Master AICPA-Auditing Exam with Reliable Practice Questions
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To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations?
Correct : D
Choice 'd' is correct. When obtaining specific written client representations, an auditor would not apply materiality limits to fraud involving employees with significant roles in the internal control structure, because even fraud that causes an immaterial effect on the financial statements may have serious implications with respect to the integrity of the employees involved.
Choice 'a' is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to disclosure of compensating balance arrangements involving restrictions on cash balances, because immaterial amounts need not be considered.
Choice 'b' is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to information concerning related party transactions and related amounts receivable or payable, because immaterial amounts need not be considered.
Choice 'c' is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to the absence of errors and unrecorded transactions in the financial statements, because immaterial amounts need not be considered.
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"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:
Correct : B
Choice 'b' is correct. In a management (client) representation letter, the client will generally confirm that there have been no communications from regulatory agencies concerning matters that could have a material effect on the financial statements.
Choice 'a' is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a special report.
Choice 'c' is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a letter for an underwriter (i.e., a comfort letter).
Choice 'd' is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a report on internal controls.
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To which of the following matters would materiality limits not apply when obtaining written client representations?
Correct : C
Choice 'c' is correct. Materiality limits would not apply when obtaining written client representations regarding irregularities involving management, because even immaterial instances of fraud may have serious implications with respect to management's integrity.
Choices 'a', 'b', and 'd' are incorrect. An auditor would apply materiality limits to matters that might affect recognition, measurement, and disclosure in the financial statements, including losses from sales commitments, unasserted claims and assessments, and noncompliance with contractual agreements.
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A purpose of a management representation letter is to reduce:
Correct : C
Choice 'c' is correct. A purpose of a management representation letter is to reduce the possibility of a misunderstanding concerning management's responsibility for the financial statements. The first representation made in the letter states 'we are responsible for the fair presentation in the financial statements of financial position, results of operations and cash flows in conformity with GAAP.'
Choice 'a' is incorrect. The management representation letter confirms oral representations made by management but does not have an effect on audit risk.
Choice 'b' is incorrect. The management letter is important audit evidence but it does not reduce the auditor's responsibility to detect material misstatements.
Choice 'd' is incorrect. The management letter is important audit evidence but it does not reduce the scope of an auditor's procedures concerning related party transactions and subsequent events (or any other generally accepted audit procedure).
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The management of Cain Company, a nonissuer, engaged Bell, CPA, to express an opinion on Cain's internal control. Bell's report described several material weaknesses and potential errors and irregularities that could occur. Subsequently, management included Bell's report in its annual report to the Board of Directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should:
Correct : A
Choice 'a' is correct. The auditor should disclaim an opinion as to management's cost-benefit statement (i.e., 'We do not express an opinion or any other form of assurance on management's cost-benefit statement.').
Choice 'b' is incorrect. The CPA should disclaim an opinion regarding management's representation.
Choice 'c' is incorrect. The CPA's report on internal control is not restricted as to use.
Choice 'd' is incorrect. The CPA does not need to withdraw the opinion as long as a disclaimer on management's cost-benefit statement is presented.
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