AICPA Auditing and Attestation 3 — Questions and Answers
Question 1: Which condition must exist for an auditor to issue a going concern explanatory paragraph in an otherwise unmodified opinion?
- Any net loss reported during the year
- Substantial doubt about the entity's ability to continue as a going concern (Correct answer)
- A debt-to-equity ratio exceeding 2:1
- Management's refusal to provide written representations
Correct answer: Substantial doubt about the entity's ability to continue as a going concern
Under AU-C 570, if substantial doubt about going concern exists after considering management's plans, the auditor adds an explanatory paragraph to the audit report.
Question 2: What is the primary purpose of a management representation letter?
- To transfer legal liability for misstatements from the auditor to management
- To obtain written confirmation of management's oral representations and acknowledge their responsibilities (Correct answer)
- To document the auditor's understanding of internal controls
- To replace substantive audit procedures for immaterial items
Correct answer: To obtain written confirmation of management's oral representations and acknowledge their responsibilities
The management representation letter confirms oral statements made during the audit and reminds management of their responsibility for the financial statements and disclosures.
Question 3: Under attestation standards, a practitioner performing a review of prospective financial statements should issue a:
- Standard audit report with a going concern paragraph
- Report expressing limited assurance that no material modifications are needed (Correct answer)
- Compilation report with a disclaimer of opinion
- Report expressing positive assurance on the reasonableness of assumptions
Correct answer: Report expressing limited assurance that no material modifications are needed
A review of prospective financial statements provides limited (negative) assurance, concluding that nothing came to the practitioner's attention indicating the statements are not presented in conformity with AICPA guidelines.
Question 4: Attribute sampling is most commonly used by auditors to:
- Estimate the dollar amount of errors in a population
- Test the operating effectiveness of internal controls (Correct answer)
- Select items for physical inventory observation
- Determine the appropriate materiality threshold
Correct answer: Test the operating effectiveness of internal controls
Attribute sampling estimates the rate of deviation (exception rate) in a population to test whether controls are operating effectively.
Question 5: Which of the following best describes 'significant deficiency' in internal control?
- A deficiency that is inconsequential and does not require reporting
- A deficiency less severe than a material weakness but important enough to merit attention by those charged with governance (Correct answer)
- A deficiency that results in a material misstatement of the financial statements
- Any internal control weakness identified during the audit
Correct answer: A deficiency less severe than a material weakness but important enough to merit attention by those charged with governance
A significant deficiency is less severe than a material weakness but significant enough that those charged with governance should be informed.
Question 6: An auditor uses the work of a specialist to value a unique piece of artwork owned by the client. If the specialist's findings are used as audit evidence, the auditor:
- May reduce audit risk to zero for that valuation
- Still retains full responsibility for the audit opinion (Correct answer)
- Must disclose the specialist's name in the audit report
- Is relieved of responsibility for that portion of the audit
Correct answer: Still retains full responsibility for the audit opinion
Using a specialist's work does not reduce the auditor's responsibility for the audit opinion; the auditor must evaluate the specialist's competence, objectivity, and work product.
Question 7: When auditing related-party transactions, the primary auditor concern is that these transactions are:
- Eliminated in consolidation if material
- Disclosed and not recorded at arm's-length terms without disclosure (Correct answer)
- Conducted more frequently than industry norms
- Approved by the board's audit committee
Correct answer: Disclosed and not recorded at arm's-length terms without disclosure
Related-party transactions may not occur at arm's length and require specific disclosure; the auditor must determine if transactions are properly identified, authorized, and disclosed.
AICPA Auditing and Attestation 3
Which condition must exist for an auditor to issue a going concern explanatory paragraph in an otherwise unmodified opinion?