AICPA Regulation Practice Tests & Exam Prep [Updated 2024]

AICPA Regulation Sample Test

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Cable Corporation orally engaged Drake & Co., CPAs, to audit its financial statements. Cable's management informed Drake that it suspected the accounts receivable were materially overstated. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss. If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did NOT________________________________.

Correct Answer:

violate generally accepted auditing standards in performing the audit
in the scenario described, cable corporation engaged drake & co., cpas, to audit its financial statements. cable informed drake of its suspicion that the accounts receivable might be materially overstated. despite this, drake issued an unqualified opinion on the financial statements which still included the overstated accounts receivable balance. subsequently, these financial statements were used by cable to secure a loan, which they later defaulted on, resulting in significant losses.

when considering the defenses available to drake if cable sues for negligence, it's important to understand the role of generally accepted auditing standards (gaas) in an audit. gaas are a set of guidelines that auditors are expected to follow during the performance of their audits of companies' financial statements. these standards are designed to ensure the accuracy, consistency, and verifiability of auditors' actions and reports.

drake’s strongest defense in this situation would be to demonstrate that they did not violate gaas while performing the audit. this defense hinges on the assertion that the audit was conducted in accordance with these standards, which would generally include understanding the nature of the business, assessing and responding to the risk of material misstatement, and obtaining sufficient appropriate audit evidence.

if drake performed the audit according to gaas, then even if an error (such as the overstated accounts receivable) was not detected, it does not automatically imply negligence on the part of the auditor. it must be shown that the auditor acted negligently or failed to follow the standards which then led to the failure in detecting the error. being in compliance with gaas can be a strong defense because it suggests that the auditor took reasonable steps expected in the profession to ensure the accuracy of the financial statements.

in contrast, if it were proven that drake violated gaas, then the defense weakens significantly. such a violation could include failing to properly assess risks, not obtaining enough evidence, or ignoring clear indications of possible material misstatements. in cases where gaas violations are clear, the auditor's liability for negligence becomes more plausible.

therefore, drake's best defense is to provide evidence and documentation showing adherence to gaas throughout the audit process. this includes demonstrating how they planned and executed the audit, how they considered and addressed the risks of material misstatement (especially given cable’s initial concern about the accounts receivable), and how they concluded that the financial statements were fairly presented in all material respects—an assertion that underpins the unqualified opinion they issued.

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AICPA Regulation

AICPA Regulation test

AICPA Regulation Certification Test

AICPA REG test

AICPA

AICPA REG

REG test

AICPA Regulation (REG)

Regulation certification

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