CPA - Auditing and Attestation (AUD) Exam 3

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

Certified Public Accountant (CPA) - Auditing and Attestation (AUD) Exam 3
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1 / 40
Which of the following is an auditor’s primary consideration when evaluating audit evidence?
The relevance and reliability of the evidence
The cost of obtaining the evidence
The complexity of the evidence
The time it takes to obtain the evidence

Explanation: The auditor's primary consideration is the relevance and reliability of the audit evidence, as these factors determine the appropriateness of the evidence in supporting the audit opinion.
2 / 40
An auditor’s evaluation of the adequacy of a client’s disclosure about a contingent liability involves:
Recalculating the potential financial impact of the contingent liability
Testing the accuracy of the recorded liability amount
Verifying the existence of the contingent liability through external confirmations
Evaluating whether the disclosures are in accordance with accounting standards

Explanation: Evaluating the adequacy of disclosures about contingent liabilities involves ensuring that the disclosures are complete and in accordance with relevant accounting standards.
3 / 40
Which of the following is an auditor’s primary concern when testing controls over cash disbursements?
Whether cash disbursements are properly recorded
Whether cash disbursements are supported by appropriate documentation
Whether cash disbursements are approved by management
Whether cash disbursements are made in accordance with the budget

Explanation: Testing controls over cash disbursements focuses on whether transactions are authorized by management to prevent unauthorized payments.
4 / 40
Which of the following internal control components is the foundation for all other components?
Control activities
Control environment
Risk assessment
Information and communication

Explanation: The control environment is the foundation for all other components of internal control, as it sets the tone of an organization and influences the control consciousness of its employ
5 / 40
Which of the following is an example of an audit procedure designed to test the occurrence assertion for expenses?
Comparing expenses to the prior year’s amounts
Reviewing invoices and comparing them to recorded expenses
Recalculating the expense totals for accuracy
Confirming expenses with suppliers

Explanation: Reviewing invoices and comparing them to recorded expenses helps verify that expenses recorded in the financial statements actually occurred.
6 / 40
When evaluating internal controls over financial reporting, an auditor is most concerned with:
The consistency of the control procedures over different periods
The efficiency of the control procedures
The level of compliance with industry standards
The effectiveness of the controls in preventing or detecting material misstatements

Explanation: The primary concern is whether the controls are effective in preventing or detecting material misstatements in the financial statements.
7 / 40
An auditor’s primary concern when performing a test of controls over payroll is to ensure:
Payroll transactions are authorized and processed in accordance with company policies
Payroll expenses are appropriately allocated to different cost centers
Payroll transactions are recorded accurately in the financial statements
Payroll records are complete and up-to-date

Explanation: Testing controls over payroll focuses on ensuring that payroll transactions are properly authorized and processed according to company policies.
8 / 40
Which of the following is an auditor’s primary concern when assessing the reasonableness of accounting estimates?
The mathematical accuracy of the estimates
The appropriateness of the assumptions and methods used
The presentation of the estimates in the financial statements
The consistency of the estimates with historical trends

Explanation: Evaluating the reasonableness of accounting estimates primarily involves assessing whether the assumptions and methods used are appropriate and reasonable.
9 / 40
An auditor should obtain an understanding of the client’s internal control systems primarily to:
Evaluate the effectiveness of the client’s operations
Determine the efficiency of the client's business processes
Assess the risk of material misstatement in the financial statements
Ensure compliance with regulatory requirements

Explanation: Understanding the client’s internal control systems helps the auditor assess the risk of material misstatement and design appropriate audit procedures.
10 / 40
Which of the following is a primary concern when an auditor is testing the completeness assertion for liabilities?
Whether all existing liabilities are recorded
Whether liabilities are supported by appropriate documentation
Whether liabilities are properly classified
Whether liabilities are recorded in the correct period

Explanation: Testing the completeness assertion focuses on ensuring that all liabilities that should be recorded in the financial statements are indeed included.
11 / 40
Which of the following is a potential indicator of fraud?
A strong internal control environment
A large number of audit adjustments
Management’s willingness to engage in a high level of risk-taking
An unusually high number of year-end transactions

Explanation: An unusually high number of year-end transactions could indicate attempts to manipulate financial results, which is a potential indicator of fraud.
12 / 40
In an audit, which of the following is the primary purpose of performing a walk-through of a transaction?
To ensure that the transaction is recorded in the appropriate accounting period
To test the accuracy of financial statement disclosures related to the transaction
To verify the existence of the transaction through external confirmation
To assess the effectiveness of internal controls over the transaction

Explanation: A walk-through helps assess the effectiveness of internal controls by tracing a transaction through the entire process and verifying that controls are operating as intended.
13 / 40
An auditor most likely would use substantive procedures to test which of the following assertions?
Information and communication
Segregation of duties
Control activities
Valuation and allocation

Explanation: Substantive procedures are used to test assertions related to valuation and allocation, such as checking whether assets and liabilities are valued correctly.
14 / 40
An auditor most likely would apply analytical procedures in the overall review stage of an audit to:
Enhance the auditor’s understanding of the client's business
Evaluate the overall financial statement presentation
Identify potential risk areas
Determine whether additional audit evidence may be needed

Explanation: In the overall review stage, analytical procedures help the auditor assess whether the financial statements as a whole are consistent with the auditor’s understanding and expectations.
15 / 40
Which of the following is least likely to be an appropriate audit procedure for assessing the accuracy of inventory records?
Observing the physical inventory count
Confirming inventory balances with suppliers
Recalculating inventory cost
Comparing inventory records to purchase orders

Explanation: Confirming inventory balances with suppliers is less relevant than procedures like observing the inventory count or recalculating costs for assessing accuracy.
16 / 40
Which of the following is an auditor most likely to use to evaluate the accuracy of the recorded amounts of inventory?
Confirming inventory quantities with vendors
Observing the physical inventory count
Reviewing the client’s inventory valuation methods
Recalculating inventory turnover ratios

Explanation: Observing the physical inventory count directly helps verify the accuracy of recorded inventory amounts by ensuring that quantities on hand match recorded amounts.
17 / 40
Which of the following is an effective audit procedure for verifying the existence of intangible assets?
Recalculating amortization expenses for intangible assets
Confirming the valuation of intangible assets with an independent appraiser
Inspecting legal documentation related to the intangible assets
Reviewing the client’s internal controls over intangible assets

Explanation: Inspecting legal documentation helps verify the existence and ownership of intangible assets.
18 / 40
Which of the following is most likely to be considered a significant deficiency in internal control?
An occasional oversight in the application of a control procedure
A frequent failure to reconcile bank statements in a timely manner
An effective monitoring process for internal controls
A well-documented and communicated control policy

Explanation: Frequent failures to reconcile bank statements can be considered a significant deficiency as it indicates a potential weakness in internal control processes.
19 / 40
Which of the following procedures would an auditor most likely perform to evaluate the accuracy of recorded revenue transactions?
Inspecting supporting documentation for a sample of sales transactions
Reviewing the client’s credit policies
Recalculating sales revenue totals
Observing the client’s sales processes

Explanation: Inspecting supporting documentation for sales transactions helps verify the accuracy and validity of recorded revenue.
20 / 40
Which of the following audit procedures is used to gather evidence about the accuracy of recorded transactions?
Tracing transactions from source documents to the financial statements
Confirming balances with external parties
Observing inventory counts
Reviewing the client’s compliance with laws and regulations

Explanation: Tracing transactions from source documents to the financial statements helps verify the accuracy of recorded transactions.
21 / 40
When an auditor identifies a significant deficiency in internal control, they should:
Ignore the deficiency if it does not affect the audit opinion
Modify the audit report to include a qualified opinion
Report the deficiency to the audit committee and management
Perform additional audit procedures to compensate for the deficiency

Explanation: Significant deficiencies in internal control should be reported to the audit committee and management to ensure appropriate corrective actions are taken.
22 / 40
What is the primary purpose of an audit engagement letter?
To detail the client’s responsibilities under the audit agreement
To establish the auditor's independence
To provide evidence of management's assertions
To outline the scope and objectives of the audit

Explanation: The audit engagement letter outlines the scope, objectives, and responsibilities of both the auditor and the client to ensure mutual understanding and agreement.
23 / 40
An auditor discovers that a client’s financial statements are materially misstated due to a fraud committed by management. The auditor should:
Modify the audit opinion to reflect the misstatement
Report the fraud to the appropriate regulatory authorities
Ignore the fraud if it is not material to the financial statements
Communicate the matter to the audit committee and consider the implications on the audit report

Explanation: The auditor should communicate material fraud to the audit committee and evaluate its impact on the audit report, even if the fraud is perpetrated by management.
24 / 40
Which of the following would an auditor most likely consider when planning an audit?
The entity’s organizational structure
The entity’s compliance with laws and regulations
The risks of material misstatement
The results of previous audits

Explanation: When planning an audit, the auditor considers the risks of material misstatement to determine the nature, timing, and extent of audit procedures.
25 / 40
Which of the following procedures is an auditor most likely to perform to test the valuation assertion for investments?
Reviewing the market prices of investments
Confirming investment balances with the custodian
Recalculating interest income on investments
Inspecting investment documentation for ownership

Explanation: Reviewing market prices helps verify that investments are valued accurately in accordance with relevant accounting standards.
26 / 40
Which of the following procedures would an auditor most likely use to test the valuation and allocation assertion for inventory?
Observing the physical inventory count
Confirming inventory held on consignment by suppliers
Reviewing the purchase order and receiving report for a sample of inventory items
Comparing the carrying amount of inventory to current market prices

Explanation: Comparing the carrying amount of inventory to current market prices helps the auditor determine whether the inventory is valued correctly and any necessary write-downs have been recorded.
27 / 40
When evaluating the results of analytical procedures, an auditor should consider:
The frequency of transactions performed
The materiality thresholds set by the client
The client’s budget for the year
The nature and extent of identified variances

Explanation: Evaluating the results of analytical procedures involves assessing the nature and extent of variances to determine whether they indicate potential misstatements.
28 / 40
What is the primary objective of performing a substantive test of transactions?
To obtain direct evidence about the validity of transactions
To determine the accuracy of account balances
To evaluate the design and effectiveness of internal controls
To assess the risk of material misstatement

Explanation: Substantive tests of transactions provide direct evidence about whether transactions are valid and accurately recorded.
29 / 40
When an auditor discovers that an account balance is misstated due to an error, they should:
Perform additional procedures to determine the extent of the misstatement
Ignore the error if it is immaterial
Report the error to the audit committee without adjusting the financial statements
Report the error to the client’s management and adjust the financial statements

Explanation: If an account balance is misstated, the auditor should perform additional procedures to assess the extent of the misstatement and determine its impact on the financial statements.
30 / 40
Which of the following is most likely to be a key control for ensuring the accuracy of accounts receivable?
Review of customer credit limits
Annual confirmation of accounts receivable balances with customers
Monthly reconciliation of the accounts receivable subsidiary ledger to the general ledger
Regular updates to the accounts receivable aging report

Explanation: Regular reconciliation of subsidiary ledgers to the general ledger helps ensure the accuracy of accounts receivable balances.
31 / 40
Which of the following is the best indicator of a potential material misstatement due to fraud?
Consistent financial results over several periods
Effective segregation of duties in the accounting department
Unusual or unexpected relationships in financial data
Routine transactions that follow established procedures

Explanation: Unusual or unexpected relationships in financial data can be an indicator of potential material misstatements or fraudulent activities.
32 / 40
Which of the following is a primary reason for performing a risk assessment during an audit?
To confirm the accuracy of the financial statements
To design the nature, timing, and extent of further audit procedures
To evaluate the effectiveness of internal control activities
To determine the appropriateness of accounting estimates

Explanation: Risk assessment helps determine the nature, timing, and extent of audit procedures to address identified risks of material misstatement.
33 / 40
Which of the following factors is least likely to influence an auditor’s decision to assess control risk as high?
The complexity of the client’s operations
The results of preliminary analytical procedures
The presence of a strong internal audit function
The effectiveness of the client’s internal control system

Explanation: While a strong internal audit function is beneficial, it does not necessarily influence the assessment of control risk as high; the effectiveness of controls and complexity of operations are more direct factors.
34 / 40
When testing the completeness assertion for accounts payable, an auditor is most likely to:
Inspect purchase orders and receiving reports
Confirm accounts payable balances with suppliers
Review subsequent payments to identify unrecorded liabilities
Reconcile the accounts payable subsidiary ledger to the general ledger

Explanation: Reviewing subsequent payments helps identify liabilities that may not have been recorded by year-end, addressing the completeness assertion.
35 / 40
Which of the following is the most appropriate procedure for an auditor to follow when assessing the reliability of internal control systems?
Review the client’s internal audit reports
Test the effectiveness of control procedures
Perform analytical procedures
Obtain a management representation letter

Explanation: Testing the effectiveness of control procedures directly assesses the reliability of internal control systems.
36 / 40
Which of the following is a primary purpose of obtaining a management representation letter?
To provide evidence about the completeness of transactions
To assess the effectiveness of internal controls
To obtain management's confirmation of the accuracy and completeness of the financial statements
To verify the existence of significant accounting estimates

Explanation: A management representation letter confirms management’s responsibility for the accuracy and completeness of the financial statements and provides evidence of management’s assertions.
37 / 40
Which of the following is most likely to indicate a risk of material misstatement related to the completeness of financial statement disclosures?
The entity has a complex organizational structure
The entity has experienced significant changes in its operations
The entity's internal control over financial reporting is weak
The entity has frequent changes in its accounting personnel

Explanation: Weak internal control over financial reporting increases the risk of material misstatements, including completeness of disclosures.
38 / 40
An auditor’s primary concern when testing the cutoff assertion for revenues is to ensure:
Revenues are supported by appropriate documentation
Revenues are properly classified in the financial statements
Revenues are recorded in the correct accounting period
Revenues are accurately measured and valued

Explanation: The cutoff assertion focuses on ensuring that revenues are recorded in the appropriate accounting period to accurately reflect the financial position.
39 / 40
Which of the following procedures would an auditor most likely use to test the occurrence assertion for cash receipts?
Reviewing the client’s cash receipts journal
Confirming cash receipts with customers
Reconciliating the bank statement to the cash receipts journal
Tracing cash receipts from the bank statement to the cash receipts journal

Explanation: Tracing cash receipts from the bank statement to the cash receipts journal helps verify that all receipts are recorded and occur as reported.
40 / 40
Which of the following is most likely to be an indicator of fraud risk?
Regular reviews of financial statements by the audit committee
A strong and consistent internal control environment
Frequent changes in accounting personnel
Consistent financial performance across periods

Explanation: Frequent changes in accounting personnel can be an indicator of fraud risk as it might suggest instability or potential concealment of fraudulent activities.
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