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Certified Public Accountant (CPA) - Auditing and Attestation (AUD) Exam 1

Certified Public Accountant (CPA) - Auditing and Attestation (AUD) Exam 2

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1 / 40

An auditor may decide to perform substantive tests of transactions and balances when:

The assessment of control risk is high

The assessment of detection risk is low

The inherent risk is assessed as low

Tests of controls indicate a strong internal control structure

Explanation: When control risk is high, the auditor has less reliance on the effectiveness of internal controls and therefore performs more substantive tests to obtain sufficient appropriate evidence.

2 / 40

An auditor typically assesses the risk of material misstatement at two levels:

Financial statement and assertion

Account balance and assertion

Entity and financial statement

Financial statement and account balance

Explanation: Auditors assess the risk of material misstatement at both the financial statement level (overall risk) and at the assertion level (specific to account balances, transactions, and disclosures).

3 / 40

An auditor’s report that refers to the use of an accounting principle that is not generally accepted in the United States would be an example of a(n):

Disclaimer of opinion

Qualified opinion

Unqualified opinion

Adverse opinion

Explanation: A qualified opinion is issued when the financial statements are presented fairly except for a material misstatement related to the use of an accounting principle that is not generally accepted.

4 / 40

An auditor's engagement letter most likely would include:

The auditor's preliminary assessment of the risk of material misstatement

The auditor's responsibility to detect errors and fraud

A request for permission to communicate with the entity's legal counsel

Management's acknowledgment of its responsibility for maintaining effective internal control

Explanation: The engagement letter typically includes management's acknowledgment of its responsibility for maintaining effective internal control, which is crucial for the auditor to perform the audit.

5 / 40

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?

There has been a change in accounting principles that has a material effect on the financial statements

The financial statements fail to disclose information that is required by generally accepted accounting principles

The entity has elected to exclude the statement of cash flows from the financial statements

The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures

Explanation: If the financial statements lack required disclosures, the auditor would choose between a qualified or adverse opinion, depending on the materiality and pervasiveness of the omission.

6 / 40

An auditor is least likely to use external confirmations to verify:

Inventory quantities

Bank balances

Accounts receivable balances

Accounts payable balances

Explanation: External confirmations are typically used to verify accounts receivable, accounts payable, and bank balances. Inventory quantities are usually verified through physical observation and inspection.

7 / 40

Which of the following is least likely to be considered by an auditor when evaluating the control environment of an entity?

The effectiveness of the board of directors

The assignment of authority and responsibility

Management's philosophy and operating style

The control activities implemented by management

Explanation: While control activities are an important part of internal control, the control environment encompasses broader factors such as the board's effectiveness, management's philosophy, and the assignment of authority and responsibility.

8 / 40

In which of the following circumstances is an auditor most likely to rely on substantive tests rather than tests of controls?

The control risk is assessed as low

The controls are highly automated

The entity has a strong internal audit function

There is an expectation of significant errors

Explanation: When there is an expectation of significant errors, the auditor is more likely to rely on substantive tests to detect material misstatements directly, rather than relying on tests of controls.

9 / 40

An auditor should consider the competence and objectivity of an internal auditor in deciding whether to:

Use the internal auditor’s work to support the audit opinion

Communicate with the audit committee about the internal audit function

Use the work of the internal auditor in performing substantive tests

Rely on the internal auditor's work to reduce control risk

Explanation: The competence and objectivity of the internal auditor are key factors in deciding whether to rely on the internal auditor's work to reduce control risk, thus affecting the nature, timing, and extent of the auditor's procedures.

10 / 40

Which of the following procedures is an auditor least likely to perform in the planning stage of an audit?

Evaluating the reasonableness of accounting estimates

Developing an overall audit strategy

Obtaining a sufficient understanding of the entity's internal control structure

Performing preliminary analytical procedures

Answer: C) Evaluating the reasonableness of accounting estimates
Explanation: Evaluating the reasonableness of accounting estimates is typically done during the substantive testing phase, not the planning stage. The planning stage focuses on understanding the entity and its environment and developing an audit strategy.

11 / 40

Which of the following is the most important consideration when evaluating the adequacy of an audit client's internal control?

Management's competence in the accounting function

The cost-benefit relationship of internal control

The tone set by management

The organization's size and structure

Explanation: The tone set by management, often referred to as the control environment, is crucial as it influences the overall attitude toward internal controls and ethical behavior within the organization.

12 / 40

Which of the following is an auditor's primary consideration when using analytical procedures during the planning phase of an audit?

To identify potential areas of material misstatement

To gather evidence to support management's assertions

To determine the effectiveness of internal controls

To test the accuracy of financial statement balances

Explanation: During the planning phase, analytical procedures are primarily used to identify areas that may represent specific risks of material misstatement, helping the auditor plan the audit approach.

13 / 40

Which of the following is an example of a test of details of balances?

Performing a search for unrecorded liabilities

Observing the physical inventory count

Confirming accounts receivable balances with customers

Testing the accuracy of sales invoices

Explanation: Confirming accounts receivable balances with customers is a test of details of balances, verifying the existence and accuracy of the reported amounts.

14 / 40

Which of the following controls would most likely reduce the risk of diversion of customer receipts by an employee?

Daily deposit of cash receipts

Monthly bank reconciliations

A bank lockbox system

Authorization of write-offs of uncollectible accounts

Explanation: A bank lockbox system reduces the risk of diversion of customer receipts by having the payments sent directly to the bank, thereby limiting the opportunity for employees to divert funds.

15 / 40

An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the:

Auditor disclaims an opinion as a result of the specialist's findings

Specialist's findings provide the auditor with greater assurance of the financial statements' fairness

Specialist is willing to issue a separate report on the financial statements

Auditor understands the methods and assumptions used by the specialist

Explanation: If the specialist's findings lead the auditor to disclaim an opinion, it is appropriate to refer to the specialist in the auditor's report to explain the basis for the disclaimer.

16 / 40

Which of the following procedures would an auditor most likely perform to obtain audit evidence about the completeness of the entity’s accounts payable?

Reviewing a sample of purchase orders for proper authorization

Tracing vendor invoices to entries in the accounts payable ledger

Examining the entity’s cash disbursements subsequent to year-end

Confirming accounts payable with vendors

Explanation: Examining cash disbursements made after year-end helps the auditor identify any liabilities that should have been recorded in the accounts payable at the balance sheet date.

17 / 40

Which of the following is a primary purpose of the management representation letter?

To detect all material errors or fraud in the financial statements

To confirm the auditor's responsibility for the financial statements

To document management's responses to inquiries concerning various aspects of the audit

To reduce audit risk to an acceptably low level

Explanation: The management representation letter documents management's responses to the auditor's inquiries and confirms certain representations made during the audit, providing evidence on matters not directly observable by the auditor.

18 / 40

An auditor should trace corporate stock issuances and treasury stock transactions to the:

Transfer agent's records

Articles of incorporation

Minutes of the board of directors

Numbered stock certificates

Explanation: The board of directors authorizes stock issuances and treasury stock transactions, so tracing these transactions to the board minutes ensures they were properly approved.

19 / 40

Which of the following procedures would an auditor most likely perform to test the completeness assertion for accounts payable?

Confirming accounts payable balances with vendors

Reviewing subsequent cash disbursements for unrecorded liabilities

Reviewing a sample of receiving reports and matching them to vendor invoices

Examining vendor statements for amounts not reported as purchases

Answer: D) Reviewing subsequent cash disbursements for unrecorded liabilities
Explanation: Reviewing subsequent cash disbursements helps identify liabilities that should have been recorded at the balance sheet date, addressing the completeness assertion for accounts payable.

20 / 40

Which of the following is an auditor most likely to use to determine the scope of audit procedures?

The timing of the auditor's visits to the client's premises

The auditor's understanding of the entity and its environment

The assessed level of control risk

The materiality levels for the financial statements

Explanation: The auditor's understanding of the entity and its environment, including its internal control, helps determine the scope of audit procedures needed to address the risks of material misstatement.

21 / 40

An auditor is least likely to test the internal controls related to which of the following?

The effectiveness of operations

The safeguarding of assets

The reliability of financial reporting

Compliance with laws and regulations

Explanation: While internal controls related to safeguarding assets, financial reporting, and compliance are relevant to an audit, controls over the effectiveness of operations are generally not a primary focus unless they impact financial reporting.

22 / 40

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Confirming year-end accounts receivable balances

Comparing the latest available interim financial statements with the financial statements being audited

Reviewing the minutes of board of directors' meetings

Performing cutoff tests of sales transactions

Explanation: Reviewing the minutes of board meetings can provide evidence of significant subsequent events, such as decisions or transactions that occurred after the balance sheet date.

23 / 40

An auditor is most likely to use audit sampling in which of the following situations?

The audit client has an effective internal control system

Testing the entire population is cost-prohibitive

Analytical procedures provide sufficient evidence

There is a low risk of material misstatement

Explanation: Audit sampling is typically used when it is impractical or cost-prohibitive to test the entire population, allowing the auditor to draw conclusions based on a representative sample.

24 / 40

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:

Extent of substantive tests

Tolerable misstatement

Extent of tests of controls

Level of inherent risk

Explanation: If control activities are ineffective, the auditor will increase the extent of substantive tests to compensate for the higher control risk, ensuring sufficient appropriate evidence is obtained.

25 / 40

Which of the following audit procedures is most likely to detect fraud?

Performing substantive tests of transactions

Inquiry of management

Analytical procedures applied to financial data

Observing employees during inventory counts

Explanation: Substantive tests of transactions can detect fraud by verifying the authenticity and accuracy of transaction details, which helps uncover misstatements resulting from fraudulent activities.

26 / 40

An auditor most likely would apply analytical procedures to:

Assess the overall financial statement presentation

Evaluate the reasonableness of the going concern assumption

Determine whether the internal controls are operating effectively

Identify areas that may represent specific risks relevant to the audit

Explanation: Analytical procedures are used to identify areas that might represent specific risks, helping the auditor focus on areas with higher risk of material misstatement.

27 / 40

An auditor may obtain information on subsequent events by:

Reviewing the minutes of stockholders' meetings

Confirming accounts payable

Investigating changes in long-term debt occurring after year-end

Comparing the latest available interim financial statements with the financial statements being audited

Explanation: Comparing interim financial statements with the audited financial statements helps the auditor identify significant events or transactions that may have occurred subsequent to the balance sheet date.

28 / 40

Which of the following procedures would an auditor most likely perform to test controls relating to management’s assertion concerning the completeness of sales transactions?

Inspect the billing records for prenumbered invoices

Review the accounting system for unrecorded sales invoices

Compare shipping documents with sales invoices

Confirm a sample of accounts receivable

Explanation: Comparing shipping documents with sales invoices helps ensure that all shipments are billed and recorded, addressing the completeness assertion for sales transactions.

29 / 40

Which of the following should an auditor do when control risk is assessed at the maximum level?

Perform additional substantive procedures

Perform fewer substantive tests of details

Perform more tests of controls

Document the conclusion more extensively

Explanation: When control risk is assessed at the maximum level, it indicates a high risk of material misstatement, leading the auditor to perform additional substantive procedures to gather sufficient appropriate evidence.

30 / 40

The primary reason for an auditor to request letters of inquiry from attorneys is to provide the auditor with:

The opinion of a specialist as to the potential outcome of pending litigation

Corroborative evidence concerning litigation, claims, and assessments

An expert opinion as to whether a loss is probable

Information concerning the progress of cases to date

Explanation: Letters of inquiry from attorneys provide corroborative evidence regarding the existence and potential impact of litigation, claims, and assessments, which are important for the auditor's evaluation of contingent liabilities.

31 / 40

The primary purpose of performing tests of controls is to

Evaluate whether controls are operating effectively

Determine the extent of substantive procedures required

Detect material misstatements in the financial statements

Provide an opinion on the effectiveness of internal controls

Explanation: Tests of controls are performed to evaluate whether the internal controls are operating effectively and can be relied upon to prevent or detect and correct material misstatements.

32 / 40

Which of the following types of audit evidence is the most reliable?

Analytical procedures performed by the auditor

Evidence obtained directly by the auditor from an external source

Evidence obtained through inquiries of client personnel

Internally generated evidence obtained under strong internal controls

Explanation: Evidence obtained directly by the auditor from an external source is generally considered the most reliable because it is not influenced by the client and is therefore less subject to bias.

33 / 40

Which of the following is the most likely reason for an auditor to use audit sampling?

To evaluate the accounting estimates made by management

To reduce audit risk to an acceptably low level

To increase the efficiency of the audit

To increase the effectiveness of the audit

Explanation: Audit sampling increases the efficiency of the audit by allowing the auditor to draw conclusions about the population based on a representative sample, rather than examining all items.

34 / 40

Which of the following is a primary objective of analytical procedures used in the overall review stage of an audit?

To assess the propriety of the client’s use of its resources

To identify potential risk areas

To obtain evidence about the completeness of transactions

To assist the auditor in evaluating the overall financial statement presentation

Explanation: Analytical procedures in the overall review stage help the auditor assess the overall financial statement presentation, ensuring that the statements are consistent with the auditor’s understanding and expectations.

35 / 40

An auditor uses the knowledge provided by the understanding of internal control and the final assessed risk of material misstatement primarily to determine the nature, timing, and:

Extent of substantive procedures

Extent of tests of controls

Timeliness of substantive procedures

Timeliness of tests of controls

Explanation: Understanding internal control and assessing the risk of material misstatement helps the auditor determine the nature, timing, and extent of substantive procedures needed to gather sufficient appropriate audit evidence.

36 / 40

Which of the following factors is most likely to affect an auditor’s judgment about the quantity, type, and content of audit documentation?

The number of personnel assigned to the audit

The auditor's judgment about materiality

The timing of the auditor's visits to the client's premises

The content of the management representation letter

Explanation: The auditor's judgment about materiality affects decisions on the quantity, type, and content of audit documentation because materiality guides the auditor in determining what is significant enough to document.

37 / 40

Which of the following is least likely to be included in an auditor’s engagement letter?

The responsibilities of the auditor

The opinion to be expressed

The form and content of the audit report

Objective and scope of the audit

Explanation: The engagement letter typically outlines the objective and scope of the audit, the auditor's responsibilities, and the form and content of the audit report, but it does not include the opinion to be expressed, as this is determined after the audit is completed.

38 / 40

Which of the following is least likely to be a reason for an auditor to consider modifying the standard unqualified audit report?

There is substantial doubt about the entity's ability to continue as a going concern

The auditor wishes to emphasize an unusually important subsequent event

The entity is a component of a larger business enterprise

There is a material inconsistency in the financial statements

Explanation: Being a component of a larger business enterprise is not in itself a reason to modify the audit report. However, the other options involve circumstances that may require emphasis of matter, modification, or additional explanatory paragraphs.

39 / 40

An auditor who discovers that a client’s legal expense is significantly understated would most likely recommend that the client:

Accrue additional legal expense

Disclose the understatement in a note to the financial statements

Record an allowance for legal contingencies

Reduce recorded liabilities for legal contingencies

Explanation: If legal expenses are understated, the auditor would recommend accruing additional legal expenses to accurately reflect the liability in the financial statements.

40 / 40

In an audit of financial statements, an auditor's primary consideration regarding an internal control structure policy or procedure is whether the policy or procedure:

Provides adequate safeguards over access to assets

Affects management's financial statement assertions

Enhances management's decision-making processes

Reflects management's philosophy and operating style

Explanation: The auditor's primary consideration is whether the internal control policy or procedure affects the management's assertions regarding the financial statements, such as existence, completeness, and valuation.

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CPA – Auditing and Attestation (AUD) Exam 2

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