Certified Public Accountant (CPA) Audit 5 — Questions and Answers
Question 1: Which of the following would most likely be considered a 'material weakness' in internal control over financial reporting?
- A single immaterial error caught by an existing control
- Restatement of financial statements due to a material error in a prior period (Correct answer)
- A minor delay in bank reconciliation preparation
- Use of manual rather than automated controls in one department
Correct answer: Restatement of financial statements due to a material error in a prior period
A restatement of financial statements for a prior-period material error is a strong indicator of a material weakness in ICFR under PCAOB AS 2201.
Question 2: According to the AICPA Code of Professional Conduct, the concept of 'objectivity' requires a CPA to:
- Maintain physical distance from all client employees
- Be free from conflicts of interest and not subordinate professional judgment to others (Correct answer)
- Refuse all non-audit services for audit clients
- Avoid expressing any opinions on client matters
Correct answer: Be free from conflicts of interest and not subordinate professional judgment to others
Objectivity requires CPAs to be impartial, intellectually honest, and free from conflicts of interest that could compromise their professional judgment.
Question 3: When testing internal controls over cash disbursements, which procedure provides the best evidence that payments were made only for authorized goods and services received?
- Footing the cash disbursements journal
- Vouching cancelled checks to approved purchase orders and receiving reports (Correct answer)
- Confirming bank balances with the financial institution
- Recalculating discounts taken on vendor invoices
Correct answer: Vouching cancelled checks to approved purchase orders and receiving reports
Vouching cancelled checks to supporting documents (POs and receiving reports) tests whether disbursements were authorized and goods were actually received.
Question 4: The auditor's report date is significant because it represents the date through which the auditor:
- Guarantees the accuracy of all financial data
- Has searched for and evaluated all subsequent events (Correct answer)
- Assumes responsibility for updating the report indefinitely
- Certifies that no fraud has occurred
Correct answer: Has searched for and evaluated all subsequent events
The report date indicates the last date through which the auditor has evaluated subsequent events and obtained sufficient appropriate audit evidence.
Question 5: An auditor is performing a compilation engagement. The accountant discovers that the financial statements are not in conformity with GAAP and management refuses to revise them. The accountant should:
- Issue a disclaimer of opinion
- Issue an adverse opinion
- Withdraw from the engagement or disclose the GAAP departure in the compilation report (Correct answer)
- Report the matter to the client's board of directors
Correct answer: Withdraw from the engagement or disclose the GAAP departure in the compilation report
Under SSARS, if management will not correct a GAAP departure, the accountant should either disclose the departure and its effects in the compilation report or withdraw.
Question 6: Which of the following best describes the auditor's responsibility for detecting illegal acts that have an indirect effect on the financial statements?
- The auditor must design procedures specifically to detect all indirect illegal acts
- The auditor has no responsibility for detecting indirect illegal acts
- The auditor should be aware of the possibility but is not required to design specific procedures to detect them (Correct answer)
- The auditor must report all suspected illegal acts to law enforcement
Correct answer: The auditor should be aware of the possibility but is not required to design specific procedures to detect them
AU-C 250 distinguishes between direct-effect illegal acts (auditor must consider) and indirect-effect illegal acts (auditor should be aware but no specific detection procedures required).
Question 7: In attestation engagements, a 'responsible party' refers to:
- The CPA firm issuing the attestation report
- The party responsible for the subject matter or its assertion (Correct answer)
- The users who rely on the attestation report
- The regulator that oversees the engagement
Correct answer: The party responsible for the subject matter or its assertion
In attestation standards, the responsible party is the person or entity responsible for the subject matter being reported on or for asserting about that subject matter.
Certified Public Accountant (CPA) Audit 5
Which of the following would most likely be considered a 'material weakness' in internal control over financial reporting?