2013 AICPA Newly Released Questions AuditingStudy4smart-accountancy

1Following are multiple choice questions and simulations recently released by theAICPA. These questions were released by the AICPA with letter answers only. Oureditorial board has provided the accompanying explanation.Please note that the AICPA generally releases questions that it does NOT intend to useagain. These questions and content may or may not be representative of questions youmay see on any upcoming exams.2013 AICPA Newly Released Questions Auditing2AICPA QUESTIONS RATED MODERATE DIFFICULTY1. CPA-8140Which of the following types of audit evidence provides the least assurance of reliability?a. Receivable confirmations received from the client's customers.b. Prenumbered receiving reports completed by the client's employees.c. Prior months' bank statements obtained from the client.d. Municipal property tax bills prepared in the client's name.Solution:Choice "b" is correct. Prenumbered receiving reports completed by the client's employees are consideredinternal evidence and are the least reliable of the items listed.Choice "a" is incorrect. Receivable confirmations received from client's customers, which are consideredexternal evidence, are more reliable than internal evidence.Choice "c" is incorrect. Prior months' bank statements obtained from the client, which are consideredexternal evidence, are more reliable than internal evidence.Choice "d" is incorrect. Municipal property tax bills prepared in the client's name, which are consideredexternal evidence, are more reliable than internal evidence.2013 AICPA Newly Released Questions Auditing32. CPA-08141An auditor is considering whether the omission of the confirmation of investments impairs the auditor'sability to support a previously expressed unmodified opinion. The auditor need not perform this omittedprocedure if:a. The results of alternative procedures that were performed compensate for the omission.b. The auditor's assessed level of detection risk is low.c. The omission is documented in a communication with the audit committee.d. No individual investment is material to the financial statements taken as a whole.Solution:Choice "a" is correct. If other audit procedures compensate for an omitted procedure, the auditor doesnot need to perform the omitted procedure.Choice "b" is incorrect. If an auditor's assessed level of detection risk is low, this would provide a furtherreason to perform the omitted procedure or an alternative procedure to confirm the investment balance.Choice "c" is incorrect. An auditor would still need to apply the omitted procedure (or alternativeprocedure) even if the omission is documented in a communication with the audit committee.Choice "d" is incorrect. An auditor would need to perform the omitted procedure or an alternativeprocedure, as the aggregate amount of investments may be material to the financial statements taken asa whole.2013 AICPA Newly Released Questions Auditing43. CPA-08142Which of the following explanations most likely would satisfy an auditor who questions managementabout significant debits to accumulated depreciation accounts in the current year?a. Prior years' depreciation expenses were erroneously understated.b. Current year's depreciation expense was erroneously understated.c. The estimated remaining useful lives of plant assets were revised upward.d. Plant assets were retired during the current year.Solution:Choice "d" is correct. The explanation that plant assets were retired during the year would most likelysatisfy an auditor who questions management about significant debits to accumulated depreciationaccounts made during the year. The journal entry to retire an asset includes a debit to accumulateddepreciation and a credit to the asset account.Choice "a" is incorrect. If prior years' depreciation expense was erroneously understated, the auditorwould expect a debit to retained earnings and a credit to accumulated depreciation for the errorcorrection.Choice "b" is incorrect. Typically, accumulated depreciation is debited when there is total and permanentimpairment, and when an asset is sold, retired, or otherwise disposed of. If the current year'sdepreciation expense was erroneously understated, this would not typically result in debits toaccumulated depreciation. Instead, the auditor would expect smaller amounts credited to accumulateddepreciation.Choice "c" is incorrect. A change in useful life is handled prospectively. An increase in the remaininguseful lives of assets would result in smaller amounts of depreciation expense being credited toaccumulated depreciation.2013 AICPA Newly Released Questions Auditing54. CPA-08143An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonableperiod of time because of negative cash flows and working capital deficiencies. Under thesecircumstances, the auditor would be most concerned about the:a. Control environment factors that affect the organizational structure.b. Correlation of detection risk and inherent risk.c. Effectiveness of the entity's internal control activities.d. Possible effects on the entity's financial statements.Solution:Choice "d" is correct. If an auditor has substantial doubt about the entity's ability to continue as a goingconcern, the auditor would be most concerned about the possible effects on the entity's financialstatements.Choice "a" is incorrect. The control environment factors that affect the organizational structure do notdirectly relate to going concern.Choice "b" is incorrect. The auditor is concerned about the correlation between detection risk andinherent risk when deciding the nature, extent, and timing of audit procedures.Choice "c" is incorrect. When the auditor is concerned about an entity's ability to continue as a goingconcern, the auditor is concerned about the effects on the entity's financial statements and will identifyconditions and events that may be indicative of substantive doubt. The effectiveness of internal controlswould not typically provide evidence of substantial doubt.2013 AICPA Newly Released Questions Auditing65. CPA-08144Subsequent to issuing a report on audited financial statements, a CPA discovers that the accountsreceivable confirmation process omitted a number of accounts that are material, in the aggregate. Whichof the following actions should the CPA take immediately?a. Bring the matter to the attention of the board of directors or audit committee.b. Withdraw the auditor's report from those persons currently relying on it.c. Perform alternative procedures to verify account balances.d. Discuss the potential financial statement adjustments with client management.Solution:Choice "c" is correct. If an auditor omits a procedure, the auditor should first determine whether otheraudit procedures compensate for the omitted audit procedures. If so, no further action is necessary. Ifother procedures do not compensate for the omitted audit procedure and there are people relying on thereport, the auditor should promptly apply the omitted procedure or perform alternative procedures.Choice "a" is incorrect. The auditor would first need to apply the procedure or alternative procedure todetermine the account balance. If the procedure indicated the account was materially misstated, then theauditor would bring the matter to the attention of the board of directors or audit committee.Choice "b" is incorrect. The auditor would first need to apply the procedure or alternative procedure todetermine the account balance. The auditor would withdraw the auditor's report if the client refuses toadjust the financial statements.Choice "d" is incorrect. The auditor would first need to apply the procedure or alternative procedure todetermine the account balance. If adjustments were necessary, the auditor would then talk to the clientabout the potential adjustments.