CPA Practice Exam Flashcards

Questions and Answers

When a CPA examines a client's projected financial statements, what should the CPA's report state?

The CPA performed procedures to evaluate management's assumptions.

Before agreeing to change the engagement from an audit to a compilation, what should Davis consider?

Additional audit effort necessary to complete the audit

Reason given for Tech's request

Both I and II (correct)

None of the above

What is the threat of familiarity as listed by GAO standards?

When the auditor is too sympathetic or accepting of work due to a long or close relationship with management.

What implicit representation does an accountant make when issuing a standard report for a compilation of a nonissuer's financial statements?

The accountant is independent with respect to the entity. Signup and view all the answers

Which transaction would normally increase Heath Co.'s current ratio of 4:1?

Selling inventory on account Signup and view all the answers

What should a covered member do upon learning that another member of the attest engagement team is considering employment with the client?

Notify an appropriate person in the firm. Signup and view all the answers

What factor would most likely assist an independent auditor in assessing the objectivity of the internal auditor?

The organizational status of the director of internal audit. Signup and view all the answers

If the business environment is experiencing a recession, which account would the auditor likely focus increased attention on?

Allowance for doubtful accounts. Signup and view all the answers

What should the auditor's opinion indicate regarding the condensed financial statements derived from audited financial statements?

The information is fairly stated in all material respects in relation to the complete financial statements. Signup and view all the answers

What assertion does the test of controls involving the mailing of monthly statements to customers support?

Existence. Signup and view all the answers

What must King, a CPA, comply with before submitting North Co.'s interim financial statements?

Statements on Standards for Accounting and Review Services. Signup and view all the answers

Under what condition would an auditor's report be designated an audit of a special-purpose financial statement?

When it is issued in connection with a basis of accounting to comply with an agreement between the entity and third parties. Signup and view all the answers

When would an auditor most likely not rely on controls within an organization?

If the payroll department supervisor is responsible for authorizing payroll rate changes for all employees. Signup and view all the answers

Which level would most likely address the risk of material misstatement by the auditor's consideration of an entity's control environment?

Financial statements. Signup and view all the answers

Which understanding is relevant when satisfying the obligation to understand the entity and its environment on an audit?

Revenue recognition practices. Signup and view all the answers

What is the primary risk of material misstatement related to contingent liabilities?

Completeness. Signup and view all the answers

What statement should guide Nile in providing technical assistance in integrating a new IT system?

Standards for Consulting Services. Signup and view all the answers

Study Notes

CPA Exam Key Concepts

Projected Financial Statements: CPA's report must confirm evaluation of management's assumptions during examination.
Engagement Change Considerations: Before converting an audit to a compilation, auditors must assess required additional audit efforts and justification for change.
Independence Threats: Familiarity is a threat defined by auditors potentially being too sympathetic towards management due to close relationships.
Accountant's Implicit Representations: By issuing a standard report for compilations, accountants implicitly assert independence concerning the entity.
Current Ratio Dynamics: A current ratio of 4:1 can be improved by selling inventory on account.
Professional Conduct Notification: Upon learning about an engagement team member's job consideration with a client, the covered member should notify someone appropriate within the firm.
Objectivity in Internal Audits: Assessment of an internal auditor's objectivity can be aided by the organizational status of the internal audit director.
Recession Focus: An auditor should pay increased attention to the allowance for doubtful accounts during economic downturns.
Condensed Financial Statements Opinion: Auditors must ensure that information in condensed statements reflects fair representation in relation to complete financial statements.
Existence Assertion: Observing the mailing of customer statements supports management's assertion of existence through error follow-up.
Interim Financial Statements Compliance: Financial statements reviewed by a CPA must comply with the Statements on Standards for Accounting and Review Services before submission.
Special-purpose Financial Statements: Issued audit reports relate to unique accounting bases used to meet agreements separate from the auditor.
Payroll Controls: Auditors may not rely on controls if the payroll supervisor authorizes all changes in employee pay rates.
Material Misstatement Risks: Material misstatement risk associated with the control environment is most pertinent at the financial statement level.
Revenue Recognition Understanding: An essential activity in understanding an entity’s environment during audits relates to revenue recognition practices.
Contingent Liabilities Auditing: Completeness is the primary risk of material misstatement for disclosures of contingent liabilities.
Consulting Standards: The guidance for CPA engagements providing technical assistance on IT integration is derived from the Standards for Consulting Services.

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Test your knowledge with these CPA practice exam flashcards. The questions cover key concepts and scenarios that CPAs face, such as evaluating financial statement projections and changing engagement types. Perfect for preparing for the CPA exam.