CPA Exam Test with Answers

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Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when  
 A. The audit committee is active in overseeing the entity’s financial reporting policies. Answer A is incorrect.  An active audit committee tends to temper management's aggressive stance.  B. External policies established by parties outside the entity affect its accounting practices. Answer B is incorrect.  External policies tend to moderate such management tendencies.  C. Management is dominated by one individual who is also a shareholder. Answer C is correct because these noted factors tend to have an especially significant influence on the control environment when management is dominated by one or a few individuals.  Such a circumstance allows management to effectively implement aggressive financial reporting and emphasize meeting profit goals.  D. Internal auditors have direct access to the board of directors and entity management. Answer D is incorrect.  Internal auditors tend to mitigate management's aggressive attitude. close

Control environment.  The control environment factors set the tone of an organization, influencing the control consciousness of its people.  The seven control environment factors, which you may remember using the mnemonic IC HAMBO, are  

I| -| Integrity and ethical values|
C| -| Commitment to competence|
H| -| Human resource policies and practices|
A| -| Assignment of authority and responsibility|
M| -| Management’s philosophy and operating style|
B| -| Board of directors or audit committee participation| O| -| Organizational structure|
 
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What situation would exacerbate the status of the control environment? close
Answer C is correct because these noted factors tend to have an especially significant influence on the control environment when management is dominated by one or a few individuals.  Such a circumstance allows management to effectively implement aggressive financial reporting and emphasize meeting profit goal Which of the following is ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies?  

 A. Commissioned sales personnel.
Answer A is incorrect.  Sales personnel are often remunerated on a commission basis and this is not considered a factor ordinarily indicative of increased financial reporting risk.  B. A corporate code of conduct.

Answer B is incorrect.  A corporate code of conduct may be developed to serve as guidelines while conducting business and this is not considered a factor ordinarily indicative of increased financial reporting risk.  C. Rapid growth of the organization.

Answer C is correct.  Rapid growth of the organization is considered a risk factor when considering a client's risk assessment policies.  D. Materiality standards for determining whether to capitalize acquisitions of fixed assets. Answer D is incorrect.  Materiality standards for determining whether to capitalize acquisitions of fixed assets relates to auditor's judgment and is not ordinarily considered a factor indicative of increased financial reporting risk. close

Risk assessment.  For financial reporting purposes an entity's risk assessment is its identification, analysis, and management of risks relevant to the preparation of financial statements following GAAP (or some other comprehensive basis).  The following are considered risks that may affect an entity's ability to properly record, process, summarize and report financial data:  

(1)  Changes in the operating environment (e.g., increased competition) (2)  New personnel
(3)  New information systems
(4)  Rapid growth
(5)  New technology
(6)  New lines, products, or activities
(7)  Corporate restructuring
(8)  Foreign operations
(9)  Accounting pronouncements
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Consider risks that may affect an entity's...
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