2012 AICPA Newly Released Questions – Auditing
Following are multiple choice questions recently released by the AICPA. These
questions were released by the AICPA with letter answers only. Our editorial board has
provided the accompanying explanation.
Please note that the AICPA generally releases questions that it does NOT intend to use
again. These questions and content may or may not be representative of questions you
may see on any upcoming exams.
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2012 AICPA Newly Released Questions – Auditing
1.
Which of the following audit procedures most likely would assist an auditor in identifying conditions and
events that may indicate there could be substantial doubt about an entity's ability to continue as a going
concern?
a.
b.
c.
d.
Confirmation of accounts receivable from principal customers.
Reconciliation of interest expense with debt outstanding.
Confirmation of bank balances.
Review of compliance with terms of debt agreements.
Solution:
Choice "d" is correct. By reviewing the debt agreements, the auditor may discover that the entity is near
or in noncompliance with specific debt (financial) covenants. This may cast doubt on whether the entity
will be able to continue as a going concern.
Choice "a" is incorrect. This procedure would not provide information on whether the entity has a going
concern issue but instead could detect errors in financial reporting by the entity.
Choice "b" is incorrect. The mere reconciliation of interest expense to the debt outstanding would not
provide information regarding the entity's ability to function as a going concern.
Choice "c" is incorrect. Confirming bank balances could detect reporting errors but would not be a
procedure to ascertain whether the entity has a going concern issue.
2
2012 AICPA Newly Released Questions – Auditing
2.
A principal auditor decides not to refer to the audit of another CPA who audited a subsidiary of the
principal auditor's client. After making inquiries about the other CPA's professional reputation and
independence, the principal auditor most likely would:
a. Document in the engagement letter that the principal auditor assumes no responsibility for the other
CPA's work.
b. Obtain written permission from the other CPA to omit the reference in the principal auditor's report.
c. Contact the other CPA and review the audit programs and working papers pertaining to the
subsidiary.
d. Add an explanatory paragraph to the auditor's report indicating that the subsidiary's financial
statements are not material to the consolidated financial statements.
Solution:
Choice "c" is correct. When the principal auditor accepts responsibility for the work performed by another
auditor, the principal auditor must contact the other CPA and review the audit program and working
papers pertaining to the subsidiary.
Choice "a" is incorrect. When a principal auditor decides not to reference another CPA who worked on
the audit of a subsidiary, the principal auditor has assumed responsibility for the work performed by the
other auditor.
Choice "b" is incorrect. Permission does not need to be obtained to assume responsibility for the work of
the other CPA.
Choice "d" is incorrect. When the principal auditor assumes responsibility for the work of another auditor,
no reference to the other auditor or to the subsidiary's financial statements is made in the auditor's report.
3
2012 AICPA Newly Released Questions – Auditing
3.
An auditor should consider which of the following when evaluating the ability of a company to continue as
a going concern?
a.
b.
c.
d.
Audit fees.
Future assurance services.
Management's plans for disposal of assets.
A lawsuit for which judgment is not anticipated for 18 months.
Solution:
Choice "c" is correct. The nature of management's plan to sell or liquidate assets could provide valuable
information to the auditor regarding whether or not the entity can continue to function as a going concern.
Choice "a" is incorrect. Audit fees have no bearing on a client's going concern issue.
Choice "b" is incorrect. This item would not be directly relevant when determining if there is a going
concern issue.
Choice "d" is incorrect. The future outcome of a pending lawsuit that is more than one year away is a
contingency that would not have a significant impact on a going concern issue for a current audit. Under
U.S. GAAP, the going concern period is one year.
4
2012 AICPA Newly Released Questions – Auditing
4.
In which of the following should an auditor's report refer to the lack of consistency when there is a change
in accounting principle that is significant?
a.
b.
c.
d.
The scope paragraph.
The opinion paragraph.
An explanatory paragraph following the opinion paragraph.
An explanatory paragraph before the opinion paragraph.
Solution:
Choice "c" is correct. A justified lack of consistency caused by a material change in GAAP between
periods would be reported in an explanatory paragraph after the opinion paragraph. Under these
circumstances, the auditor issues a modified unqualified opinion.
Choices "a", "b", and "d" are incorrect. The proper treatment of a justified lack of consistency is to add an
explanatory paragraph after the opinion paragraph.
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2012 AICPA Newly Released Questions – Auditing
5.
In which of the following paragraphs of an auditor's report does an auditor communicate the nature of the
engagement and the specific financial statements covered by the audit?
a.
b.
c.
d.
Scope paragraph.
Opinion paragraph.
Introductory paragraph.
Explanatory paragraph.
Solution:
Choice "c" is correct. The introductory paragraph indicates the nature of the engagement (i.e., audit), the
financial statements covered in the (audit) engagement, and the responsibilities of management and the
auditor regarding the financial statements.
Choice "a" is incorrect. The scope paragraph includes the following statements: audit prepared in
accordance with GAAS; audit was planned and performed to obtain reasonable assurance that the
financial statements are free from material misstatements; audit included examining evidence on a test
basis, assessing the accounting principles used and management estimates; and, that the audit provides
a reasonable basis for opinion.
Choice "b" is incorrect. The opinion paragraph refers to the financial statements identified in the
introductory paragraph, an opinion on the fair presentation of the financial statements, and a statement
regarding their conformity with U.S. GAAP.
Choice "d" is incorrect. This information is included in the introductory paragraph and not in an
explanatory paragraph.
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2012 AICPA Newly Released Questions – Auditing
6.
Zag Co. issues financial statements that present financial position and results of operations but Zag omits
the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial
statements without the statement of cash flows although Brown's access to all of the information
underlying the basic financial statements will not be limited. Under these circumstances, Brown most
likely would:
a. Add an explanatory paragraph to the standard auditor's report that justifies the reason for the
omission.
b. Refuse to accept the engagement as proposed because of the client-imposed scope limitation.
c. Explain to Zag that the omission requires a qualification of the auditor's opinion.
d. Prepare the statement of cash flows as an accommodation to Zag and express an unqualified
opinion.
Solution:
Choice "c" is correct. The auditor would explain to the client that in order for the entity's financial
statements to be in conformity with GAAP, there must be adequate disclosures of all material matters
including all financial statements and the supporting footnotes. As a result, the auditor would tell Zag that
without adequate disclosure of the entity's cash flows, the audit report would have issued a qualified or
adverse audit opinion.
Choice "a" is incorrect. Missing the statements of cash flows would not result in an unqualified opinion
with an additional explanatory paragraph because no statement of cash flows is a material departure from
GAAP.
Choice "b" is incorrect. The auditor is not required to refuse to accept the engagement, but the client
should be made aware that the missing statement of cash flows will result in a qualified or adverse
opinion.
Choice "d" is incorrect. The responsibility to prepare the statement of cash flows is solely the client's.
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2012 AICPA Newly Released Questions – Auditing
7.
An auditor is engaged to report on selected financial data that are included in a client-prepared document
containing audited financial statements. Under these circumstances, the report on the selected data
should:
a.
b.
c.
d.
State that the presentation is a comprehensive basis of accounting other than GAAP.
Restrict the use of the report to those specified users within the entity.
Be limited to data derived from the entity's audited financial statements.
Indicate that the data are subject to prospective results that may not be achieved.
Solution:
Choice "c" is correct. When the audit engagement includes reporting on selected financial data, the
report prepared by the auditor should be limited to the data that was obtained from the financial
statements.
Choice "a" is incorrect. The presentation of selected financial data is not based on a comprehensive
basis of accounting other than GAAP.
Choice "b" is incorrect. The report is not required to be restricted to specific individuals within the
organization.
Choice "d" is incorrect. The presentation of selected financial data is not a form of prospective financial
statement.
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2012 AICPA Newly Released Questions – Auditing
8.
A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the
following reporting options does an auditor have if the amounts pervasively distort the financial
statements?
a.
b.
c.
d.
Qualified opinion.
Unqualified opinion.
Disclaimer opinion.
Adverse opinion.
Solution:
Choice "d" is correct. The scenario above indicates a material departure from GAAP that is neither
necessary nor justified by the client. When a misstatement is both material and pervasive, the auditor
should issue an adverse opinion.
Choice "a" is incorrect. A misstatement that is both material and pervasive is too significant to justify a
qualified opinion.
Choice "b" is incorrect. An unqualified opinion cannot be issued because the financial statements are not
fairly presented in conformity with GAAP.
Choice "c" is incorrect. A disclaimer opinion would not be used by the auditor for the above scenario as
there are no apparent scope limitations to inhibit the auditor from rendering an opinion.
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2012 AICPA Newly Released Questions – Auditing
9.
An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an
unqualified opinion on the current years:
a.
b.
c.
d.
Income statement only.
Statement of cash flows only.
Balance sheet only.
Statement of shareholders' equity only.
Solution:
Choice "c" is correct. If the auditor is unable to form an opinion on a new client's opening inventory
balances, the auditor will issue an opinion on the closing balance sheet only and will issue a disclaimer of
opinion on the statements of income, retained earnings and cash flows.
Choices "a", "b", and "d" are incorrect. The auditor should issue a disclaimer of opinion on these financial
statements if the auditor is unable to form an opinion regarding opening inventory balances.
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2012 AICPA Newly Released Questions – Auditing
10.
An accountant who accepts an engagement to compile a financial projection most likely would make the
client aware that the:
a. Projection may not be included in a document with audited historical financial statements.
b. Accountant's responsibility to update the projection for future events and circumstances is limited to
one year.
c. Projection omits all hypothetical assumptions and presents the most likely future financial position.
d. Engagement does not include an evaluation of the support for the assumptions underlying the
projection.
Solution:
Choice "d" is correct. When an accountant accepts a compilation engagement, he or she should indicate
that it is limited in scope and would not include an opinion or assurance on the projected financial
statements or the related assumptions.
Choice "a" is incorrect. A projection may be included in a document with audited historical financial
statements. The compilation report would also be included with the document to make clear that the
accountant provides no opinion or any other form of assurance.
Choice "b" is incorrect. Updating the projection is the responsibility of company management, not the
accountant. The compilation report specifically states that the accountant has no responsibility to update
the report for events and circumstances occurring after the date of the report.
Choice "c" is incorrect. A projection is based on hypothetical assumptions.
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2012 AICPA Newly Released Questions – Auditing
11.
The inability to complete which of the following activities most likely would prevent an accountant from
accepting and completing an engagement for a review of financial statements performed in accordance
with Statements on Standards for Accounting and Review Services?
a.
b.
c.
d.
Performing tests of details of major account balances.
Performing inquiries and analytical procedures.
Obtaining an understanding of internal control to assess control risk.
Having previous experience in the client's industry.
Solution:
Choice "b" is correct. The requirements of a review completed in accordance with SSARS include the
requirement that inquiries be made to the appropriate individuals and analytical procedures be performed.
Choice "a" is incorrect. The inability to perform detail testing on major account balances would not
prevent a review to be performed in accordance with SSARS. Detail testing is an auditing procedure, not
a procedure performed during a review engagement.
Choice "c" is incorrect. Tests of internal control are performed in audit engagements and are not required
for a review under SSARS.
Choice "d" is incorrect. While an accountant should obtain sufficient knowledge regarding the company's
industry and business during the review engagement, he or she is not required to have previous
experience in the client's industry.
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2012 AICPA Newly Released Questions – Auditing
12.
Which of the following procedures most likely would be performed in a review engagement of a
nonissuer's financial statements in accordance with Statements on Standards for Accounting and Review
Services?
a.
b.
c.
d.
Making inquiries of management.
Observing a year-end inventory count.
Assessing the internal control system.
Examining subsequent cash receipts.
Solution:
Choice "a" is correct. When performing a review, inquiries should be made with members of
management that have direct financial and accounting responsibilities. For example, the inquiries would
include: the accounting principles/practices used by the entity and the method of applying them; any
unusual or complex situations that may affect the financial statements; material subsequent events; and,
significant journal entries or adjustments.
Choice "b" is incorrect. This is an audit procedure that is not performed during a review engagement.
Choice "c" is incorrect. Developing an understanding of the client's internal control system is not required
in a review engagement.
Choice "d" is incorrect. Examining cash receipts is an audit procedure that is not required in a review.
13
2012 AICPA Newly Released Questions – Auditing
13.
An accountant was asked by a potential client to perform a compilation of its financial statements. The
accountant is not familiar with the industry in which the client operates. In this situation, which of the
following actions is the accountant most likely to take?
a.
b.
c.
d.
Request that management engage an independent industry expert to consult with the accountant.
Accept the engagement and obtain an adequate level of knowledge about the industry.
Decline the engagement.
Postpone accepting the engagement until the accountant has obtained an adequate level of
knowledge about the industry.
Solution:
Choice "b" is correct. An accountant can accept a compilation engagement with no previous experience
in the client's industry. The accountant is then responsible for acquiring an adequate level of knowledge
of the industry's accounting principles and practices.
Choice "a" is incorrect. Requesting an industry consultant to assist the accountant is not necessary.
Choice "c" is incorrect. Under the above scenario, the accountant is not required to decline the
engagement but should accept the engagement and then obtain knowledge of industry practices and
related accounting principles.
Choice "d" is incorrect. The accountant can still accept the engagement but must acquire adequate
knowledge during the compilation engagement.
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2012 AICPA Newly Released Questions – Auditing
14.
To compile financial statements of a nonissuer in accordance with Statements on Standards for
Accounting and Review Services, an accountant should:
a.
b.
c.
d.
Identify material misstatements in the financial statements.
Review bank statement reconciliations.
Make inquiries of significant customers, vendors, and creditors.
Obtain a general understanding of the client's business transactions.
Solution:
Choice "d" is correct. In order to compile a nonissuer's financial statements, the accountant should obtain
an understanding of the client's transaction types and frequency of transactions.
Choice "a" is incorrect. The accountant is not required to identify material misstatements in the financial
statements for a compilation.
Choice "b" is incorrect. Reviewing banks statement reconciliations is an audit test and is not required for
a compilation.
Choice "c" is incorrect. Making inquiries would be done as part of a review, not a compilation.
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2012 AICPA Newly Released Questions – Auditing
15.
A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer
professional services that conform with professional standards by:
a. Establishing an understanding with each client concerning individual responsibilities in a signed
engagement letter.
b. Assessing the risk that errors and fraud may cause the financial statements to contain material
misstatements.
c. Developing specific audit objectives to support management's assertions that are embodied in the
financial statements.
d. Maintaining a comprehensive system of quality control that is suitably designed in relation to its
organizational structure.
Solution:
Choice "d" is correct. Statements of Quality Control Standards (SQCS) are issued to provide guidance
with respect to audit quality control. These standards indicate that the nature and extent of a firm's quality
control policies and procedures are directly tied to its organizational structure. So by maintaining a
comprehensive system of quality control in relation to its organizational structure, the CPA firm would
provide reasonable assurance that its professional services conform to the above standards.
Choice "a" is incorrect. Specific individual responsibilities are not outlined in an engagement letter.
Furthermore, the engagement letter does not provide reasonable assurance that the audit firm is meeting
its responsibility to provide professional services that comply with professional standards. This is done
through a system of quality control.
Choice "b" is incorrect. Assessing the risk of material misstatement is part of an audit engagement and
does not provide reasonable assurance that the audit firm is meeting its responsibility to provide
professional services that comply with professional standards. This is done through a system of quality
control.
Choice "c" is incorrect. Developing specific audit objectives to support management's assertions in the
financial statements is an audit procedure that does not provide reasonable assurance that the audit firm
is meeting its responsibility to provide professional services that comply with professional standards. This
is done through a system of quality control.
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2012 AICPA Newly Released Questions – Auditing
16.
Which of the following items should be included in prospective financial statements issued in an
attestation engagement performed in accordance with Statements on Standards for Attestation
Engagements?
a.
b.
c.
d.
All significant assertions used to prepare the financial statements.
All significant assumptions used to prepare the financial statements.
Pro forma financial statements for the past two years.
Historical financial statements for the past three years.
Solution:
Choice "b" is correct. When performing an attestation engagement related to a client's prospective
financial statements, the accountant should ensure that the client discloses all significant assumptions
that are used for the prospective financial statements.
Choice "a" is incorrect. The client is not required to disclose the significant assertions used for the
prospective financial statements, but must disclose the significant assumptions used.
Choice "c" is incorrect. Pro forma financial statements are not required in an attestation engagement
related to prospective financial statements.
Choice "d" is incorrect. Historical financial statements are not required in an attestation engagement
related to prospective financial statements.
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2012 AICPA Newly Released Questions – Auditing
17.
Which of the following activities is an accountant not responsible for in review engagements performed in
accordance with Statements on Standards for Accounting and Review Services?
a.
b.
c.
d.
Performing basic analytical procedures.
Remaining independent.
Developing an understanding of internal control.
Providing any form of assurance.
Solution:
Choice "c" is correct. A review prepared in accordance with SSARS does not require an understanding of
internal controls.
Choice "a" is incorrect. A review engagement under SSARS requires that analytical procedures be
performed.
Choice "b" is incorrect. Independence is required in a review engagement.
Choice "d" is incorrect. In a review engagement, the accountant provides limited assurance that there are
no material modifications that should be made to the financial statements.
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2012 AICPA Newly Released Questions – Auditing
18.
Which of the following items should be included in an auditor's report for financial statements prepared in
conformity with another comprehensive basis of accounting (OCBOA)?
a.
b.
c.
d.
A sentence stating that the auditor is responsible for the financial statements.
A title that includes the word "independent."
The signature of the company controller.
A paragraph stating that the audit was conducted in accordance with OCBOA.
Solution:
Choice "b" is correct. The title of the OCBOA report should be "Independent Auditor's Report."
Choice "a" is incorrect. The management of the company is responsible for the financial statements.
Choice "c" is incorrect. Because the auditor is preparing the auditor's report under OCBOA, he or she
would sign the report (not the company controller).
Choice "d" is incorrect. The financial statements are prepared using the OCBOA. The audit report would
state that the audit was conducted in accordance with auditing standards generally accepted in the United
States of America.
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2012 AICPA Newly Released Questions – Auditing
19.
Which of the following procedures would be generally performed when evaluating the accounts receivable
balance in an engagement to review financial statements in accordance with Statements on Standards for
Accounting and Review Services?
a.
b.
c.
d.
Perform a reasonableness test of the balance by computing days' sales in receivables.
Vouch a sample of subsequent cash receipts from customers.
Confirm individually significant receivable balances with customers.
Review subsequent bank statements for evidence of cash deposits.
Solution:
Choice "a" is correct. When evaluating the accounts receivable balance under a review engagement, the
accountant would perform analytical procedures such as computing the current period's days' sales in
receivables ratio. Once computed, this ratio could be compared to the client's prior period's ratio and /or
an industry average ratio to determine if the reported accounts receivable balance (and its relationship to
sales) is reasonable.
Choice "b" is incorrect. Audit testing, which includes tests of accounting records by obtaining sufficient
supporting auditing evidence, is not part of a review engagement.
Choice "c" is incorrect. Confirmation is an audit procedure that is not required in a review engagement.
Choice "d" is incorrect. This audit procedure (test) would not be performed in a review engagement, but
may be done in an audit engagement.
20
2012 AICPA Newly Released Questions – Auditing
20.
According to the AICPA Statements on Standards for Attestation Engagements, a public accounting firm
should establish quality control policies to provide assurance about which of the following matters related
to agreed-upon procedures engagements?
a.
b.
c.
d.
Use of the report is not restricted.
The public accounting firm takes responsibility for the sufficiency of procedures.
The practitioner is independent from the client and other specified parties.
The practitioner sets the criteria to be used in the determination of findings.
Solution:
Choice "c" is correct. One of the conditions/policies that must exist in an agreed-upon procedures
attestation engagement is that the practitioner be independent from the client and other specified parties
pertaining to the engagement.
Choice "a" is incorrect. The reporting requirements include a statement regarding the restriction of use of
the report as it is intended solely for the specified parties.
Choice "b" is incorrect. A condition for agreed-upon procedures engagements is that the specified parties
and not the auditor take responsibility for the sufficiency of the procedures for their purposes.
Choice "d" is incorrect. The specified parties define the criteria to be used to determine findings.
21
2012 AICPA Newly Released Questions – Auditing
21.
Hart, CPA, is engaged to review the year 2 financial statements of Kell Co., a nonissuer. Previously, Hart
audited Kell's year 1 financial statements and expressed a qualified opinion due to a scope limitation.
Hart decides to include a separate paragraph in the year 2 review report because comparative financial
statements are being presented for year 2 and year 1. This separate paragraph should indicate the:
a.
b.
c.
d.
Substantive reasons for the prior-year's qualified opinion.
Reason for changing the level of service from an audit to a review.
Consistency of application of accounting principles between year 2 and year 1.
Restriction on the distribution of the report for internal use only.
Solution:
Choice "a" is correct. Because comparative financial statements are being reported, and last year's audit
engagement included a scope limitation on the audited financial statements, Hart should include a
separate paragraph in the review report outlining the substantive reasons for the client's qualified report.
Choice "b" is incorrect. An explanation of why the client is changing from an audit engagement last year,
to a review engagement this year, is not required.
Choice "c" is incorrect. A separate paragraph regarding the consistency of the application of accounting
principles is not required in a review report unless there is a lack of consistency.
Choice "d" is incorrect. A review report is not generally restricted as to its use.
22
2012 AICPA Newly Released Questions – Auditing
22.
A CPA is engaged to audit the financial statements of a nonissuer. After the audit begins, the client's
management questions the extent of procedures and objects to the confirmation of certain contracts. The
client asks the accountant to change the scope of the engagement from an audit to a review. Under
these circumstances, the accountant should do each of the following, except:
a. Issue an accountant's review report with a separate paragraph discussing the change in engagement
scope.
b. Consider the additional audit effort and cost required to complete the audit.
c. Evaluate the possibility that financial statement information affected by the limitation on work to be
performed may be incorrect or incomplete.
d. Consider the reason given for the client's request and assess whether the request is reasonable.
Solution:
Choice "a" is correct. When an accountant determines that a change in the scope of an engagement
from an audit to a review is appropriate, the accountant would issue a review report and would not refer to
the original engagement, any procedures performed as part of the engagement, or any scope limitation.
Choices "b", "c", and "d" are incorrect. All of these items should be considered by the accountant when
determining whether the change in engagement is justified.
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2012 AICPA Newly Released Questions – Auditing
23.
Obtaining an understanding of an internal control involves evaluating the design of the control and
determining whether the control has been:
a.
b.
c.
d.
Authorized.
Implemented.
Tested.
Monitored.
Solution:
Choice "b" is correct. When evaluating a client's internal controls, the auditor must first obtain an
understanding of the design of the controls and then determine if the controls have been implemented.
Choice "a" is incorrect. It is assumed that the design of the internal control has been authorized by client
management.
Choice "c" is incorrect. Testing internal controls is not part of the understanding phase of internal control.
Choice "d" is incorrect. Monitoring the ongoing effectiveness of internal controls is not part of the
understanding phase of internal control and is the responsibility of client management.
24
2012 AICPA Newly Released Questions – Auditing
24.
Which of the following is the best way to compensate for the lack of adequate segregation of duties in a
small organization?
a.
b.
c.
d.
Disclosing lack of segregation of duties to the external auditors during the annual review.
Replacing personnel every three or four years.
Requiring accountants to pass a yearly background check.
Allowing for greater management oversight of incompatible activities.
Solution:
Choice "d" is correct. The best compensating control for the lack of segregation of duties in smaller
organizations is to have more management oversight of incompatible functions.
Choice "a" is incorrect. While disclosing the matter to external auditors is prudent, it does not help as a
compensating control.
Choice "b" is incorrect. Replacing personnel every three to four years does not eliminate the lack of
segregation of duties in smaller organizations because this is an ongoing issue.
Choice "c" is incorrect. Performing accountants' background checks does not help the lack of
segregation of duties in smaller organizations.
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2012 AICPA Newly Released Questions – Auditing
25.
Which of the following situations most likely represents the highest risk of a material misstatement arising
from misappropriations of assets?
a.
b.
c.
d.
A large number of bearer bonds on hand.
A large number of inventory items with low sales prices.
A large number of transactions processed in a short period of time.
A large number of fixed assets with easily identifiable serial numbers.
Solution:
Choice "a" is correct. Bearer bonds represent the highest risk of misappropriation of assets by an entity
because they are unregistered with no records kept of the owner(s) or transactions involving ownership.
Historically, bearer bonds have been used to facilitate money laundering, tax evasion, and to conceal
business transactions.
Choice "b" is incorrect. Having a large number of inventory items with low sales prices may result in
asset misappropriation if the inventory items are easy to steal. However, if the inventory items have a low
sales price, it is unlikely that any misappropriation would be material.
Choice "c" is incorrect. Processing a large number of transactions in a short period of time does not
necessarily lead to a high risk of misappropriation of assets.
Choice "d" is incorrect. Tagging fixed assets with easily identifiable serial numbers would decrease the
risk of misappropriation of the fixed assets.
26
2012 AICPA Newly Released Questions – Auditing
26.
Which of the following procedures would an auditor most likely perform in the planning stage of an audit?
a.
b.
c.
d.
Make a preliminary judgment about materiality.
Confirm a sample of the entity's accounts payable with known creditors.
Obtain written representations from management that there are no unrecorded transactions.
Communicate management's initial selection of accounting policies to the audit committee.
Solution:
Choice "a" is correct. During the planning stage of an audit, the auditor should make a preliminary
assessment of materiality.
Choice "b" is incorrect. Confirmation procedures are substantive procedures and are not performed
during the planning stage of the audit. Also, note that accounts payable are not typically tested through
confirmations.
Choice "c" is incorrect. Written representations from management in the form of a representation letter
are obtained at the end of the audit and not during the planning stage.
Choice "d" is incorrect. Audit committee communications can take place throughout the audit and not
necessarily during the planning stage.
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2012 AICPA Newly Released Questions – Auditing
27.
Under which of the following circumstances should an auditor consider confirming the terms of a large
complex sale?
a.
b.
c.
d.
When the assessed level of control risk over the sale is low.
When the assessed level of detection risk over the sale is high.
When the combined assessed level of inherent and control risk over the sale is moderate.
When the combined assessed level of inherent and control risk over the sale is high.
Solution:
Choice "d" is correct. The auditor would consider confirming a large complex sale when the risk of
material misstatement (RMM) is high. The risk of material misstatement includes both inherent risk and
control risk. If both inherent risk and control risk are high, then RMM is high and the auditor would
minimize detection risk by performing more reliable auditing procedures, such as confirmation of the
terms of large complex sale.
Choice "a" is incorrect. When control risk is low, the overall risk of material misstatement is lower. If the
risk of material misstatement is low, the auditor is less likely to confirm the terms of a large complex sale.
Choice "b" is incorrect. High detection risk implies a low risk of material misstatement. If the risk of
material misstatement is low, the auditor is less likely to confirm the terms of a large complex sale.
Choice "c" is incorrect. If both inherent risk and control risk are moderate, then the risk of material
misstatement is moderate and the auditor would be less likely to confirm the terms of a large complex
sale. This is an audit procedure that is most likely to be performed when the risk of material misstatement
is high.
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2012 AICPA Newly Released Questions – Auditing
28.
The understanding with the client regarding a financial statement audit generally includes which of the
following matters?
a.
b.
c.
d.
The expected opinion to be issued.
The responsibilities of the auditor.
The contingency fee structure.
The preliminary judgment about materiality.
Solution:
Choice "b" is correct. The understanding with the client includes an understanding of both the
responsibilities of the audit firm pertaining to the financial statement audit as well as the responsibilities of
the entity's management.
Choice "a" is incorrect. The auditor should not provide the client with an expected audit opinion prior to or
during a financial statement audit.
Choice "c" is incorrect. Contingent fees are prohibited when performing financial statement audits and
would not be part of any discussion with the client.
Choice "d" is incorrect. When developing an audit strategy, the auditor will make a preliminary
assessment of materiality using his or her professional judgment. This is part of the planning process and
is not included in the understanding with the client.
29
2012 AICPA Newly Released Questions – Auditing
29.
Each of the following is a type of known misstatement, except:
a.
b.
c.
d.
An inaccuracy in processing data.
The misapplication of accounting principles.
Differences between management and the auditor's judgment regarding estimates.
A difference between the classification of a reported financial statement element and the classification
according to generally accepted accounting principles.
Solution:
Choice "c" is correct. A known misstatement is a specific misstatement identified during the audit.
Differences between management and the auditor's judgment regarding estimates are an example of a
likely misstatement, not a known misstatement.
Choices "a", "b", and "d" are incorrect. An inaccuracy in processing data, the misapplication of
accounting principles, and a difference between the classification of a reported financial statement
element and the classification according to GAAP are all examples of known misstatements.
30
2012 AICPA Newly Released Questions – Auditing
30.
Which of the following statements best describes why an auditor would use only substantive procedures
to evaluate specific relevant assertions and risks?
a.
b.
c.
d.
The relevant internal control components are not well documented.
The internal auditor already has tested the relevant controls and found them effective.
Testing the operating effectiveness of the relevant controls would not be efficient.
The cost of substantive procedures will exceed the cost of testing the relevant controls.
Solution:
Choice "c" is correct. If the auditor determines that testing the operating effectiveness of controls would
not be efficient, he or she may choose to use only substantive procedures to evaluate specific assertions
and risks.
Choice "a" is incorrect. The fact that internal control components are not well documented does not
necessarily mean that the auditor would use only substantive procedures. A primarily substantive
approach is taken when there are no effective controls, when implemented controls are assessed as
ineffective, or when it would not be efficient to test controls.
Choice "b" is incorrect. Although the internal auditor may assist with certain aspects of the audit, the
judgment of the internal auditor regarding the effectiveness of the controls cannot be used by the external
auditor.
Choice "d" is incorrect. The auditor will generally take a combined approach when it is efficient or cost
effective to test controls.
31
2012 AICPA Newly Released Questions – Auditing
31.
Which of the following courses of action is the most appropriate if an auditor concludes that there is a
high risk of material misstatement?
a.
b.
c.
d.
Use smaller, rather than larger, sample sizes.
Perform substantive tests as of an interim date.
Select more effective substantive tests.
Increase of tests of controls.
Solution:
Choice "c" is correct. When the auditor determines that the overall risk of material misstatement is high,
the acceptable level of detection risk decreases and the auditor must perform more effective substantive
procedures.
Choice "a" is incorrect. Larger samples sizes should be used when the risk of material misstatement is
high.
Choice "b" is incorrect. The performance of substantive tests on an interim basis is inappropriate when
the risk of material misstatement is high because interim testing increases (rather than reduces) the risk
that the auditor will not detect material misstatements in the financial statements.
Choice "d" is incorrect. The increase in the tests of controls would be done if the substantive tests
(procedures) alone are insufficient to detect the risk of material misstatement. This is not evident in the
question scenario.
32
2012 AICPA Newly Released Questions – Auditing
32.
Which of the following would not be considered an analytical procedure?
a. Converting dollar amounts of income statement account balances to percentages of net sales for
comparison with industry averages.
b. Developing the current year's expected net sales based on the sales trend of similar entities within
the same industry.
c. Projecting a deviation rate by comparing the results of a statistical sample with the actual population
characteristics.
d. Estimating the current year's expected expenses based on the prior year's expenses and the current
year's budget.
Solution:
Choice "c" is correct. This would not be considered an analytical procedure because there is no
comparison or conversion of an entity's financial information/data. Instead, this represents a procedure
used in statistical sampling.
Choice "a" is incorrect. Preparing a common-sized income statement and then comparing the entity's
information to a corresponding industry average represents an analytical procedure.
Choice "b" is incorrect. Using trend analysis on the sales of competing firms to develop a current year
sales forecast for an entity is considered an analytical procedure.
Choice "d" is incorrect. Using trend analysis on the entity's past expenses along with the current year's
budget to develop an estimate of entity's current expenses is a viable analytical procedure.
33
2012 AICPA Newly Released Questions – Auditing
33.
In auditing related party transactions, an auditor ordinarily places primary emphasis on:
a.
b.
c.
d.
The probability that related party transactions will recur.
Confirming the existence of the related parties.
Verifying the valuation of the related party transactions.
The adequacy of the disclosure of the related party transactions.
Solution:
Choice "d" is correct. When auditing related party transactions, the auditor must determine whether they
are adequately disclosed in accordance with GAAP.
Choice "a" is incorrect. The auditor's emphasis is on reviewing actual related party transactions that have
occurred and not on the probability that a related party transaction could recur in the future.
Choice "b" is incorrect. Confirming the existence of related parties would be an initial step (only) when
auditing related party transactions.
Choice "c" is incorrect. While verification of the amounts associated with related party transactions may
be part of the test process performed by an auditor, the primary emphasis is on determining whether the
disclosure of the related party transactions are adequate.
34
2012 AICPA Newly Released Questions – Auditing
34.
An auditor is required to confirm accounts receivable if the accounts receivable balances are:
a.
b.
c.
d.
Older than the prior year.
Material to the financial statements.
Smaller than expected.
Subject to valuation estimates.
Solution:
Choice "b" is correct. The use of audit confirmations for an entity's accounts receivables is a required
GAAP procedure if the accounts receivable balances are deemed material to the balance sheet.
Choice "a" is incorrect. While the age of the accounts receivable account may indicate the potential lack
of collectability, it is not a reason for confirmations to be required under GAAP.
Choice "c" is incorrect. Confirmations are not required for accounts receivables that are immaterial or
small.
Choice "d" is incorrect. All accounts receivable are subject to valuation estimates (the estimate of the
allowance for uncollectible accounts). The need for an allowance is not a criteria used to assess whether
accounts receivable confirmations are required.
35
2012 AICPA Newly Released Questions – Auditing
35.
Which of the following controls should prevent an invoice for the purchase of merchandise from being
paid twice?
a. The check signer accounts for the numerical sequence of receiving reports used in support of each
payment.
b. An individual independent of cash operations prepares a bank reconciliation.
c. The check signer reviews and cancels the voucher packets.
d. Two check signers are required for all checks over a specified amount.
Solution:
Choice "c" is correct. Having the check signer review and cancel the voucher packet is a preventive
control to ensure the same voucher is not presented and paid a second time. Additionally, because this
control is implemented prior to processing (paying for) the original invoice, it functions as a preventive
control of avoiding duplicate payments.
Choice "a" is incorrect. This control helps ensure that payment is made for actual goods received
(documented), but canceling the voucher packets to avoid duplication of payments is a preventive control.
Choice "b" is incorrect. This is not a preventive control because the bank reconciliation may detect
multiple payments for the same invoice after the payments already happened.
Choice "d" is incorrect. Having two check signers for material invoices is not a preventive control here.
An effective preventive control is canceling the voucher packets regardless of the dollar amount of the
invoices.
36
2012 AICPA Newly Released Questions – Auditing
36.
Which of the following procedures would a CPA most likely perform in the planning phase of a financial
statement audit?
a.
b.
c.
d.
Make inquiries of the client's lawyer concerning pending litigation.
Perform cutoff tests of cash receipts and disbursements.
Compare financial information with nonfinancial operating data.
Recalculate the prior year's accruals and deferrals.
Solution:
Choice "c" is correct. During the planning phase of an audit, analytical procedures that include comparing
financial information to nonfinancial operating data may be performed. This type of test will be used to
assist the auditor in understanding the client and its environment, as well as to potentially alert the auditor
to problems that could require attention later in the audit.
Choice "a" is incorrect. Performing inquiries to gather more information regarding contingencies such as
lawsuits is done in the latter stages of fieldwork and is not done during the planning phase.
Choice "b" is incorrect. During the audit fieldwork phase, the auditor may perform cutoff tests on cash
receipts and disbursements.
Choice "d" is incorrect. The verification of mathematical accuracy of prior year's transaction items is done
during the audit fieldwork phase.
37
2012 AICPA Newly Released Questions – Auditing
37.
In confirming a client's accounts receivable in prior years, an auditor discovered many differences
between recorded account balances and confirmation replies. These differences were resolved and were
not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would
choose:
a.
b.
c.
d.
Customers with credit balances.
Small account balances.
Individual overdue balances.
Individual invoices.
Solution:
Choice "d" is correct. Because of the significant discrepancies on past confirmations, the auditor would
most likely choose to use individual invoices in the current year's audit. Depending on the client's
accounting system, these invoices could provide more confirmation detail including individual transactions
instead of a balance at a point in time. By confirming individual transaction detail on the individual
invoices, there should be fewer discrepancies than confirmations sent out to customers in years past.
Choice "a" is incorrect. An auditor is unlikely to focus the confirmation process on customers with credit
balances because credit balance accounts receivable are unlikely to be overstated. Confirmation is
primarily a test of existence, or overstatement.
Choice "b" is incorrect. When confirming accounts receivable, the auditor is unlikely to focus on
confirming small account balances because misstatements in accounts with small balances are unlikely
to be material and because the confirmation process is primarily a test of existence, or overstatement.
Choice "c" is incorrect. The confirmation process typically does not focus on overdue balances because
confirmation is primarily a test of existence and not valuation.
38
2012 AICPA Newly Released Questions – Auditing
38.
A company employs three accounts payable clerks and one treasurer. Their responsibilities are as
follows:
Employee
Clerk 1
Clerk 2
Clerk 3
Treasurer
Responsibility
Reviews vendor invoices for proper signature approval.
Enters vendor invoices into the accounting system and verifies payment terms.
Posts entered vendor invoices to the accounts payable ledger for payment and
mails checks.
Reviews the vendor invoices and signs each check.
Which of the following would indicate a weakness in the company's internal control?
a.
b.
c.
d.
Clerk 1 opens all of the incoming mail.
Clerk 2 reconciles the accounts payable ledger with the general ledger monthly.
Clerk 3 mails the checks and remittances after they have been signed.
The treasurer uses a stamp for signing checks.
Solution:
Choice "c" is correct. Clerk 3 responsibilities indicate a weakness in internal control as the accounts
payable clerk has both the recordkeeping and custody functions. To mitigate this control weakness, clerk
3 can have responsibility for posting invoices to the ledger, but the Treasurer should be the person that
mails the checks, which is part of the custody function.
Choice "a" is incorrect. The functions assigned to clerk 1 do not indicate an internal control weakness.
Choice "b" is incorrect. There is no internal control weakness for clerk 2 based on the recordkeeping
functions assigned.
Choice "d" is incorrect. Using a stamp to sign checks is not an internal control weakness (especially in a
high transaction environment) as long as the Treasurer has custody of his or her signature stamp.
39
2012 AICPA Newly Released Questions – Auditing
39.
Which of the following management assertions is an auditor most likely testing if the audit objective states
that all inventory on hand is reflected in the ending inventory balance?
a.
b.
c.
d.
The entity has rights to the inventory.
Inventory is properly valued.
Inventory is properly presented in the financial statements.
Inventory is complete.
Solution:
Choice "d" is correct. In order to determine whether the actual inventory on hand is reflected in the
ending inventory balance by the client, the auditor would test the completeness of inventory. This is done
in conjunction with inventory observation, through testing the physical inventory report by tracing test
counts to the report to verify that reported inventory is complete.
Choice "a" is incorrect. The verification of legal right to the inventory is not a test that would satisfy this
audit objective.
Choice "b" is incorrect. Testing whether management properly valued its inventory would not satisfy the
audit objective, but testing for completeness would.
Choice "c" is incorrect. Testing for this management assertion would not satisfy the audit objective
because inventory can be properly presented in the financial statements without the inventory amounts
being accurate.
40
2012 AICPA Newly Released Questions – Auditing
40.
Which of the following matters is most likely to be included in a management representation letter as a
specific representation?
a.
b.
c.
d.
Length of a material contract with a new customer.
Information concerning fraud by the CFO.
Reason for a significant increase in revenue over the prior year.
The competency and objectivity of the internal audit department.
Solution:
Choice "b" is correct. The management representation letter should disclose knowledge of actual fraud or
suspected fraud impacting the firm involving: members of management, employees that have a primary
role in the firm's internal controls, and other individuals, especially when the fraud has a material impact
on the reported financial statements.
Choice "a" is incorrect. The management representation letter is not a place to disclose the length of a
material contract with a customer. This information would be documented by the auditor in the audit
workpapers and disclosed in the financial statement footnotes.
Choice "c" is incorrect. The reasons for the increase in revenue over the prior year would be documented
by the auditor in the audit workpapers and disclosed in the Management, Discussion, and Analysis
section of the firm's annual report.
Choice "d" is incorrect. The auditor is required to assess the competency and objectivity of the internal
audit department if using the internal auditors during the audit process. However, management does not
typically make any representation about the competency and objectivity of the internal auditors.
41
2012 AICPA Newly Released Questions – Auditing
41.
For which of the following audit tests would an auditor most likely use attribute sampling?
a.
b.
c.
d.
Inspecting purchase orders for proper approval by supervisors.
Making an independent estimate of recorded payroll expense.
Determining that all payables are recorded at year end.
Selecting accounts receivable for confirmation of account balances.
Solution:
Choice "a" is correct. Attribute sampling is used by the auditor to test whether the controls put in place by
the client operate effectively. By inspecting purchase orders, the auditor can determine whether
adequate approvals are in place (documented) to demonstrate that purchases are properly supervised.
Choice "b" is incorrect. Sampling is not used to make an independent estimate of payroll expense.
Choice "c" is incorrect. Determining that all payables are recorded at year end would not use attribute
sampling because a specific control (or attribute) put in place by the client is not being tested. The
completeness of year-end accounts receivable is typically tested using the search for unrecorded
liabilities, which is a substantive procedure. Variables sampling and PPS sampling are typically used in
substantive testing.
Choice "d" is incorrect. The selection of confirmations to verify account balances is part of substantive
testing and would use variables sampling or PPS sampling, not attributes sampling.
42
2012 AICPA Newly Released Questions – Auditing
42.
Which of the following statements is generally correct about the sample size in statistical sampling when
testing internal controls?
a.
b.
c.
d.
As the population size doubles, the sample size should increase by about 67%.
The sample size is inversely proportional to the expected error rate.
There is no relationship between the tolerable error rate and the sample size.
The population size has little or no effect on the sample size.
Solution:
Choice "d" is correct. Unless the population is very small, the population size has virtually no impact on
determining the sample size for statistical sampling when testing internal control using attributes
sampling.
Choice "a" is incorrect. A doubling of the population size would not directly result in a 67% increase in
sample size.
Choice "b" is incorrect. There is a direct relationship between sample size and the expected error rate.
Choice "c" is incorrect. The sample size will decrease as the tolerable error rate increases.
43
2012 AICPA Newly Released Questions – Auditing
43.
Under the Sarbanes-Oxley Act of 2002, exactly how many consecutive years may an audit partner lead
an audit for an issuer?
a.
b.
c.
d.
Four years.
Five years.
Six years.
Seven years.
Solution:
Choice "b" is correct. Under the Sarbanes-Oxley Act of 2002, the lead audit partner must rotate off an
audit of an issuer every five years.
Choices "a", "c", and "d" are incorrect. The number of years for these answer choices does not match the
SOX requirement for audit partner rotation.
44
2012 AICPA Newly Released Questions – Auditing
44.
A government internal audit function is presumed to be free from organizational independence
impairments for reporting internally when the head of the organization:
a.
b.
c.
d.
Is not accountable to those charged with governance.
Performs auditing procedures that are consistent with generally accepted accounting principles.
Is a line-manager of the unit under audit.
Is removed from political pressures to conduct audits objectively, without fear of political reprisal.
Solution:
Choice "d" is correct. A government internal audit function is presumed to be free from organizational
independence impairments for reporting internally when the head of the organization is removed from
political pressures to conduct audits objectively, without fear of political reprisal.
Choice "a" is incorrect. Accountability to those charged with governance generally increases the
objectivity of the internal auditors.
Choice "b" is incorrect. The audit procedures used for the government audit should be consistent with
generally accepted government auditing standards (GAGAS), not GAAP.
Choice "c" is incorrect. If the head of the organization is also the line manager under the current audit,
there is a potential conflict of interest with these two roles and potential pressure on behalf of the internal
auditor to provide a more favorable audit opinion.
45
2012 AICPA Newly Released Questions – Auditing
45.
An accountant can perform, with preapproval of the audit committee of the board of directors, which of the
following non-audit services during the audit of an issuer?
a.
b.
c.
d.
Bookkeeping services.
Human resource services.
Tax planning services.
Internal audit outsourcing services.
Solution:
Choice "c" is correct. Tax planning services that are preapproved by the audit committee of the issuer's
board can also be performed during the audit of an issuer, as long as the effect on the audit firm's
independence is discussed and documented with the audit committee.
Choices "a", "b", and "d" are incorrect. Each of these non-audit services would impair auditor
independence if performed during the audit of an issuer.
46
2012 AICPA Newly Released Questions – Auditing
46.
The controller of a small utility company has interviewed audit firms proposing to perform the annual audit
of their employee benefit plan. According to the guidelines of the Department of Labor (DOL), the
selected auditor must be:
a. The firm that proposes the lowest fee for the work required.
b. Independent for purposes of examining financial information required to be filed annually with the
DOL.
c. Included on the list of firms approved by the DOL.
d. Independent of the utility company and not relying on its services.
Solution:
Choice "b" is correct. The DOL requires auditor independence when auditing and providing an opinion on
the financial information submitted annually to the DOL.
Choices "a", "c", and "d" are incorrect. Each of these choices is not a requirement outlined by the DOL.
47
2012 AICPA Newly Released Questions – Auditing
47.
Under the ethical standards of the profession, which of the following is a "permitted loan" regardless of
the date it was obtained?
a.
b.
c.
d.
Home mortgage loan.
Student loan.
Secured automobile loan.
Personal loan.
Solution:
Choice "c" is correct. According to Rule 101-Independence of the AICPA code, a fully secured
automobile loan with a financial institution client is permitted (regardless of the date obtained) and does
not impair the independence rule.
Choices "a", "b", and "d" are incorrect. Each of these loans from the client would be considered an
impairment of independence under Rule 101.
48
2012 AICPA Newly Released Questions – Auditing
48.
According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA
receive a contingent fee?
a.
b.
c.
d.
Performing an audit of a financial statement.
Performing a review of a financial statement.
Performing an examination of prospective financial information.
Seeking a private letter ruling.
Solution:
Choice "d" is correct. Under Rule 302, contingent fees are permitted when they involve a legal
proceeding or ruling. When a CPA is receiving a contingent fee for a private letter ruling, it would be
allowed under Rule 302 and not be considered actually "contingent" because it would most likely be fixed
by the legal jurisdiction.
Choice "a" is incorrect. Contingent fees are prohibited for audits of a client's financial statements.
Choice "b" is incorrect. Contingent fees are not allowed for a review engagement of a client's financial
statements.
Choice "c" is incorrect. Contingent fees are prohibited for an examination of a prospective client's
financial information.
49
2012 AICPA Newly Released Questions – Auditing
49.
In which of the following circumstances would a covered member's independence be impaired with
respect to a nonissuer client?
a. The member is designated to serve as guardian of a friend's children if the need arises, and the
friend's estate, which would be held in trust for the children, holds significant stock ownership in a
client entity.
b. The member's spouse qualifies because of geographical residence to belong to a client's credit union,
and all transactions with the credit union are conducted under normal operating practices.
c. The member owns municipal utility bonds issued by a client, and the bonds are not material to the
member's wealth.
d. The member belongs to a client golf club that requires members to acquire a share of the club's debt
securities.
Solution:
Choice "c" is correct. Although the bonds are not material in relation to the member's total wealth,
independence is still impaired because the ownership of the bonds represents a direct financial interest in
the client and a violation of AICPA Rule 101 – Independence.
Choice "a" is incorrect. Independence is not violated because the member is the children's guardian, but
is not a trustee of the estate held in trust for the children.
Choice "b" is incorrect. Independence is not impaired by membership in a client credit union.
Choice "d" is incorrect. According to an AICPA ethics ruling, as long as the membership in the golf club is
essentially a social matter, the covered member's association with the golf club would not impair
independence because the debt ownership is not considered to be a direct financial interest.
50
2012 AICPA Newly Released Questions – Auditing
50.
A cooling-off period of how many years is required before a member of an issuer's audit engagement
team may begin working for the registrant in a key position?
a.
b.
c.
d.
One year.
Two years.
Three years.
Four years.
Solution:
Choice "a" is correct. The Securities and Exchange Commission requires a cooling-off period of one year
for a former member of an audit client engagement team before he or she can be employed in a financial
oversight role for that same client. This requirement is necessary to preserve auditor (firm)
independence.
Choices "b", "c", and "d" are incorrect based on the explanation above.
51
AICPA Newly Released AUD Simulations
Task 1515_01
Situation 1: Issue a Disclaimer of Opinion
Failure to furnish the auditor with adequate evidence is a scope limitation. When there
is a scope limitation in an audit of internal controls, the auditor can issue a disclaimer of
opinion or withdraw from the engagement.
Situation 2: Determine if the control deficiency is a material weakness by
obtaining further audit evidence
Control deficiencies can result from deficiencies in the design of an entity’s controls
and/or failures in the operation of an entity’s controls. In this situation, the controls are
operating as designed, so there is no failure in the operation of the controls. However,
a control deficiency exists because there is a deficiency in the design of the controls.
The auditor must determine if the control deficiency is a material weakness by obtaining
further audit evidence.
Situation 3: Express an adverse opinion on the internal controls
In an audit of an entity’s internal control, a material weakness in internal control results
in an adverse opinion.
Situation 4: Express an unqualified opinion on the internal controls
In an internal control audit, management is required to provide an assertion about the
effectiveness of the entity’s internal controls. However, management does not provide
assurance about the internal controls. An unqualified opinion is issued If the auditor
does not find any material weaknesses in the entity’s internal controls.
Situation 5: Express an unqualified opinion on the internal controls
Although last year’s auditor’s report included an adverse opinion on the client’s internal
controls, the client has since modified their internal controls, and the auditor has tested
the effectiveness of these internal controls in the current year’s audt. Because the audit
tests found no material weaknesses in the client’s internal controls, the auditor will
express an unqualified opinion on the internal controls in this year’s auditor’s report.
Tab 1765_01
Issue 1: Reconciliation was not reviewed in a timely manner.
The bank reconciliation for the period ended December 31, Year 2 was prepared on
January 10, Year 3. Evan Monroe did not review the bank reconciliation until March 2,
Year 3, which was 51 days later.
Issue 2: Reconciliation was not agreed to the bank statement balance at the
appropriate date.
The bank reconciliation was as of December 31, Year 2, but the bank balance was
agreed to the online account balance as of January 3, Year 3.
Issue 3: Reconciliation contains stale checks.
The actual bank reconciliation included a deduction for year 2 outstanding checks dated
March 29, November 30, and December 1, respectively. The check dated March 29 is
unlikely to clear the bank and should be written-off as a stale check.
Issue 4: Reconciliation has unsubstantiated unrecorded items.
At the very bottom of the bank reconciliation, there were adjustments totaling $5,500
that included a bank fee (amount undisclosed) and unrecorded items (no totals or item
breakdown provided).
Issue 5: Reconciliation contains aged items that should have been added to the
bank balance.
The bank reconciliation had 2 deposits in transit that were added to the balance per
bank. While an argument can be made that the December 28,Year 2 deposit was still in
transit at year-end, the second deposit, dated October 25, Year 2, should have been
recorded by the bank at year-end.
Issue 6: Reconciliation balance was not properly agreed to the December 31
general ledger balance.
The bank reconciliation, dated as of December 31, Year 2, was improperly agreed to
the general ledger on January 1, Year 3. While these dates are only 1 day apart and
January 1 is a U.S. legal holiday, there could be transactions that posted the following
day. The reconciliation should agree balances to the same date.
Tab 3749_01
Key words:
Updated auditor’s report, change in audit opinion