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web.groovymark@gmail.com
- December 12, 2024
Question 01
Which type of report should be issued if an auditor has determined that a company has maintained effective internal controls over financial reporting for the period under audit?
a) Adverse
b) Qualified
c) Disclaimer
d) Unqualified
Answer: d) Unqualified
Explanation: An unqualified report is issued when the auditor concludes that a company’s internal controls are effective and the financial statements are fairly presented.
Question 02
Which type of work performed by a CPA is considered an attestation service?
a) Risk advisory
b) Website security assurance
c) Data integrity
d) Financial statement review
Answer: d) Financial statement review
Explanation: Financial statement review is an attestation service because the CPA provides an independent report on financial information that is the responsibility of another party.
Question 03
Which entity may obtain audited financial statements to ensure a company is complying with industry regulations?
a) Lenders
b) Consumers
c) Governments
d) General public
Answer: c) Governments
Explanation: Governments often require audited financial statements to ensure that companies comply with regulations within their industries.
Question 04
Which group performs an audit and review of financial statements to ensure financial statement users’ needs are met?
a) Internal auditors
b) The Internal Revenue Service (IRS)
c) Independent third-party auditors
d) The Financial Accounting Standards Board (FASB)
Answer: c) Independent third-party auditors
Explanation: Independent third-party auditors are responsible for ensuring that financial statements are fairly presented and free of material misstatement to meet the needs of users.
Question 05
A new CPA is aware of how accounting affects stakeholders. Which characteristic of professionalism is motivating this awareness?
a) Level of expertise
b) Advanced certification
c) Professional judgment
d) Concern for the public interest
Answer: d) Concern for the public interest
Explanation: Concern for the public interest is a core element of professionalism, motivating CPAs to act in the best interest of stakeholders.
Question 06
Which component of the AICPA Code of Professional Conduct provides the tenets of ethical conduct that govern the professional responsibility of its members?
a) Morals
b) Principles
c) Interpretations
d) Rules of conduct
Explanation: The AICPA Code of Professional Conduct contains principles that provide the ethical framework governing the responsibilities of CPAs.
Question 07
A CPA firm provides tax services for a large automotive client. Over the years, the client has continually pushed for aggressive tax strategies that the CPA does not always agree with. While performing the current year’s tax return, the client threatens to discontinue the relationship if the firm continues to disagree. Which type of threat to ethical decision-making is demonstrated by this practice?
a) Self-review
b) Self-interest
c) Adverse interest
d) Undue influence
Answer: d) Undue influence
Explanation: Undue influence occurs when a client uses power or influence to pressure the CPA into compromising their ethical responsibilities.
Question 08
A CPA has prepared a couple’s joint tax returns for 10 years, but the couple is now experiencing a complicated divorce, with both parties wishing to claim the same child as a dependent. The CPA agrees to work with both clients on their tax returns. Which standard of the AICPA Code of Professional Conduct is being violated by this CPA’s action?
a) Independence
b) Contingent Fees
c) Accounting Principles
d) Integrity and Objectivity
Answer: d) Integrity and Objectivity
Explanation: The CPA is violating the AICPA's Integrity and Objectivity rule by taking on conflicting interests and compromising their objectivity.
Question 09
A large client asks a CPA firm for consulting help with their quarterly sales and use tax reporting. The CPA firm specializes in audit and tax preparation and has not dealt with this type of work before but would like to add it. What step is required to maintain compliance with the general standards of the AICPA Code of Professional Conduct?
a) The CPA firm must send the CPAs to a continuing professional education course on sales and use tax reporting.
b) The CPA firm must be independent of the client to perform consulting services on sales and use tax reports.
c) The CPA firm must develop this line of work by adding additional clients who need assistance with sales and use tax reports.
d) The CPA firm must collect sufficient relevant data to complete sales and use tax reports.
Answer: a) The CPA firm must send the CPAs to a continuing professional education course on sales and use tax reporting.
Explanation: To maintain professional competence, CPAs must pursue the necessary education to perform services outside of their current expertise.
Question 10
A junior accountant is providing tax and audit services to a large company that is pressuring the accountant to reduce the amount of taxes owed. The junior accountant decides to use last year’s tax laws instead of the current year’s laws to save the company money. Which general standard of the AICPA Code of Professional Conduct is the junior accountant violating?
a) Due Professional Care
b) Sufficient Relevant Data
c) Planning and Supervision
d) Professional Competence
Answer: a) Due Professional Care
Explanation: The accountant is violating the standard of Due Professional Care by not applying the most current and accurate laws.
Question 11
A CPA firm has been retained to audit a client’s financial statements. The client’s bank has requested audited financial statements in order to approve or deny a loan. The client has suggested that the CPA firm will earn a $20,000 bonus if the bank grants the loan to the client. Which statement characterizes the permissibility of this fee structure?
a) The CPA will need to obtain a ruling letter from the AICPA before agreeing to this fee structure.
b) This fee structure is not permitted under ethical standards applicable to the auditing profession.
c) The CPA will need to obtain written permission from the client’s bank before agreeing to this fee structure.
d) This fee structure is an acceptable arrangement under ethical standards applicable to the auditing profession.
Answer: b) This fee structure is not permitted under ethical standards applicable to the auditing profession.
Explanation: CPAs cannot accept contingent fees based on the outcome of their audit work, as this compromises their independence.
Question 12
A CPA is auditing a car dealership and is identifying factors that affect the likelihood of overstated revenue. During which phase of the audit does the CPA take this action?
a) Reporting
b) Regulatory
c) Risk response
d) Risk assessment
Answer: d) Risk assessment
Explanation: The CPA assesses risks, including the risk of overstated revenue, during the risk assessment phase of the audit.
Question 13
After performing risk assessment procedures and tests of controls, an auditor has determined that the risk of material misstatement (RMM) is high. How should the auditor proceed?
a) Withdraw from the audit engagement
b) Select a substantive approach for the audit strategy
c) Issue a qualified opinion in the auditor’s report
d) Select a reliance on a controls approach for the audit strategy
Answer: b) Select a substantive approach for the audit strategy
Explanation: If RMM is high, the auditor must focus on substantive procedures to gather more detailed evidence.
Question 14
An audit firm is finalizing the acceptance of an audit by sending the client an engagement letter. Which piece of information should be included in this letter?
a) Client’s reason for switching audit firms
b) Client’s confirmation of management integrity
c) Client’s statement that no conflict of interest exists
d) Client’s responsibility for the preparation of the financial statements
Answer: d) Client’s responsibility for the preparation of the financial statements
Explanation: The engagement letter outlines that the client is responsible for the preparation and presentation of the financial statements.
Question 15
An audit manager is concerned about a severe economic downturn in the country where its audit client is based. Which component of the audit risk model is of concern to this manager?
a) Control
b) Inherent
c) Detection
d) Quantitative
Answer: b) Inherent
Explanation: Inherent risk is influenced by external factors such as economic downturns, which are beyond the client’s control.
Question 16
A company has been operating with weak internal accounting policies within an industry known for poor accounting practices. The auditor must keep audit risk below 1%. Which situation must be present to ensure this level of audit risk?
a) There must be a low level of inherent risk.
b) There must be a high level of inherent risk.
c) There must be a low level of detection risk.
d) There must be a high level of detection risk.
Answer: c) There must be a low level of detection risk.
Explanation: To maintain low audit risk, detection risk must be minimized, especially if inherent and control risks are high.
Question 17
A staff auditor working on a large company’s audit has found a red flag that may indicate fraud. Which item was found by the auditor?
a) Simple business structure
b) Strong internal controls
c) Inadequate training programs
d) Basic business transactions
Answer: c) Inadequate training programs
Explanation: Inadequate training programs can create opportunities for fraud due to a lack of understanding of proper procedures.
Question 18
An auditor has a new audit engagement of an urgent care clinic with a high turnover of direct care workers in a geographic area that has experienced tremendous population growth. Which procedure should the auditor perform to gain an understanding of the client?
a) Test the client’s procedures for recording payroll liabilities
b) Review AICPA industry guides for the healthcare industry
c) Test a sample of wage calculations from a payroll register
d) Review the client’s formal procedures for classifying payroll expenses
Answer: b) Review AICPA industry guides for the healthcare industry
Explanation: The auditor should consult AICPA industry guides to understand the unique risks associated with the healthcare industry.
Question 19
How does the inclusion of a non-executive individual in the composition of the board of directors affect an auditor’s risk assessment?
a) It increases the risk of a material misstatement due to a lack of expertise.
b) It reduces the risk of a material misstatement because they are more impartial.
c) It increases the risk of a material misstatement due to a lack of a vested interest in the company.
d) It reduces the risk of a material misstatement because they are outside of corporate governance.
Answer: b) It reduces the risk of a material misstatement because they are more impartial.
Explanation: Non-executive directors are more impartial and can provide a more objective view of the company’s governance, reducing the risk of material misstatement.
Question 20
A company begins to use a new accounts payable computer system and then realizes a critical data field present in the old system is missing in the new system. Which type of risk is present for this company?
a) Control
b) Inherent
c) Financial
d) Detection
Answer: a) Control
Explanation: This is a control risk because the new system’s missing data field compromises the company’s ability to properly manage its accounts payable.
