1. Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?
- Supporting records that should be readily available are frequently not produced when requested.
- Reportable conditions previously communicated have not been corrected.
- Clerical errors are listed on a monthly computer-generated exception report.
- Differences are discovered during the client's annual physical inventory count.
2. An auditor is testing internal control procedures that are evidenced on an entity's vouchers by matching random numbers with voucher numbers. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher:
- Constitutes an exception.
- Has been properly voided.
- Cannot be located.
- Represents an immaterial dollar amount.
3. In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are:
- Consistent with prior periods.
- Similar to industry guidelines.
- Objective and not susceptible to bias.
- Deviations from historical patterns.
4. An auditor may achieve audit objectives related to particular assertions by:
- Performing analytical procedures.
- Adhering to a system of quality control.
- Preparing auditor working papers.
- Increasing the level of detection risk.
5. Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client-operating personnel being aware of the testing process?
- Integrated test facility.
- Input controls matrix.
- Parallel simulation.
- Data entry monitor.
6. An auditor should design the written audit plan so that
- All material transactions will be selected for substantive testing.
- Substantive tests prior to the balance sheet date will be minimized.
- Each account balance will be tested under either tests of controls or tests of transactions.
- The audit procedures selected will achieve specific audit objectives.
7. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding
- The competency of the client's internal audit staff.
- Specialized accounting principles of the client's industry.
- Disagreements with management as to auditing procedures.
- The uncertainty inherent in applying sampling procedures.
8. Which of the following statements is correct with respect to audits of U.S. issuers?
- Audits of issuers must be conducted under SAS issued by the ASB.
- Audits of issuers must be conducted under AS issued by the PCAOB.
- Audits of issuers must be conducted under ISA issued by the PCAOB.
- Audits of issuers may now be conducted under any set of nationally recognized audit standards.
Regulation (REG) Practice Exam Answers
1. Correct Answer
To enable a third party to solicit business from the taxpayer
A tax return preparer may not disclose or use tax return information without the taxpayer's consent except
pursuant to a court or administrative order, in connection with the preparation of the tax return, or to be
evaluated for quality or peer review. The preparer may not disclose tax return information to enable a third
party to solicit business from the taxpayer.
2. Correct Answer
$250,000.
A corporation may not deduct federal income taxes for federal tax purposes. In addition, only 50 percent of
meals and entertainment may be deducted. As a result, Cape will add back the $140,000 book income
federal tax of $40,000 and 50 percent of the meals and entertainment, or $25,000, resulting in taxable
income of $205,000.
3. Correct Answer
Stark is a secured creditor and can assert a claim to the circuit tester that will be superior to the claims of
Peters' other creditors.
By filing a financing statement within ten days of obtaining a purchase money security interest, Stark has
perfected a secured interest in the circuit tester that is superior to all other claims. Whether a creditor is
secured or unsecured has nothing to do with that creditor's participation in a bankruptcy filing. The security
agreement and subsequent filing were all a part of a contemporaneous exchange, so the filing is not
considered an attempt to gain a preference on an antecedent debt, and is not a voidable preference.
4. Correct Answer
The assignment transfers the assignor's interest in partnership profits and surplus.
A partner may sell or assign his or her interest in the partnership without dissolving the partnership. The
assignee does not become a partner, does not have the right to participate in management, and does not
have the right to inspect partnership books or records
5. Correct Answer
False
Blake's verbal offer of December 15 was a legitimate offer. Offers need not be written to be legitimate
6. Correct Answer
actual fee would be substantially higher.
Stating a particular fee for specific consulting services would violate the profession's ethical standards if it
was apparent to the CPA consultant that the actual fee would be much higher. Independence is not
required when performing consulting services.
7. Correct Answer
Claims resulting out of an extension of credit based upon false representations.
There are many exceptions to discharge, including claims from credit obtained in a fraudulent manner. The
other choices in the problem are not among the exceptions in the law and would only receive a distributive
part of the bankrupt party’s assets in accordance with the court order of distribution. The claims remaining
unpaid after all assets are distributed are discharged.
8. Correct Answer
Is limited to $100,000 on a joint income tax return.
Home equity indebtedness is limited to $100,000 on a joint return. Home equity indebtedness is any nonacquisition debt that is secured by a qualified residence. It may not exceed the fair market value of the
house less the acquisition indebtedness or the $100,000, whichever is less. Acquisition indebtedness, on the
other hand, is debt incurred in acquiring, constructing, or substantially improving a qualified residence and
is secured by such residence (limit is $1 million). Note: Any interest attributed to debt over these limits may
not be deducted.
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