AICPA Exam CPA-Auditing Topic 1 Question 94 Discussion

Actual exam question for AICPA's CPA-Auditing exam

Question #: 94
Topic #: 1

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?

AThe CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques.

BManagement's disregard of its responsibility to maintain an adequate internal control environment.

CThe CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions.

DManagement's refusal to permit the CPA to perform substantive tests before the year-end.
Explanation
Choice 'b' is correct. The control environment is the foundation for all other components of internal control. Management's disregard of its responsibility to maintain an adequate internal control environment therefore compromises its ability to provide reasonable assurance regarding reliable financial reporting. The auditor may conclude that the risk of misrepresentation in the financial statements is great enough that an audit should not be conducted.
Choice 'a' is incorrect. The CPA does not need to understand the internal auditor's techniques in order to accept a new audit engagement.
Choice 'c' is incorrect. Related party transactions (by definition) are not considered to be arm's-length transactions, and evaluation of such transactions does not affect the CPA's decision regarding acceptance of new clients.
Choice 'd' is incorrect. Substantive tests are generally performed after year-end, since prior to that time the financial statements have not been finalized.

Show Suggested Answer

Suggested Answer: 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.

by Amalia at Aug 05, 2024, 11:09 PM

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Alison

1 months ago

Related party transactions? More like 'related party shenanigans' if the client tries to hide them from the auditor!

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William

4 days ago

User 1

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Garry

1 months ago

Wait, so they can't do substantive tests before year-end? That's like trying to finish your homework the night before it's due!

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Lashon

Doing substantive tests before year-end could lead to inaccurate results.

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Helaine

17 days ago

It's important to have accurate information before conducting those tests.

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Erinn

29 days ago

That's right, they need the financial statements to be finalized before performing substantive tests.

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Celestina

2 months ago

I guess the auditor doesn't need to understand the internal auditor's techniques, as long as they can still do their job effectively.

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Carol

24 days ago

C: It's important for the CPA to have confidence in the client's internal controls before starting an audit.

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Rodrigo

1 months ago

B: Yeah, that could definitely make a CPA think twice about taking on a new audit engagement.

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Gladys

1 months ago

A: Management's disregard of its responsibility to maintain an adequate internal control environment is a big red flag.

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Kirby

2 months ago

I'd be wary of a client who doesn't take internal controls seriously. That's a red flag for potential misstatements.

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Sanjuana

1 days ago

Yeah, that could lead to unreliable financial reporting.

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Lore

1 months ago

It's definitely a concern if management doesn't care about internal controls.

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Naomi

2 months ago

Exactly. It's important for the CPA to ensure reliable financial reporting.

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Yuki

2 months ago

Hmm, this question really highlights the importance of the control environment. I'll make sure to review that thoroughly in my studies.

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Lisha

1 months ago

Definitely, management's responsibility in maintaining internal controls cannot be overlooked.

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Julio

2 months ago

Yes, the control environment is crucial for ensuring reliable financial reporting.

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Rolland

2 months ago

I agree. If management doesn't take internal control seriously, it's a red flag.

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Naomi

3 months ago

I think the answer is B.

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