design, and to determine whether relevant controls have been implemented.

Choice "c" is incorrect. An auditor is required to document his or her understanding of the entity's internal control components, even if he or she intends to use a substantive approach.

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Question CPA-03462

The auditor's report on compliance and internal control over compliance designed to meet the requirements of Government Auditing Standards (the Yellow Book), should include:

I.The scope of the auditor's testing of internal controls.

II. Uncorrected misstatements that were determined by management to be immaterial.

a.I only.

b.II only.

c.Both I and II.

d.Neither I nor II.

Explanation

Choice "a" is correct. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book).

Choices "b" and "c" are incorrect. Immaterial uncorrected misstatements are not included in the auditor's report on internal controls and compliance with laws and regulations.

Choice "d" is incorrect. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book).

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Question CPA-03464

In performing an audit in accordance with Generally Accepted Government Auditing Standards (the "Yellow Book"), the auditor:

a.Accepts less responsibility in conducting fieldwork than is accepted in a GAAS audit, since the specific requirements of the Generally Accepted Government Auditing Standards reduce required professional judgment.

b.Accepts shared responsibility with Federal Inspectors General, who are equally responsible for compliance evaluation, control, and reporting.

c.Accepts greater reporting responsibilities than accepted under a GAAS audit, since the auditor must report on compliance with laws, rules, and regulations, violations of which may affect financial statement amounts, and on the organization's internal control over financial reporting.

d.Accepts equal reporting responsibilities with that accepted under GAAS audits, since compliance evaluation and reporting have implied financial statement implications and require expanded treatment as a material contingency.

Explanation

Choice "c" is correct. An auditor's reporting requirements under Generally Accepted Government Auditing Standards (GAGAS or the Yellow Book) are expanded to include reports on the audited entity's compliance with laws, rules, and regulations that have a material impact on the financial statements and on internal controls over financial reporting.

Rule: Reporting responsibilities under GAGAS are expanded to include:

1.Reports on compliance with laws, rules, and regulations, violations of which may affect financial statement amounts, and

2.Reports on internal control over financial reporting.

Choice "a" is incorrect. Specific reporting requirements and other expanded audit standards associated with Yellow Book audits do not reduce professional judgment.

Choice "b" is incorrect. Federal Inspectors General do not split their responsibilities with independent public accountants performing Yellow Book Audits.

Choice "d" is incorrect. Although Yellow Book requirements represent logical extensions of generally accepted auditing standards, the specific responsibilities undertaken in an audit that requires application of the Yellow Book would not surface as a result of an audit under generally accepted auditing standards.

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Question CPA-03466

Government Auditing Standards published by the Government Accountability Office:

a.Only apply to audits of governments.

b.Only apply to audits of governments receiving federal financial assistance.

c.Primarily apply to audits of federal financial assistance and government organizations.

d.Only apply to audits of federal financial assistance programs operated by state and local governments.

Explanation

Choice "c" is correct. Generally Accepted Government Auditing Standards primarily apply to audits of federal financial assistance and government organizations but have been adopted by some states for audits of state financial assistance.

Choice "a" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations. GAGAS may also extend to other financial assistance depending on whether those standards have been adopted by the state providing the assistance.

Choice "b" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations, not only to governments.

Choice "d" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations, not only to governments.

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Question CPA-03474

Gearty & Duffy, certified public accountants, have been engaged to perform a single audit of Sleepy Knoll Township, a local government receiving substantial federal financial assistance for community development and housing assistance. A single audit represents:

a.An audit of annual activity of only federal financial assistance programs over the course of the town's fiscal year.

b.An inception to date audit of only federal financial assistance programs over the course of the grant year specified by the grant award.

c.An audit of the township's financial statements and of compliance with federal regulations relating to federal financial assistance as prescribed by the Single Audit Act and OMB Circular A-133.

d.An audit of the township's financial statements and the fair presentation of the revenues derived from federal financial assistance.

Explanation

Choice "c" is correct. A single audit represents a combined audit of both an entity's financial statements and federal financial assistance programs. The single audit provides audited organizations with the opportunity to capitalize on the efficiency of satisfying their audit requirements with a single audit. Auditors are governed by the Single Audit Act and OMB Circular A-133.

Choice "a" is incorrect. A single audit is not simply an audit of federal financial assistance. Choice "b" is incorrect. A single audit is not simply an audit of federal financial assistance.

Choice "d" is incorrect. A single audit is not limited to expression of an opinion on the fair presentation of financial statements. It also is designed to report on compliance with laws, rules, and regulations.

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Question CPA-03482

An audit performed in accordance with OMB Circular A-133 will expand the auditor's responsibilities beyond generally accepted auditing standards. The auditor's expanded responsibilities include:

a.Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have any effect on federal award programs.

b.Performance of additional procedures to test for noncompliance with laws, rules and regulations targeted for review by the Office of the Inspector General.

c.Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have a direct and material effect on major federal award programs.

d.Performance of additional procedures to test and report on achievement of program objectives.

Explanation

Choice "c" is correct. OMB Circular A-133 expands the auditor's responsibilities to include procedures designed to test and report on compliance matters having a direct and material effect on major federal award programs.

Choice "a" is incorrect. OMB Circular A-133 expands procedures to major programs as defined by the Circular, not to all programs.

Choice "b" is incorrect. OMB Circular A-133 audit objectives relate to management's assertions regarding compliance with laws, rules, and regulations, not to noncompliance issues identified by the Office of the Inspector General.

Choice "d" is incorrect. OMB Circular A-133 relates to the financial and compliance audits of major federal financial assistance programs, not to the achievement of program objectives.

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Question CPA-03488

Gearty & Duffy, certified public accountants, have been engaged to perform an audit of Sleepy Knoll Township in accordance with OMB Circular A-133. In connection with that engagement, Gearty & Duffy will determine major programs:

a.Using a list of programs included in the work plan of the Office of the Inspector General.

b.By applying only a specific dollar threshold, where all programs exceeding the threshold would be considered major.

c.By applying a risk-based approach.

d.By testing enough grants to achieve a single specific coverage percentage.

Explanation

Choice "c" is correct. OMB Circular A-133 allows auditors to use a risk-based approach to determine major grants.

Choice "a" is incorrect. The judgment of the Office of the Inspector General would not exclusively influence the selection of major programs.

Choice "b" is incorrect. Programs in excess of $300,000 are generally considered to be major grants; however, the dollar threshold is not the exclusive determinant of major programs.

Choice "d" is incorrect. Risk-based auditing allows auditors to test as little as 25 percent of total federal programs or as much as 50 percent of total federal programs, depending on circumstances and on the auditor's judgment.

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Question CPA-03500

When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on:

I.Noteworthy accomplishments of the program.

II. The scope of the auditor's testing of internal controls.

a.I only.

b.II only.

c.Both I and II.

d.Neither I nor II.

Explanation

Choice "b" is correct. When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor is required to report on the scope of the auditor's testing of internal control, but not on noteworthy accomplishments of the program.

Choices "a", "c", and "d" are incorrect, based on the above explanation.

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Question CPA-03507

When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on:

I.Recommendations for actions to improve operations.

II. The scope of the auditor's tests of compliance with laws and regulations.

a.I only.

b.II only.

c.Both I and II.

d.Neither I nor II.

Explanation

Choice "b" is correct. When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor is required to report on the scope of the auditor's testing of compliance with laws and regulations, but not on recommendations for actions to improve operations.

Choices "a", "c", and "d" are incorrect based on the above explanation.

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Question CPA-03514

Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common?

a.The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

b.The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient.

c.The auditor should obtain written management representations that the recipient's internal auditors will report their findings objectively without fear of political repercussion.

d.The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipient's financial statements are disclosed to the inspector general.

Explanation

Choice "a" is correct. Audits of federal financial assistance under the Single Audit Act require that the auditor determine if the auditee has complied with laws, regulations, and provisions of the contracts or grant agreements.

Choice "b" is incorrect. Materiality in audits of federal financial assistance is set at the program level and is not determined by the government entities that provided the federal financial assistance to the recipient.

Choice "c" is incorrect. If the internal auditors are considered organizationally independent for internal auditing purposes, then they can be considered independent when conducting audits external to the government entity to which they are routinely assigned. Organizationally, independent refers to the audit organization being outside of line management, reporting to the chief executive or administrative officer; that is, the internal auditors will report their findings objectively without fear of political repercussion. However, in this case, an external auditor need not be involved in the audit, and no written management representations regarding the internal auditors need be obtained.

Choice "d" is incorrect. In audits of federal financial assistance under the Single Audit Act, the auditor does not express negative assurance on items not tested.

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Question CPA-03517

In auditing a not-for-profit entity that receives governmental financial assistance, the auditor has a responsibility to:

a.Issue a separate report that describes the expected benefits and related costs of the auditor's suggested changes to the entity's internal control.

b.Assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements.

c.Notify the governmental agency providing the financial assistance that the audit is not designed to provide any assurance of detecting errors and fraud.

d.Render an opinion concerning the entity's continued eligibility for the governmental financial assistance.

Explanation

Choice "b" is correct. The auditor must assess whether management has identified laws and regulations that have a direct and material effect on the determination of amounts in an entity's financial statements and obtain an understanding of the possible effects on the financial statements of such laws and regulations.

Choice "a" is incorrect. The auditor must issue a separate report on the consideration of the entity's internal control, not on the expected benefits and related costs.

Choice "c" is incorrect. Government Auditing Standards (the Yellow Book) specify that the auditor should design the audit to provide reasonable assurance that material errors and fraud are detected.

Choice "d" is incorrect. The auditor may be required to express an opinion on whether the entity has complied with the requirements applicable to its major federal financial assistance programs, but not whether it is still eligible to receive assistance.

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Question CPA-03523

Which of the following statements represents a quality control requirement under Government Auditing Standards?

a.A CPA who conducts government audits is required to undergo an annual external quality control review when an appropriate internal quality control system is not in place.

b.A CPA seeking to enter into a contract to perform an audit should provide the CPA's most recent external quality control review report to the party contracting for the audit.

c.An external quality control review of a CPA's practice should include a review of the audit documentation for each government audit performed since the prior external quality control review.

d.A CPA who conducts government audits may not make the CPA's external quality control review report available to the public.

Explanation

Choice "b" is correct. Audit organizations seeking to enter into a contract to perform an audit in accordance with government auditing standards should provide their most recent external quality control review report to the party contracting for the audit. The audit organization should make its most recent peer review report publicly available by posting to an external website or through similar means.

Choice "a" is incorrect. Each audit organization conducting audits in accordance with governmental auditing standards should have an appropriate internal quality control system in place and undergo an external quality control review.

Choice "c" is incorrect. It is not necessary to review all government audits performed since the last external quality control review. Reviewers should select audits that provide a reasonable cross-section of engagements performed since the last review.

Choice "d" is incorrect. It is recommended that the report be made available to the public.

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Question CPA-03526

An auditor most likely would be responsible for communicating significant deficiencies in the design of internal control:

a.To the Securities and Exchange Commission when the client is a publicly-held entity.

b.To specific legislative and regulatory bodies when reporting under Government Auditing Standards.

c.To a court-appointed creditors' committee when the client is operating under Chapter 11 of the Federal Bankruptcy Code.

d.To shareholders with significant influence (more than 20% equity ownership) when the signficant deficiencies (reportable conditions) are deemed to be material weaknesses.

Explanation

Choice "b" is correct. When reporting under Government Auditing Standards, the auditor should consider whether any noted deficiencies in such internal controls should be reported to specific legislative and regulatory bodies.

Choice "a" is incorrect. The auditor would report significant deficiencies to the audit committee. The auditor is prohibited from disclosing confidential client information to the SEC by the Code of Professional Conduct.

Choice "c" is incorrect. When there is no audit committee, the auditor would report significant deficiencies in the design of the client's internal control to an otherwise formally designated committee with oversight over the financial reporting process, not necessarily to a court-appointed creditors' committee.

Choice "d" is incorrect. The auditor would report significant deficiencies to the audit committee. The auditor is prohibited from disclosing confidential client information to significant shareholders by the Code of Professional Conduct.

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Question CPA-03532

In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor's report:

a.A statement of assurance that all controls over fraud and illegal acts were tested.

b.Material instances of fraud and illegal acts that were discovered.

c.The materiality criteria used by the auditor in considering whether instances of noncompliance were significant.

d.An opinion on whether compliance with laws and regulations affected the entity's goals and objectives.

Explanation

Choice "b" is correct. Only material instances of fraud and illegal acts discovered need to be communicated in the auditor's report on compliance. If applicable, the report should state that other instances of noncompliance were communicated to management in a separate letter.

Choice "a" is incorrect. The report would state that consideration of internal control over compliance would not necessarily disclose all deficiencies, significant deficiencies or material weaknesses in internal control over compliance. Not only would there be no assurance that all controls were tested, the auditor would assert the exact opposite.

Choice "c" is incorrect. The auditor would not disclose the materiality criteria used in considering whether instances of noncompliance were significant.

Choice "d" is incorrect. The auditor does not express an opinion on whether the compliance affected the entity's goals and objectives.

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Question CPA-03542

Which of the following statements is a standard applicable to financial statement audits in accordance with

Government Auditing Standards?

a.An auditor should assess whether the entity has reportable measures of economy and efficiency that are valid and reliable.

b.An auditor should report on the scope of the auditor's testing of internal controls.

c.An auditor should briefly describe in the auditor's report the method of statistical sampling used in performing tests of controls and substantive tests.

d.An auditor should determine the extent to which the entity's programs achieve the desired level of results.

Explanation

Choice "b" is correct. Auditors should report on the scope of their testing of compliance with laws and regulations and of internal controls.

Choice "a" is incorrect. The auditor would assess whether the entity has reportable measures of economy and efficiency that are valid and reliable as part of an economy and efficiency (performance) audit, not a financial statement audit.

Choice "c" is incorrect. The auditor may report the methods of statistical sampling used as part of a performance audit.

Choice "d" is incorrect. A program audit would determine the extent to which the entity's programs achieve the desired level of results.

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Question CPA-03579

Wolf is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program. Wolf's report on compliance should express:

a.No assurance on the compliance tests.

b.Reasonable assurance on the compliance tests.

c.A qualified or adverse opinion.

d.An adverse or disclaimer of opinion.

Explanation

Choice "c" is correct. If material instances of noncompliance are identified, the auditor should express either a qualified or adverse opinion on compliance.

Choice "a" is incorrect. The auditor's report directs the reader to a separate schedule of findings after stating the importance of compliance testing and indicating that providing an opinion on compliance is not an objective of the audit.

Choice "b" is incorrect. The auditor's report directs the reader to a separate schedule of findings after stating the importance of compliance testing and indicating that providing an opinion on compliance is not an objective of the audit.

Choice "d" is incorrect. If material instances of noncompliance are identified, a disclaimer of opinion is not appropriate.

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Question CPA-03582

An auditor was engaged to conduct a performance audit of a governmental entity in accordance with Government Auditing Standards. These standards do not require, as part of this auditor's report:

a.A statement of the audit objectives and a description of the audit scope.

b.Indications or instances of illegal acts that could result in criminal prosecution discovered during the audit.

c.The pertinent views of the entity's responsible officials concerning the auditor's findings.

d.A concurrent opinion on the financial statements taken as a whole.

Explanation

Choice "d" is correct. A concurrent opinion on the financial statements taken as a whole is not a required part of the auditor's report.

Choice "a" is incorrect. A statement of the audit objectives and a description of the audit scope are required parts of the auditor's report.

Choice "b" is incorrect. The auditor would provide indications of illegal acts discovered during the audit.

Choice "c" is incorrect. The pertinent views of the entity's responsible officials concerning the auditor's findings are generally part of the auditor's report.

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Question CPA-03597

For an entity that does not receive governmental financial assistance, an auditor's standard report on financial statements generally would not refer to:

a.Significant estimates made by management.

b.An assessment of the entity's accounting principles.

c.Management's responsibility for the financial statements.

d.The entity's internal control.

Explanation

Choice "d" is correct. The auditor's standard report does not refer to the entity's internal control.

Choice "a" is incorrect. The auditor's standard report refers to "significant estimates made by management" in the scope paragraph.

Choice "b" is incorrect. The auditor's standard report refers to "assessments of the entity's accounting principles" in the scope paragraph.

Choice "c" is incorrect. The auditor's standard report states management's responsibility for the financial statements in the introductory paragraph.

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Question CPA-03599

Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has:

a.Responsibility for understanding and complying with compliance requirements.

b.Implemented internal controls designed to detect all illegal acts.

c.Expressed both positive and negative assurance to the auditor that the entity complied with all laws and regulations.

d.Employed internal auditors who can report their findings, opinions, and conclusions objectively without fear of political repercussion.

Explanation

Choice "a" is correct. The auditor should obtain written representation that management has responsibility for understanding and complying with compliance requirements.

Choice "b" is incorrect. Management need not acknowledge that it has implemented internal control activities to detect all illegal acts.

Choice "c" is incorrect. Management should state that it is responsible for compliance with all laws and regulations.

Choice "d" is incorrect. Management need not employ internal auditors.

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Question CPA-03603

Which of the following is a documentation requirement that an auditor should follow when auditing in accordance with Government Auditing Standards?

a.The auditor should obtain written representations from management acknowledging responsibility for correcting instances of fraud, abuse, and waste.

b.Audit documentation should contain sufficient information so that supplementary oral explanations are not required.

c.The auditor should document the procedures that assure discovery of all illegal acts and contingent liabilities resulting from noncompliance.

d.Audit documentation should contain a caveat that all instances of material errors and fraud may not be identified.

Explanation

Choice "b" is correct. Per Government Auditing Standards, audit documentation should contain sufficient information so that supplementary oral explanations are not required.

Choice "a" is incorrect. The auditor should obtain written representation from management stating that management is responsible for taking corrective action on audit findings of the compliance audit.

Choice "c" is incorrect. The auditor should document procedures performed to evaluate compliance with laws and regulations that have a direct and material effect on the determination of financial statement amounts.

Choice "d" is incorrect. There is no such requirement that audit documentation contain this caveat.

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Question CPA-03610

When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor should prepare a written report on the auditor's:

a.Identification of the causes of performance problems and recommendations for actions to improve operations.

b.Understanding of internal control and assessment of control risk.

c.Field work and procedures that substantiated the auditor's specific findings and conclusions.

d.Opinion on the entity's attainment of the goals and objectives specified by applicable laws and regulations.

Explanation

Choice "b" is correct. Government Auditing Standards require that the auditor issue a written report on internal control in all audits. As part of this reporting requirement, the auditor must describe the scope of the auditor's work in obtaining an understanding of internal control and his or her assessment of control risk.

Choice "a" is incorrect. In the report, the auditor would identify deficiencies, significant deficiencies, and material weaknesses in internal control over compliance (not performance problems) found in the examination of the entity's internal control.

Choice "c" is incorrect. A report on fieldwork and procedures that substantiated the auditor's specific findings and conclusions would not be prepared as part of a GAGAS audit.

Choice "d" is incorrect. The objective of the audit of the financial statements is to provide an opinion on the financial statements, not on the entity's attainment of goals and objectives.

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Question CPA-03612

In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity's compliance with laws and regulations. This report should:

a.State that the audit should be planned to obtain reasonable assurance about whether noncompliance could have a material effect on the entity's programs.

b.Describe the laws and regulations that the entity must comply with.

c.Provide an opinion on overall compliance with laws and regulations.

d.Provide negative assurance of the entity's legal compliance.

Explanation

Choice "a" is correct. Basic elements of a report on compliance include a statement that the audit should be planned to obtain reasonable assurance about whether noncompliance could have a material effect on the programs audited.

Choice "b" is incorrect. It is not necessary to describe the laws and regulations with which the entity must comply.

Choice "c" is incorrect. The objective of the audit of the financial statements is not to provide an opinion on overall compliance with laws and regulations.

Choice "d" is incorrect. The report should specifically state that a compliance audit does not provide a legal determination of the entity's compliance.

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Question CPA-03613

Reporting on internal control to meet the requirements of Government Auditing Standards differs from report- ing under other generally accepted auditing standards in that Government Auditing Standards requires a:

a.Written report describing the entity's internal controls specifically designed to prevent fraud, abuse, and illegal acts.

b.Report describing the scope of the auditor's testing of compliance and of internal control.

c.Statement of negative assurance that internal controls not tested have an immaterial effect on the entity's financial statements.

d.Statement of positive assurance that internal controls designed to detect material errors and fraud were tested.

Explanation

Choice "b" is correct. Government Auditing Standards require a description of the scope of the auditor's testing of compliance and of internal control. This is not required under generally accepted auditing standards.

Choice "a" is incorrect. Although a written report on internal control is required, the auditor does not have to identify procedures specifically designed to prevent fraud, abuse, and illegal acts.

Choice "c" is incorrect. Government Auditing Standards require tests of compliance with applicable laws and regulations governing a particular grant, because the grant money received can only be spent for certain purposes. However, neither GAGAS nor GAAS requires that negative assurance be given with respect to internal controls.

Choice "d" is incorrect. Although Government Auditing Standards require tests of compliance with applicable laws and regulations governing a particular grant (the grant money received can only be spent for certain purposes), auditors are not required to give positive assurance that internal controls designed to detect material errors and fraud were tested under either GAGAS or GAAS.

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Question CPA-03798

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

Our audit is designed to provide reasonable assurance of detecting misstatements that, in our judgment, could have a material effect on the financial statements taken as a whole. Consequently, our audit will not necessarily detect all misstatements that exist due to error, fraudulent financial reporting, or misappropriation of assets.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "H" is correct. An understanding with the client should be established, and this understanding should be documented through an engagement letter. The understanding, and the letter, should include the auditor's responsibilities, including the fact that an audit is designed to provide only reasonable assurance of detecting material misstatements, and therefore may not necessarily detect all misstatements that exist.

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Question CPA-03800

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "N" is correct. Management's statement that there have been no communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices provides information regarding the completeness of information, and would be included in the management representation letter.

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Question CPA-03802

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

Nothing came to our attention that caused us to believe that at October 31, 20XX, there was any change in the capital stock, increase in long-term debt, or decrease in consolidated net current assets or stockholders' equity as compared with the amounts shown in the September 30, 20XX unaudited condensed consolidated balance sheet.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "I" is correct. In a comfort letter, negative assurance is provided with respect to changes in selected financial statement items during a period subsequent to the date and period of the latest financial statements included in the registration statement.

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Question CPA-03811

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

As discussed in Note 4 to the financial statements, the company experienced a net loss for the year ended July 31, 20XX, and is currently in default under substantially all of its debt agreements. In addition, on September 25, 20XX, the company filed a prenegotiated voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. These matters raise substantial doubt about the company's ability to continue as a going concern.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "L" is correct. When there is substantial doubt about an entity's ability to continue as a going concern, the auditor would state his or her concerns in an explanatory paragraph of the auditor's report.

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Question CPA-03853

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

During the year under audit, we were advised that management consulted with Better & Best, CPAs. The purpose of this consultation was to obtain another CPA firm's opinion concerning the company's recognition of certain revenue that we believe should be deferred to future periods. Better & Best's opinion was consistent with our opinion, so management did not recognize the revenue in the current year.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "F" is correct. Unless all of those charged with governance are also involved with managing the entity, the auditor should discuss with those charged with governance significant accounting or auditing matters that were the subject of outside consultation.

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Question CPA-03857

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

The company believes that all material expenditures that have been deferred to future periods will be recoverable.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "N" is correct. Management's discussion of its belief that all material expenditures that have been deferred to future periods will be recoverable provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.

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Question CPA-03862

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

Our use of professional judgment and the assessment of audit risk and materiality for the purpose of our audit mean that matters may have existed that would have been assessed differently by you. We make no representation as to the sufficiency or appropriateness of the information in our audit documentation for your purposes.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "P" is correct. An audit of a new client may be facilitated by review of the predecessor's audit documentation. The predecessor should make it clear that they are not responsible for the sufficiency or appropriateness of the information in their audit documentation for the successor auditor's purposes.

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Question CPA-03872

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

Blank checks are maintained in an unlocked cabinet along with the check-signing machine. Blank checks and the check-signing machine should be locked in separate locations to prevent the embezzlement of funds.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "B" is correct. Failure to lock blank checks and the check-signing machine in separate locations is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.

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Question CPA-03877

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

Our audit cannot be relied upon to disclose significant deficiencies in the design or operation of internal control. Nevertheless, we will communicate to you all such significant deficiencies and potential areas for improvement that we become aware of during the course of our audit.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "H" is correct. An understanding with the client should be established, and this understanding should be documented through an engagement letter. The understanding, and the letter, should include limitations of the engagement, including the fact that an audit is not designed to provide assurance on internal control or to identify significant deficiencies in internal control.

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Question CPA-03884

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

The timetable set by management to complete our audit was unreasonable considering the failure of the company's personnel to complete schedules on a timely basis and delays in providing necessary information.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "F" is correct. The auditor should inform the audit committee of any serious difficulties encountered with management during the performance of the audit.

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Question CPA-03892

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

Several employees have disabled the anti-virus detection software on their PCs because the software slows the processing of data and occasionally rings false alarms. The company should obtain anti-virus software that runs continuously at all system entry points and that cannot be disabled by unauthorized personnel.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "B" is correct. The ability for unauthorized personnel to disable anti-virus detection software is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.

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Question CPA-03906

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "N" is correct. Management's discussion of plans or intentions that may materially affect the carrying value or classification of assets and liabilities provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.

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Question CPA-03909

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.

In planning the sampling application, was appropriate consideration given to the relationship of the sample to the audit objective and to preliminary judgments about materiality levels?

A.Practitioner's report on management's assertion about an entity's compliance with specified requirements.

B.Auditor's communications on significant deficiencies in internal control.

C.Audit inquiry letter to legal counsel.

D.Lawyer's response to audit inquiry letter.

E.Communication from those charged with governance to the auditor.

F.Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).

G.Report on the application of accounting principles.

H.Auditor's engagement letter.

I.Letter for underwriters.

J.Accounts receivable confirmation request.

K.Request for bank cutoff statement.

L.Explanatory paragraph of an auditor's report on financial statements.

M.Partner's engagement review notes.

N.Management representation letter.

O.Successor auditor's communication with predecessor auditor.

P.Predecessor auditor's communication with successor auditor.

Explanation

Choice "M" is correct. The engagement partner has ultimate responsibility for the performance of the audit and the preparation of the report. He or she would therefore want to ensure that, in planning a sampling application, appropriate consideration was given to the relationship of the sample to the audit objective and to preliminary judgments about materiality levels.

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Question CPA-04623

Which of the following factors most likely would cause an auditor to question the integrity of management?

a.Management has an aggressive attitude toward financial reporting and meeting profit goals.

b.Audit tests detect material fraud that was known to management, but not disclosed to the auditor.

c.Managerial decisions are dominated by one person who is also a stockholder.

d.Weaknesses in internal control reported to the audit committee are not corrected by management.

Explanation

Choice "b" is correct. Management is required to disclose all material matters to the independent auditor, including information concerning material fraud. This disclosure is so important that it is included in writing, in the management representation letter. Failure of management to disclose material fraud to the auditor would cause the auditor to question management's integrity and perhaps even to withdraw from the engagement.

Choice "a" is incorrect. While management's aggressive attitude certainly constitutes a fraud risk, this alone would not necessarily cause the auditor to question management's integrity. It is possible for management to be both aggressive and ethical.

Choice "c" is incorrect. While the domination of management by a stockholder certainly constitutes a fraud risk, this alone would not necessarily cause the auditor to question management's integrity. It is possible for management to be an ethical shareholder.

Choice "d" is incorrect. Failure to correct a known weakness in internal control may be a conscious decision based on the cost and benefit involved with making the correction. Such decisions do not imply that management lacks integrity.

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Question CPA-04625

An auditor is selecting vouchers for testing an entity's internal control activities related to the proper approval of vouchers before checks are prepared. The auditor is matching random numbers with voucher numbers to determine which vouchers to inspect. If a random number matches a voided voucher, that voucher ordinarily would be replaced by another voucher in the random sample if the voided voucher:

a.Cannot be located in the voucher file.

b.Represents a dollar amount that is material.

c.Indicates a deviation from the prescribed activity.

d.Has been properly voided.

Explanation

Choice "d" is correct. If a random number matches a properly voided voucher, the auditor would ordinarily replace this with another voucher in order to attain the desired sample size.

Choice "a" is incorrect. A voucher that cannot be located is normally considered a deviation.

Choice "b" is incorrect. The auditor would be particularly concerned with a voided voucher that represents a material amount, but this fact alone would not cause selection of another voucher. Determination of whether to select another voucher or to instead consider this a deviation would depend on whether the voucher was properly voided.

Choice "c" is incorrect. If the voided voucher indicates a control deviation, then it would be counted as such.

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Question CPA-04626

Which of the following matters is an auditor not required to communicate to those charged with governance?

a.Significant adjustments arising from the audit that were recorded by management.

b.The basis for the auditor's conclusions about the reasonableness of management's sensitive accounting estimates.

c.The level of responsibility assumed by the auditor under generally accepted auditing standards.

d.The degree of reliance the auditor placed on the management representation letter.

Explanation

Choice "d" is correct. The auditor is not required to communicate to those charged with governance the degree of reliance placed on the management representation letter.

Choice "a" is incorrect. Unless all those charged with governance are also involved with managing the entity, the auditor should inform those charged with governance about adjustments arising from the audit, regardless of whether or not management recorded them.

Choice "b" is incorrect. The auditor should communicate qualitative aspects of the process used by management in formulating sensitive accounting estimates, which would likely include discussion of the basis for the auditor's conclusions regarding the reasonableness of those estimates.

Choice "c" is incorrect. The auditor should communicate the level of responsibility that he/she is assuming under GAAS.

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Question CPA-04628

For financial statement audits, generally accepted government auditing standards (GAGAS) incorporate the Statements on Auditing Standards (SAS) that are issued by the AICPA. GAGAS prescribe additional standards on:

 

Direct reporting

Reporting on

 

of illegal acts

internal controls

a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

Explanation

Choice "a" is correct. Generally accepted government auditing standards (GAGAS) prescribe additional standards on the direct reporting of illegal acts. For example, the auditor is required to directly report illegal acts discovered during the audit to federal inspector generals if management fails to disclose such illegal acts to the grantor or fails to take appropriate remedial action. In addition, GAGAS also prescribe additional standards related to internal control reporting, such as requiring that the auditor provide a written report on internal control in every financial statement audit and specific reporting over internal control over compliance.

Choices "b", "c", and "d" are incorrect, based on the above explanation.

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Question CPA-04648

Rachel, CPA, is conducting an audit of Eaton Enterprises, a nonissuer. Rachel has conducted her audit in accordance with generally accepted auditing standards, and she wishes to emphasize in her report that such standards do not require the same level of testing and reporting on internal control as is required for audits of issuers under the Sarbanes-Oxley Act. Which report modification would be most appropriate in this situation?

a.Only the scope paragraph should be modified.

b.An explanatory paragraph should be added following the opinion paragraph.

c.An explanatory paragraph should be added preceding the opinion paragraph, and the opinion paragraph should state, "Except for the matter discussed in the preceding paragraph..."

d.No report modification should be made in this scenario.

Explanation

Choice "a" is correct. The auditor may expand the scope paragraph to state that internal control was considered as a basis for designing appropriate audit procedures, but not for the purpose of expressing an opinion on the effectiveness of internal control. This serves to emphasize that the extended level of testing and reporting on internal control required by the Sarbanes-Oxley Act did not apply in this case.

Choice "b" is incorrect. The auditor should modify the scope paragraph, not add an additional explanatory paragraph.

Choice "c" is incorrect. An "except for" qualified opinion would not be appropriate in this case.

Choice "d" is incorrect. Although a report modification is not required, the question states that Rachel wishes to emphasize the scope of her work on internal control. In such situations, the scope paragraph should be modified.

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Question CPA-04649

Hannah, CPA, has been engaged to perform financial statement audits for three different clients. The first two clients, McCormick Surf Shop and Kleinpeter Technologies, are both nonissuers, while the third client, Bender Industries, is an issuer. Hannah is required to follow PCAOB standards in her audit of Bender Industries.

She has also been asked to conduct the Kleinpeter audit in accordance with both generally accepted auditing standards and the auditing standards of the PCAOB. Regarding the McCormick engagement, Hannah has decided to follow only generally accepted auditing standards, and not the standards of the PCAOB. Which of the following best describes the scope of Hannah's work related to internal control in these three engagements?

a.Hannah must express an opinion on the effectiveness of internal control in all three engagements.

b.Hannah must express an opinion on the effectiveness of internal control in both the Bender and Kleinpeter engagements, but is not required to express such an opinion in the McCormick engagement.

c.Hannah must express an opinion on the effectiveness of internal control in the Bender engagement, but is not required to express such an opinion in the Kleinpeter and McCormick engagements.

d.Hannah is not required to express an opinion on the effectiveness of internal control in any of the three engagements, since she was hired to perform a financial statement audit and not to report on internal control.

Explanation

Choice "c" is correct. While it is true that Hannah is following PCAOB standards in both the Bender and Kleinpeter engagements, PCAOB standards do not require expanded testing and reporting on internal control for nonissuers. Therefore, only in the Bender engagement would Hannah be required to express an opinion on the effectiveness of internal control.

Choice "a" is incorrect. Hannah is not required to express an opinion on internal control in either the Kleinpeter engagement (because PCAOB standards do not require such an opinion for financial statement audits of nonissuers) or the McCormick engagement (because generally accepted auditing standards do not require such an opinion for financial statement audits).

Choice "b" is incorrect. Hannah is not required to express an opinion on internal control in the Kleinpeter engagement because PCAOB standards do not require such an opinion for financial statement audits of nonissuers.

Choice "d" is incorrect. Hannah is required to express an opinion on internal control in the Bender engagement. PCAOB standards require the auditor to express such an opinion, in conjunction with financial statement audits of issuers.

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Question CPA-04702

Which of the following expressions most likely would be included in a management representation letter?

a.No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.

b.There are no significant deficiencies in internal control identified during the prior-year's audit of which those charged with governance are unaware.

c.We do not intend to provide any information that may be construed to constitute a waiver of the attorney- client privilege.

d.Certain computer files and other required audit evidence may exist only for a short period of time and only in computer-readable form.

Explanation

Choice "a" is correct. It is appropriate for the representation letter to contain a statement regarding subsequent events.

Choice "b" is incorrect. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events. The communication of significant deficiencies in internal control does not fall within these categories.

Choice "c" is incorrect. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events. A waiver of attorney-client privilege does not fall within these categories.

Choice "d" is incorrect. While this may be an accurate statement, it is not something that would be included in the management representation letter. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events.

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Question CPA-04706

Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control in a financial statement audit of a nonissuer?

a.The auditor should design and apply tests of controls to discover significant deficiencies in internal control that could result in material misstatements.

b.The auditor need not search for significant deficiencies in internal control unless management requests an attestation that "no significant deficiencies in internal control were noted in the audit."

c.The auditor should search for significant deficiencies in internal control if the auditor expects that controls are operating effectively (i.e., if the auditor plans to rely on controls).

d.The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.

Explanation

Choice "d" is correct. The auditor need not search for significant deficiencies in internal control, but should document and communicate any such deficiencies that are discovered.

Choice "a" is incorrect. Tests of controls are designed and applied to evaluate the risk of financial statement misstatement, and to determine the nature, timing, and extent of substantive tests to be performed. They are not designed to discover significant deficiencies in internal control.

Choice "b" is incorrect. Searching for significant deficiencies in internal control is not part of an audit, and it would be inappropriate for the auditor to state that no significant deficiencies in internal control were noted (even if management requested such a statement).

Choice "c" is incorrect. Searching for significant deficiencies in internal control is not part of an audit even if the auditor expects that controls are operating effectively (i.e., expects to rely on controls).

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Question CPA-04716

An auditor examining inventory most likely would use variables sampling rather than attributes sampling to:

a.Identify whether inventory items are properly priced.

b.Estimate whether the dollar amount of inventory is reasonable.

c.Discover whether misstatements exist in inventory records.

d.Determine whether discounts for inventory are properly recorded.

Explanation

Choice "b" is correct. Variables sampling is used to determine whether a given account balance is reasonable.

Choice "a" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if proper procedures with respect to pricing were followed for each item in the sample.

Choice "c" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if inventory was properly recorded for each item in the sample.

Choice "d" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if discounts were properly applied to inventory for each item in the sample.

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Question CPA-04740

An auditor's communication with those charged with governance is required to include the:

a.Basis for the auditor's preliminary judgment about materiality.

b.Justification for the auditor's selection of sampling methods.

c.Discussion of disagreements with management about matters that significantly impact the entity's financial statements.

d.Assessment of the quality of the entity's earnings as compared to the previous year.

Explanation

Choice "c" is correct. The auditor should discuss with those charged with governance any significant disagreements with management, whether or not satisfactorily resolved, about matters that are significant to the financial statements or to the auditor's report.

Choices "a" and "b" are incorrect. There is no requirement that the auditor's communication with those charged with governance include a justification for any of the judgments made in conducting the audit.

Choice "d" is incorrect. An auditor is required to discuss his or her judgment about the quantitative aspects of the entity's accounting principles and estimates, not the quality of the entity's earnings. Note too that that no comparison to prior year is required.

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Question CPA-05015

Auditors conducting an audit in accordance with the Single Audit Act use a risk-based approach designed to:

a.Focus the audit on grants related to large federal programs.

b.Focus the audit on high-risk programs.

c.Reduce audit risk by providing an equal opportunity for all grants to be tested.

d.Reduce audit risk by providing an equal opportunity for all expended federal dollars to be tested.

Explanation

Choice "b" is correct. The risk-based approach of the Single Audit Act is designed to focus the auditor's tests of federal financial assistance on the programs with the highest risk.

Choice "a" is incorrect. The risk-based approach does not focus the auditor on larger ("Type A") programs. Although the segregation of programs into larger ("Type A") and smaller ("Type B") programs gives the auditor a basis for determining coverage and evaluating risk, the focus is on the risk, not the size of the program.

Choice "c" is incorrect. The risk-based approach is not an extension of random sampling concepts and is not designed to provide each grant with an equal opportunity of being selected.

Choice "d" is incorrect. The risk-based approach is not an extension of random sampling or PPS sampling concepts and is not designed to provide each Federal dollar expended with an equal opportunity of being selected for testing.

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Question CPA-05333

The scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies. Which of the following elements do these audits have in common?

a.The auditor is required to disclose all situations and transactions that could be indicative of fraud, abuse, and illegal acts to the federal inspector general.

b.The materiality levels are higher and are determined by the government entities that provide the federal financial assistance to the recipients.

c.The auditor is required to document an understanding of internal control established to provide reasonable assurance of compliance with the applicable laws and regulations.

d.The accounts should be 100% verified by substantive tests because certain statistical sampling applications are not permitted.

Explanation

Choice "c" is correct. Auditors engaged to perform audits of federal financial assistance (generally under the provisions of the Single Audit Act) must perform procedures to obtain an understanding of internal control pertaining to compliance, and should document this understanding of internal control.

Choice "a" is incorrect. The auditor is required to disclose actual instances of fraud and illegal acts, not all situations that could be indicative of fraud, abuse, or illegal acts.

Choice "b" is incorrect. Materiality levels of organizations receiving federal financial assistance are set by the auditor, not the government. Materiality levels depend upon auditor judgment and will not fall or rise purely as a result of federal participation.

Choice "d" is incorrect. Statistical sampling applications are permitted, and 100% verification of accounts is not required.

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Question CPA-05348

Which of the following matters most likely would be included in a management representation letter?

a.An assessment of the risk factors concerning the misappropriation of assets.

b.An evaluation of the litigation that has been filed against the entity.

c.A confirmation that the entity has complied with contractual agreements.

d.A statement that all material internal control weaknesses have been corrected.

Explanation

Choice "c" is correct. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that the company has complied with all aspects of contractual agreements that may materially affect the financial statements.

Choice "a" is incorrect. As part of planning the audit, the auditor must assess the risk that misappropriation of assets may occur, and may cause a material misstatement in the financial statements. While management may also assess this risk for its own purposes, the auditor would not be able to rely on management's assessment, and therefore would not typically request a representation regarding this matter.

Choice "b" is incorrect. The auditor will typically request that the client's attorney evaluate pending litigation, as the attorney is more knowledgeable in such areas than is management.

Choice "d" is incorrect. The management representation letter typically includes information regarding the financial statements, the completeness of information, recognition, measurement, and disclosure, and subsequent events. Representations regarding internal control are not typically included in a management representation letter.

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Question CPA-05356

The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for governmental financial audits?

a.Auditors should report the scope of their testing of compliance with laws and regulations and of internal controls.

b.Material indications of illegal acts should be reported in a document distributed only to the entity's senior officials.

c.All changes in the audit program from the prior year should be reported to the entity's audit committee.

d.Any privileged or confidential information discovered should be reported to the organization that arranged for the audit.

Explanation

Choice "a" is correct. The auditor's report on compliance and on internal control over financial recording (based on an audit) must include the scope of testing of compliance and internal control.

Choice "b" is incorrect. Material indications of illegal acts are not only reported to the members of the governing body of the audited entity and their senior staff officials but, in some circumstances, auditors should report illegal acts directly to external parties (such as the grantor agency).

Choice "c" is incorrect. Although GAO standards require that the auditor communicate information regarding the nature, timing and extent of planned testing to officials of the audited entity and to individuals contracting for the audit, reporting of all changes is not required. (For example, immaterial changes to the audit program need not be reported.)

Choice "d" is incorrect. Certain privileged or confidential information may be prohibited from general disclosure and should not be included in the audit report. The report should, however, disclose the nature of the information omitted and the requirement that makes an opinion necessary.

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Question CPA-05357

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?

a."Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."

b."There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed."

c."We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities."

d."No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements."

Explanation

Choice "a" is correct. The sufficiency of audit evidence and the type of opinion to be rendered are determined by the auditor, who applies professional judgment in making such determinations. Management representations are not necessary for the auditor to make such judgments, but rather would be used to confirm representations given to the auditor regarding the financial statements, completeness of information, recognition, measurement, and disclosure, and subsequent events.

Choice "b" is incorrect. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that there are no unasserted claims or assessments that the entity's lawyer has advised are probable of assertion and must be disclosed.

Choice "c" is incorrect. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that management has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.

Choice "d" is incorrect. The management representation letter should include information on subsequent events, and will generally state that no events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements.

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Question CPA-05359

To which of the following matters would materiality limits not apply when obtaining written client representations?

a.Violations of state labor regulations.

b.Disclosure of line-of-credit arrangements.

c.Information about related party transactions.

d.Instances of fraud involving management.

Explanation

Choice "d" is correct. Materiality limits do not apply to client representations involving management fraud. The management representation letter generally indicates that "we have no knowledge of fraud or suspected fraud involving management" (without reference to materiality). The only mention of material fraud relates to situations involving parties other than management.

Choice "a" is incorrect. Materiality limits do apply to violations of state labor regulations. The management representation letter generally indicates that there are no violations of regulations "whose effects should be considered for financial statement disclosure"--and only material effects would typically be considered for disclosure.

Choice "b" is incorrect. Since GAAP requires disclosure of material line-of-credit arrangements, materiality limits do apply to representations about such matters.

Choice "c" is incorrect. Since GAAP requires disclosure of material related party transactions, materiality limits do apply to representations about such matters.

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Question CPA-05369

Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?

a.The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.

b.As the likely rate of deviation decreases, the auditor should increase the planned sample size.

c.The allowable risk of assessing control risk too low has no effect on the planned sample size.

d.Of all the factors to be considered, the population size has the greatest effect on the sample size.

Explanation

Choice "a" is correct. There is an inverse relationship between the tolerable deviation rate and sample size: as the auditor is willing to accept a greater deviation rate, a smaller sample size can be used.

Choice "b" is incorrect. There is a direct relationship between expected deviation rate and sample size: as the likely rate of deviation decreases, a smaller sample size can be used.

Choice "c" is incorrect. There is an inverse relationship between the risk of assessing control risk too low and sample size: as the allowable level of risk increases, the sample size decreases.

Choice "d" is incorrect. Population size has a relatively small effect on sample size, especially in large populations.

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Question CPA-05377

Which of the following is true regarding significant deficiencies in internal control?

a.Auditors must search for them.

b.Auditors must communicate them to management and to those charged with governance.

c.They must be included in the financial statements.

d.They must be disclosed in footnotes.

Explanation

Choice "b" is correct. The auditor is required to communicate to management and to those charged with governance (the audit committee) any significant deficiencies in internal control that the auditor observes.

Choice "a" is incorrect. The auditor is not obligated to search specifically for significant deficiencies in internal control.

Choice "c" is incorrect. Significant deficiencies in internal control are not typically included in the financial statements, as they relate to controls and not to the presentation and disclosure of financial information.

Choice "d" is incorrect. Significant deficiencies in internal control are not typically included in the footnotes to the financial statements, as they relate to controls and not to the presentation and disclosure of financial information.

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Question CPA-05385

Management of Eva Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated a material weakness previously noted in its assessment of internal control, and has hired Henna and Company, CPAs, to attest to the improvements in internal control. Which of the following is true of this engagement?

a.It is required by PCAOB standards.

b.It is only required if Eva Industries elects to have an audit in accordance with PCAOB standards.

c.Eva's management must provide a written report to accompany Henna and Company's report.

d.It is required by generally accepted auditing standards.

Explanation

Choice "c" is correct. Eva's management must provide a written report to accompany Henna and Company's report.

Choices "a" and "d" are incorrect. An engagement to report on whether a previously reported internal control weakness continues to exist is a voluntary engagement, not required by professional standards.

Choice "b" is incorrect. An engagement to report on whether a previously reported internal control weakness continues to exist is a voluntary engagement, not required by professional standards. In addition, as an issuer, Eva must have an audit in accordance with PCAOB standards.

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Question CPA-05387

A control deficiency would be considered a material weakness when the likelihood that potential financial statement misstatements will not be prevented, or detected/corrected, and the magnitude of such misstatements are:

 

Likelihood

Magnitude

a.

Reasonable

Material

b.

Probable

Material

c.

Reasonable

More than inconsequential

d.

Probable

More than inconsequential

Explanation

Choice "a" is correct. A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected/corrected.

Choices "b", "c", and "d" are incorrect, based on the explanation above.

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Question CPA-05388

In an audit of an issuer:

I.Management must assess and report on internal control.

II. The auditor must assess and report on internal control.

a.I only.

b.II only.

c.Either I or II.

d.Both I and II.

Explanation

Choice "d" is correct. It is management's responsibility to assess and report on internal control, but the auditor is also required to assess and report on internal control.

Choices "a", "b", and "c" are incorrect, based on the explanation above.

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Question CPA-05389

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.

a.I and III only.

b.I, II, and III.

c.I and II only.

d.I only.

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.

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Question CPA-05390

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an audit of a nonissuer?

a.The auditor must communicate both significant deficiencies and material weaknesses.

b.The auditor must communicate material weaknesses, but need not disclose significant deficiencies.

c.The auditor must communicate significant deficiencies, but need not separately identify material weaknesses.

d.Neither significant deficiencies nor material weaknesses are required to be communicated.

Explanation

Choice "a" is correct. In an audit of a nonissuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and those charged with governance.

Choice "b" is incorrect. The auditor is required to communicate significant deficiencies.

Choice "c" is incorrect. The auditor's report includes the definition of significant deficiencies and a list of such deficiencies noted, as well as the definition of material weaknesses and a list of such weaknesses noted.

Choice "d" is incorrect. Both significant deficiencies and material weaknesses are required to be communicated to management and those charged with governance.

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Question CPA-05391

Which of the following best describes the responsibility of the auditor with respect to significant deficiencies and material weaknesses in an audit of an issuer?

 

Must be Communicated to Management

Results in an Adverse Opinion on the

 

and the Audit Committee

Effectiveness of Internal Control

a.

Both significant deficiencies and

Both significant deficiencies and

 

material weaknesses

material weaknesses

b.

Both significant deficiencies and

Material weaknesses but not

 

material weaknesses

significant deficiencies

c.

Material weaknesses but not

Both significant deficiencies and

 

significant deficiencies

material weaknesses

d.

Material weaknesses but not

Material weaknesses but not

 

significant deficiencies

significant deficiencies

Explanation

Choice "b" is correct. In an audit of an issuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and the audit committee, but only material weaknesses result in an adverse opinion on the effectiveness of internal control.

Choice "a" is incorrect. In an audit of an issuer, significant deficiencies (that do not rise to the level of being material weaknesses) do not result in an adverse opinion on the effectiveness of internal control.

Choice "c" is incorrect. In an audit of an issuer, both significant deficiencies and material weaknesses must be communicated, in writing, to management and the audit committee. In addition, significant deficiencies (that do not rise to the level of being material weaknesses) do not result in an adverse opinion on the effectiveness of internal control.

Choice "d" is incorrect. In an audit of an issuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and the audit committee.

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Question CPA-05392

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an attest engagement to examine the effectiveness of a nonissuer's internal control?

a.The auditor must communicate both significant deficiencies and material weaknesses.

b.The auditor must communicate material weaknesses, but need not disclose significant deficiencies.

c.The auditor must communicate significant deficiencies, but need not separately identify material weaknesses.

d.Neither significant deficiencies nor material weaknesses are required to be communicated.

Explanation

Choice "a" is correct. In an attest engagement to examine the effectiveness of an entity's internal control, the auditor must communicate both significant deficiencies and material weaknesses to management and those charged with governance.

Choice "b" is incorrect. The auditor is required to communicate significant deficiencies.

Choices "c" and "d" are incorrect. Both significant deficiencies and material weaknesses are required to be communicated to management and those charged with governance.

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Question CPA-05477

An enterprise engaged a CPA to audit its financial statements in accordance with Government Auditing Standards (the Yellow Book) because of the provisions of government grant funding agreements. Under these circumstances, the CPA is required to report on the enterprise's internal controls either in the report on the financial statements or in:

a.The report on the performance audit.

b.The notes to the financial statements.

c.A letter to the government funding agency.

d.A separate report.

Explanation

Choice "d" is correct. The report on the audit of the financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and should either present the results of those tests or refer to a separate report containing that information.

Choice "a" is incorrect. The CPA was engaged to audit financial statements in accordance with the Yellow Book, not to perform a performance audit.

Choice "b" is incorrect. The notes to the financial statements are a management representation and would not be used by the CPA to comply with requirements to either report or opine in conformity with Yellow Book requirements.

Choice "c" is incorrect. Governmental Auditing Standards require that the auditor describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting and present the results of those tests as part of their report or in a separate report, not simply in a letter to the funding agency.

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Question CPA-05485

As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:

a.Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control activity.

b.The auditor believes that the control activity relates to the client's assertions when, in fact, it does not.

c.The auditor believes that the control activity will reduce the extent of substantive testing when, in fact, it will not.

d.Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.

Explanation

Choice "d" is correct. The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control.

Choice "a" is incorrect. The risk of assessing control risk too low is the risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control.

Choice "b" is incorrect. Assessing control risk too high relates to an incorrect evaluation of risk by the auditor, not to whether the control activity relates to the client's assertions.

Choice "c" is incorrect. If the auditor believes that a control activity will reduce the extent of substantive testing when, in fact, it will not, this implies that the control risk based on the auditor's sample was less than the true risk based on the actual operating effectiveness of the control. This would be an example of assessing control risk too low, not too high.

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Question CPA-05496

Which of the following characteristics most likely would be an advantage of using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

a.The selection of negative balances requires no special design considerations.

b.The sampling process can begin before the complete population is available.

c.The auditor need not consider the preliminary judgments about materiality.

d.The sample will result in a smaller sample size if few errors are expected.

Explanation

Choice "a" is correct. Inclusion of negative balances requires special design considerations with PPS sampling, but it does not require special design considerations with classical variables sampling.

Choice "b" is incorrect. All items in the population should have an equal chance to be included in the sample. Therefore, the sampling process should not begin before the complete population is available, regardless of whether classical variables sampling or PPS sampling is used.

Choice "c" is incorrect. When planning a particular sample for a substantive test of details, the auditor should consider preliminary estimates of materiality.

Choice "d" is incorrect. If no errors are expected, PPS sampling generally requires a smaller sample than other methods.

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Question CPA-05497

Which of the following matters is an auditor required to communicate to those charged with governance?

a.Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity's financial reporting process.

b.The auditor's consideration of risk factors in assessing the risk of material misstatement arising from the misappropriation of assets.

c.The results of the auditor's analytical procedures performed in the review stage of the engagement that indicate significant variances from expected amounts.

d.Changes in the auditor's preliminary judgment about materiality that were caused by projecting the results of statistical sampling for tests of transactions.

Explanation

Choice "a" is correct. The auditor is required to communicate significant audit findings to those charged with governance. Significant audit findings include material, corrected misstatements brought to management's attention as a result of the audit. Unless all of those charged with governance are also involved with managing the entity, such findings should be communicated by the auditor.

Choice "b" is incorrect. The auditor is not required to communicate with those charged with governance regarding his/her fraud risk assessment.

Choice "c" is incorrect. The auditor is not required to communicate with those charged with governance regarding the results of specific audit procedures.

Choice "d" is incorrect. The auditor is not required to communicate with those charged with governance regarding changes to his/her preliminary judgment about materiality.

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Question CPA-05498

For which of the following audit tests would a CPA most likely use attribute sampling?

a.Identifying entries posted to incorrect accounts.

b.Estimating the amount in an expense account.

c.Evaluating the reasonableness of depreciation expense.

d.Selecting receivables for confirmation of account balances.

Explanation

Choice "a" is correct. Attribute sampling is used to estimate a rate of occurrence, and often involves a yes-no question. Attribute sampling could be used to determine the error rate in posting journal entries, perhaps by asking, "Is the entry posted to the proper account?"

Choice "b" is incorrect. Variables sampling is typically used to estimate a numerical quantity, such as the amount in an expense account.

Choice "c" is incorrect. Variables sampling is typically used to estimate a numerical quantity, such as a reasonable amount for depreciation expense.

Choice "d" is incorrect. Attribute sampling is used to estimate a rate of occurrence, not to select the items to include in a sample.

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Question CPA-05509

Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to:

a.Provide positive assurance that control activities regarding segregation of duties are consistent with the entity's control objectives.

b.Present the results of the auditor's tests of controls.

c.Provide negative assurance that the auditor discovered no evidence of intentional override of internal controls.

d.Describe the scope of the auditor's principal substantive tests.

Explanation

Choice "b" is correct. The report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and present the results of those tests.

Choice "a" is incorrect. The auditor's report on internal controls indicates whether or not material weaknesses were found, but it does not provide assurance that specific internal control activities are consistent with the entity's objectives.

Choice "c" is incorrect. The auditor is not required to provide negative assurance regarding the override of internal control, although the audit report will provide negative assurances regarding internal control over financial reporting and its operations that may involve a material weakness.

Choice "d" is incorrect. There is no requirement that the auditor describe the scope of substantive tests. However, under Government Auditing Standards, the report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting.

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Question CPA-05604

In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor's consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality is:

a.Calculated in relation to the financial statements taken as a whole.

b.Determined separately for each major federal financial assistance program.

c.Decided in conjunction with the auditor's risk assessment.

d.Ignored, because all account balances, regardless of size, are fully tested.

Explanation

Choice "b" is correct. Under the Single Audit Act, materiality is determined separately for each major federal financial assistance program.

Choice "a" is incorrect. Under a GAAS audit, materiality is determined in relation to the financial statements taken as a whole. Under a GAGAS audit, materiality levels may be lower due to the public accountability of the entity, the various legal requirements, and the visibility and sensitivity of governmental programs, activities, and functions.

Choice "c" is incorrect. Materiality must be determined before risk is assessed.

Choice "d" is incorrect. The Single Audit Act does not require that all balances be tested.

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Question CPA-05612

Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true?

a.Jackson is not required to audit internal control, but should report any significant deficiencies or material weaknesses noted.

b.Saffer is required to obtain an audit of its internal control, but a professional other than Jackson may be hired for this purpose.

c.Jackson is required to audit and report on Saffer’s internal control.

d.If Jackson provides an adverse opinion on the financial statements, an audit of Saffer’s internal control is not permitted.

Explanation

Choice "c" is correct. PCAOB Auditing Standard No. 5 requires Jackson to perform an integrated audit, auditing both the financial statements and management's assessment of the effectiveness of internal control.

Choice "a" is incorrect. Jackson is required to perform an integrated audit, which includes an audit of internal control.

Choice "b" is incorrect. PCAOB Auditing Standard No. 5 requires Saffer to have an audit of internal control. Because the objectives and the work involved in an audit of internal control and in a financial statement audit are so closely related, the two audits must be performed together. Each of these two audits provides information that is relevant to the other.

Choice "d" is incorrect. An audit of internal control is required, regardless of the type of opinion rendered on the financial statements.

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Question CPA-05613

Which of the following best describes an auditor’s responsibility with respect to communicating internal control deficiencies of issuers?

a.The auditor is required to communicate all deficiencies in internal control to management, deficiencies that constitute a significant deficiency to the audit committee, and deficiencies that constitute a material weakness to the full board of directors.

b.The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee.

c.The auditor is not required to communicate control deficiencies to management or the audit committee unless they constitute a significant deficiency or a material weakness.

d.The auditor is not required to communicate control deficiencies or significant deficiencies to management or the audit committee, but must communicate material weaknesses to both management and the audit committee.

Explanation

Choice "b" is correct. The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee.

Choice "a" is incorrect. There is no requirement that material weaknesses be communicated to the full board of directors.

Choice "c" is incorrect. The auditor is required to communicate all deficiencies in internal control to management.

Choice "d" is incorrect. The auditor is also required to communicate significant deficiencies to management and the audit committee.

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Question CPA-05614

In which case might an auditor of an issuer render a qualified opinion on internal control?

a.When there is a scope limitation.

b.When there is a material weakness in internal control.

c.Both "a" and "b".

d.Neither "a" nor "b".

Explanation

Choice "d" is correct. A scope limitation requires the auditor to disclaim an opinion or withdraw from the engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion. Neither situation would result in a qualified opinion.

Choice "a" is incorrect. A scope limitation requires the auditor to disclaim an opinion or withdraw from the engagement.

Choice "b" is incorrect. A material weakness in internal control requires the auditor to issue an adverse opinion.

Choice "c" is incorrect. A scope limitation requires the auditor to disclaim an opinion or withdraw from the engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion. Neither situation would result in a qualified opinion.

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Question CPA-05615

Gail is auditing the financial statements of Hoefener Home Improvements, a publicly held company. Gail notes several deficiencies in internal control, and is trying to determine whether each deficiency constitutes a significant deficiency or a material weakness. Which best describes the framework Gail should use in making this evaluation?

a.A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement.

b.A significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is more than a remote chance of a material misstatement.

c.A significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is a reasonable possibility of material misstatement.

d.A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is more than a remote chance of a material misstatement.

Explanation

Choice "a" is correct. A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement.

Choice "b" is incorrect. A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement.

Choice "c" is incorrect. A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting.

Choice "d" is incorrect. A material weakness exists when there is a reasonable possibility of material misstatement.

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Question CPA-05701

In obtaining written representations from management, materiality limits ordinarily would apply to representations related to:

a.Amounts concerning related party transactions.

b.Irregularities involving members of management.

c.The availability of financial records.

d.The completeness of minutes of directors' meetings.

Explanation

Choice "a" is correct. Representations may be limited to items that management and the auditor agree are material, such as amounts concerning related party transactions. Materiality considerations do not apply to items not directly related to financial statement amounts (e.g., all minutes and all financial records should be made available to the auditor).

Choice "b" is incorrect. Irregularities involving management are considered significant regardless of dollar amount.

Choices "c" and "d" are incorrect. Materiality considerations do not apply to items not directly related to financial statement amounts (e.g., all minutes and all financial records should be made available to the auditor).

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Question CPA-05702

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate. The most likely explanation for this situation is that:

a.The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.

b.The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.

c.The deviation rates of both the auditor's sample and the population exceed the tolerable rate.

d.The deviation rates of both the auditor's sample and the population are less than the tolerable rate.

Explanation

Choice "b" is correct. If the deviation rate in the auditor's sample is higher than the tolerable rate, the auditor will assess control risk as unacceptably high. If it turns out that the deviation rate in the population is less than the tolerable rate, the auditor will have made an improper decision by assessing control risk higher than appropriate.

Choice "a" is incorrect. If the deviation rate in the auditor's sample is less than the tolerable rate, the auditor will assess control risk as acceptably low. If it turns out that the deviation rate in the population exceeds the tolerable rate, the auditor will have made an improper decision by assessing control risk lower than appropriate.

Choice "c" is incorrect. When both the deviation rate in the auditor's sample and the deviation rate in the population exceed the tolerable rate, there will be no sampling error and the auditor will assess risk properly.

Choice "d" is incorrect. When both the deviation rate in the auditor's sample and the deviation rate in the population are less than the tolerable rate, there will be no sampling error and the auditor will assess risk properly.

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Question CPA-05724

Which of the following is the primary objective of probability proportional to sample size?

a.To identify overstatement errors.

b.To increase the proportion of smaller-value items in the sample.

c.To identify items where controls were not properly applied.

d.To identify zero and negative balances.

Explanation

Choice "a" is correct. PPS sampling is a method designed to estimate overstatement errors. Zero balances, negative balances, and understated balances require special design considerations.

Choice "b" is incorrect. PPS sampling emphasizes larger items, which are more likely to be selected for the sample.

Choice "c" is incorrect. PPS sampling is a technique used to estimate a dollar amount of error in a population. It does not identify items where controls were lacking.

Choice "d" is incorrect. PPS sampling does not identify zero and negative balances; however, if such balances exist in the population, special design considerations are required in order to use PPS sampling.

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Question CPA-05732

In attribute sampling, a 25% change in which of the following factors will have the smallest effect on the size of the sample?

a.Tolerable rate of deviation.

b.Number of items in the population.

c.Degree of assurance desired.

d.Planned assessed level of control risk.

Explanation

Choice "b" is correct. As long as the population is large enough, population size has virtually no impact on sample size.

Choice "a" is incorrect. The tolerable rate of deviation does affect sample size. As the auditor is willing to accept a greater deviation rate, a smaller sample size can be used.

Choice "c" is incorrect. The degree of assurance required does affect sample size. As the auditor desires greater assurance from the sample, a larger sample size should be used.

Choice "d" is incorrect. The planned assessed level of control risk is related to the expected deviation rate (a low expected deviation rate corresponds to a low planned assessed level of control risk). Therefore, changes to this assessment do affect sample size.

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Question CPA-05755

Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure?

a.Make inquiries to understand the potential consequence of the deviation.

b.Assume that the deviation is an isolated occurrence without audit significance.

c.Report the matter to the next higher level of authority within the entity.

d.Increase sample size of tests of controls.

Explanation

Choice "a" is correct. In response to discovering a deviation from a prescribed control procedure, the auditor should make inquiries to understand the potential consequence of the deviation.

Choice "b" is incorrect. The auditor should not simply assume that a deviation is an isolated occurrence without audit significance.

Choice "c" is incorrect. There is no requirement that the auditor report all deviations to the next higher level of authority within the entity. Note that a single deviation does not necessarily represent a control deficiency.

Choice "d" is incorrect. The auditor would not increase the sample size in tests of controls just because he or she discovers a single deviation. Instead, the auditor would estimate the population deviation rate based on the number of deviations in the sample.

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Question CPA-05812

Which of the following would be a consideration in planning an auditor's sample for a test of controls?

a.Preliminary judgments about materiality levels.

b.The auditor's allowable risk of assessing control risk too high.

c.The level of detection risk for the account.

d.The auditor's allowable risk of assessing control risk too low.

Explanation

Choice "d" is correct. The auditor’s allowable risk of assessing control risk too low has an inverse relationship with sample size when planning a sample for a test of controls.

Choice "a" is incorrect. Preliminary judgments about materiality levels might be a consideration in planning an auditor’s sample for a substantive test, but not for a test of controls.

Choice "b" is incorrect. The auditor’s allowable risk of assessing control risk too high is not a factor when planning a sample for a test of controls.

Choice "c" is incorrect. The auditor’s desired level of detection risk might be a consideration in planning an auditor’s sample for a substantive test, but not for a test of controls.

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Question CPA-06030

According to the Statement on Auditing Standards No. 117, Compliance Audits, a compliance audit is based on management's assumption of responsibility for all of the following except:

a.Identification of the government's programs and understanding and fulfilling compliance requirements.

b.Maintaining effective controls that provide absolute assurance that the entity administers programs in compliance with related requirements.

c.Ongoing evaluation and monitoring of the entity's compliance with program requirements.

d.Taking appropriate corrective actions on audit findings.

Explanation

Choice "b" is correct. Management takes responsibility for providing reasonable, not absolute, assurance that programs are operated in compliance with requirements.

Choice "a" is incorrect. Management is presumed to take responsibility for identifying programs and understanding and complying with requirements.

Choice "c" is incorrect. Entity compliance with compliance requirements is presumed to be evaluated and monitored by management on an ongoing basis.

Choice "d" is incorrect. Management's proactive efforts to timely and effectively address compliance findings in audits is presumed.

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Question CPA-06031

In its tests of controls over the Tarbet Township Housing Assistance Program, Black, CPA, has found that the clerk assigned to monitor and limit participation in the housing program to a target population of individuals meeting income criteria is routinely overruled by his supervisor in order to meet volume based level of effort requirements. Ineligible participants whose income exceeds program limits are routinely admitted to the program. Black would characterize this as a(n):

a.Deficiency in the design of internal control.

b.Deficiency in the operation of internal control.

c.Audit risk of noncompliance.

d.Inherent risk of noncompliance.

Explanation

Choice "b" is correct. Deficiency in operation exists when a properly designed control is either not executed as designed or the person performing the control does not have either the authority or the skill to perform the control. In this case, the clerk did not have the necessary authority to follow through on the control.

Choice "a" is incorrect. Deficiency in design exists when noncompliance occurs even when the control operates as designed. The control contemplates a clerical determination of income eligibility (which occurs). If the control were not overridden, it would be effective.

Choice "c" is incorrect. Audit risk of noncompliance is a planning concept that represents the risk the auditor might express an inappropriate audit opinion on the entity's compliance when material noncompliance exists. Findings associated with tests of controls would not be characterized as audit risk of noncompliance.

Choice "d" is incorrect. Inherent risk of noncompliance is the susceptibility of a requirement to noncompliance and is a component of the risk of material noncompliance. It exists prior to the audit and would not be a characterization that would be applied to the results of tests of controls.

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Question CPA-06032

Management's written representation to the auditor in connection with a governmental audit would most likely include:

a.A statement that management had identified and disclosed all material government programs to the auditor.

b.Representation that all known noncompliance had been reported or negative assurance that other noncompliance likely does not exist.

c.Negative assurance that the government has complied with compliance requirements.

d.Identification of management's interpretation of compliance requirements that are subject to different interpretations.

Explanation

Choice "d" is correct. The management letter will include identification of management's interpretation of compliance requirements that are subject to different interpretations.

Choice "a" is incorrect. The representation letter should include a statement that management has disclosed all governmental programs to the auditor.

Choice "b" is incorrect. Management will assert that they have disclosed all known noncompliance or state that there was no such noncompliance.

Choice "c" is incorrect. The representation letter should include a statement that management believes that the entity has complied with compliance requirements, not negative assurance.

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Question CPA-06033

A report on compliance would include:

a.A disclaimer of opinion on compliance.

b.An opinion on whether the entity complied, in all material respects, with the applicable compliance requirements.

c.A representation that findings that do not result in any report modification are not otherwise disclosed.

d.A statement that generally accepted auditing standards includes all governmental audit standards by reference.

Explanation

Choice "b" is correct. The auditor will express an opinion at the level specified by the governmental audit requirement.

Choice "a" is incorrect. The auditor will express an opinion at the level specified by the governmental audit requirement.

Choice "c" is incorrect. Findings that do not impact the opinion are displayed in the report or referenced to a separate report.

Choice "d" is incorrect. The report should state that the audit was conducted in compliance with GAAS, GAGAS (Yellow Book), and any other specific governmental audit requirement.

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Question CPA-06034

A report on internal control over compliance will include which of the following assertions?

a.A disclaimer of opinion on internal control over compliance.

b.An opinion as to whether internal controls were adequate to provide reasonable assurance that the organization would comply, in all material respects, with laws rules and regulations.

c.Identification of material weakness in the event an adverse opinion is expressed.

d.Disclaimer of opinion in the event that significant weaknesses are identified.

Explanation

Choice "a" is correct. The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.

Choice "b" is incorrect. The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.

Choice "c" is incorrect. Material weaknesses are identified as part of the report on internal control over compliance. No opinion on internal control over compliance (unqualified or adverse) is expressed.

Choice "d" is incorrect. The report disclaims an opinion on the effectiveness of internal control over compliance regardless of the status of reported weaknesses. Significant weaknesses are disclosed or referenced in a separate report.

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Question CPA-06035

Compliance audit workpapers will include all of the following documentation except:

a.Risk assessment procedures performed including those related to gaining an understanding of the internal control over compliance.

b.Responses to the assessed risk of noncompliance including tests of compliance and tests of controls

c.Materiality levels.

d.Final basis for the opinion on the effectiveness of internal control over compliance.

Explanation

Choice "d" is correct. The auditor will not express an opinion on the effectiveness of internal control over compliance. Documentation of conclusions for an opinion would not be appropriate.

Choice "a" is incorrect. Documentation should include the risk assessment over internal control over compliance.

Choice "b" is incorrect. Responses to control assessments including both tests and test results should be documented.

Choice "c" is incorrect. Materiality levels should be documented.

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Question CPA-06036

The auditors' purpose in establishing materiality levels in a compliance audit includes all of the following except:

a.Determining the nature and extent of risk assessment procedures.

b.Determining the nature, timing and extent of additional audit procedures.

c.Evaluate whether the entity has complied with applicable requirements.

d.Establishing the basis for the opinion on effectiveness of internal control over compliance.

Explanation

Choice "d" is correct. The auditor does not express an opinion on the effectiveness of internal control over compliance. Materiality limits would not contribute to that nonexistent objective.

Choice "a" is incorrect. Materiality limits are used in conjunction with planning risk assessment procedures. Choice "b" is incorrect. Materiality limits are used to plan audit timing, procedures and volume of testing. Choice "c" is incorrect. Materiality is significant in allowing the auditor to formulate an opinion on compliance.

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Question CPA-06037

The auditor's objectives in a compliance audit of a governmental entity includes:

a.Forming an opinion on whether the government complied in all material respects with applicable compliance requirements.

b.Providing negative assurance regarding a legal determination of compliance.

c.Limiting auditing procedures and audit exposure to the standards described by GAAS and GAGAS.

d.Minimizing control risk of noncompliance.

Explanation

Choice "a" is correct. An objective of a compliance audit of a governmental entity is to form an opinion on whether that government complied with applicable compliance requirements in all material respects, and then to report at the level specified by the governmental audit requirement.

Choice "b" is incorrect. The auditor specifically reports that the audit does not provide a legal determination of compliance with requirements.

Choice "c" is incorrect. The auditor is to identify audit and reporting requirements (e.g., Single Audit/OMB Circular A-133 requirements) supplementary to GAAS and GAGAS and perform procedures to address those requirements.

Choice "d" is incorrect. The auditor cannot minimize control risk. Control risk cannot be influenced by the auditor.

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Question CPA-06038

Detection risk of noncompliance is inversely related to:

a.Audit risk of noncompliance.

b.Risk of material noncompliance.

c.Inherent risk of noncompliance.

d.Control risk of noncompliance.

Explanation

Choice "b" is correct. As risk of material noncompliance increases, detection risk of noncompliance should decrease to reach a desired level of overall audit risk of noncompliance. This concept is identical to the relationship between risk of material misstatement and detection risk.

Choice "a" is incorrect. Audit risk of noncompliance, like audit risk in financial audits, is the product of risk of material noncompliance and detection risk.

Choices "c" and "d" are incorrect. Both inherent and control risk are components of risk of material noncompliance.

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Question CPA-06690

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

a.Preliminary judgments about materiality levels.

b.The amount of bad debt write-offs in the prior year.

c.The size of the intercompany receivable balance.

d.The auditor's allowable risk of assessing control risk is too low.

Explanation

Choice "a" is correct. When planning a sample for a test of subsequent cash receipts, the auditor should consider preliminary judgments about materiality levels.

Choice "b" is incorrect. The amount of bad debt write-offs in the prior year is not a consideration in planning for a sample for a test of subsequent cash receipts. A test of subsequent cash receipts is performed to assess the valuation of customer/trade accounts receivable.

Choice "c" is incorrect. The size of the intercompany accounts receivable balance is not a consideration in planning a sample for a test of subsequent cash receipts. Intercompany accounts receivable are eliminated upon consolidation and do not impact the valuation of accounts receivable.

Choice "d" is incorrect. The auditor's allowable risk of assessing control risk too low relates to tests of controls and is not a consideration in planning for a sample for a test of subsequent cash receipts. A test of subsequent cash receipts is a substantive test of details.

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Question CPA-06695

Which of the following management roles would typically be acknowledged in a management representation letter?

a.Management has the responsibility for the design of controls to detect fraud.

b.Management communicates its views on ethical behavior to its employees.

c.Management's knowledge of fraud is communicated to the audit committee.

d.Management's compensation is contingent upon operating results.

Explanation

Choice "a" is correct. Management acknowledges its responsibility for the design of controls to detect and prevent fraud in its management representation letter.

Choice "b" is incorrect. The auditor should inquire of management how it communicates its views on ethical behavior to employees as part of obtaining an understanding of the design of the entity's internal control. This matter is not typically included in the management representation letter.

Choice "c" is incorrect. The management representation letter is concerned with representations made by management to the auditors, not representations made by management to the audit committee.

Choice "d" is incorrect. This would not be communicated in a management letter. This is a risk factor associated with fraudulent financial reporting.

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Question CPA-06705

Which of the following is correct about reporting on compliance with laws and regulations in a financial audit under Government Auditing Standards (the Yellow Book)?

a.Auditors are not required to report fraud, illegal acts, and other material noncompliance in the audit report.

b.In some circumstances, auditors are required to report fraud and illegal acts directly to parties external to the audited entity.

c.The auditor's key findings of the audit of the financial statements should be communicated in a separate report.

d.The reporting standards in a governmental audit modify the auditor's responsibilities under generally accepted auditing standards.

Explanation

Choice "b" is correct. In a variety of circumstances, auditors may be required to report directly to an entity external to the audited entity (e.g., the grantor, inspectors general, etc.). Instances that require external reporting might include situations in which management is unwilling to take corrective action with regard to illegal acts, fraud or material non compliance or circumstances in which a specific requirement is imposed by the grantor that requires that any discovery of illegal acts, fraud or material non compliance by the auditor be reported to the grantor or others.

Choice "a" is incorrect. Auditors must report fraud, illegal acts and material non compliance in the audit report.

Choice "c" is incorrect. Although the key findings associated with the audit of governmental financial statements may be communicated in a separate report, the auditor has the latitude to include specific findings and conclusions in the same report.

Choice "d" is incorrect. The reporting standard under GAGAS augment the standards associated with reports on audited financial statements in several ways including a requirement that the auditor specifically mention adherence to GAGAS. These standards do not, however, change or modify GAAS reporting responsibilities.

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Question CPA-06709

How does Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non- profit Organizations, define a subrecipient?

a.As a nonfederal entity that provides a federal award to another entity to carry out a federal program.

b.As an individual who receives and expends federal awards received from a pass-through entity.

c.As a dealer, distributor, merchant, or other seller providing goods or services that are required for the conduct of a federal program.

d.As a nonfederal entity that expends federal awards received from another entity to carry out a federal program.

Explanation

Choice "d" is correct. A nonfederal entity that expends federal financial assistance administered by another entity is a sub recipient. For example, a state might receive federal funds and in turn provides those funds to a not-for-profit organization to accomplish an objective (e.g., mental health care, homeless relief, etc.). The not-for-profit organization would be the sub recipient.

Choice "a" is incorrect. A nonfederal entity that receives a grant award and, in turn, contracts or provides that award to another entity to carry out the program would be a recipient. For example, a state might receive federal funds and in turn provides those funds to a not-for-profit organization to accomplish an objective (e.g., mental health care, homeless relief, etc.). The state would be the grant recipient while the not-for-profit organization would be the sub recipient.

Choice "b" is incorrect. An individual who receives and expends federal awards received from a pass-through entity is a recipient.

Choice "c" is incorrect. A nonfederal entity compensated for goods or services with federal monies is a vendor.

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Question CPA-06723

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?

a.Disagreements regarding management's judgment about accounting estimates for goodwill.

b.Disagreements about the scope of the audit.

c.Disagreements in the application of accounting principles relating to software development costs.

d.Disagreements of the amount of the LIFO inventory layer based on preliminary information.

Explanation

Choice "d" is correct. Disagreements based upon preliminary information need not be communicated by the auditor to those charged with governance.

Choice "a" is incorrect. Disagreements with management regarding the application of accounting principles have to be communicated by the auditor to those charged with governance.

Choice "b" is incorrect. Disagreements about the scope of the audit have to be communicated by the auditor to those charged with governance.

Choice "c" is incorrect. Disagreements in the application of accounting principles relating to software- development costs must be communicated by the auditor to those charged with governance.

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