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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
When an auditor identifies a significant deficiency in internal control, they should:
Report the deficiency to the audit committee and management
Perform additional audit procedures to compensate for the deficiency
Ignore the deficiency if it does not affect the audit opinion
Modify the audit report to include a qualified opinion

Explanation: Significant deficiencies in internal control should be reported to the audit committee and management to ensure appropriate corrective actions are taken.
2 / 40
When testing the completeness assertion for accounts payable, an auditor is most likely to:
Review subsequent payments to identify unrecorded liabilities
Confirm accounts payable balances with suppliers
Reconcile the accounts payable subsidiary ledger to the general ledger
Inspect purchase orders and receiving reports

Explanation: Reviewing subsequent payments helps identify liabilities that may not have been recorded by year-end, addressing the completeness assertion.
3 / 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
A well-documented and communicated control policy
An effective monitoring process for internal controls

Explanation: Frequent failures to reconcile bank statements can be considered a significant deficiency as it indicates a potential weakness in internal control processes.
4 / 40
Which of the following is a primary concern when an auditor is testing the completeness assertion for liabilities?
Whether liabilities are supported by appropriate documentation
Whether all existing liabilities are recorded
Whether liabilities are recorded in the correct period
Whether liabilities are properly classified

Explanation: Testing the completeness assertion focuses on ensuring that all liabilities that should be recorded in the financial statements are indeed included.
5 / 40
Which of the following internal control components is the foundation for all other components?
Control environment
Risk assessment
Control activities
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
6 / 40
An auditor’s evaluation of the adequacy of a client’s disclosure about a contingent liability involves:
Testing the accuracy of the recorded liability amount
Recalculating the potential financial impact of the contingent liability
Evaluating whether the disclosures are in accordance with accounting standards
Verifying the existence of the contingent liability through external confirmations

Explanation: Evaluating the adequacy of disclosures about contingent liabilities involves ensuring that the disclosures are complete and in accordance with relevant accounting standards.
7 / 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
Report the error to the client’s management and adjust the financial statements
Report the error to the audit committee without adjusting the financial statements
Ignore the error if it is immaterial

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.
8 / 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.
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
In an audit, which of the following is the primary purpose of performing a walk-through of a transaction?
To assess the effectiveness of internal controls over the transaction
To test the accuracy of financial statement disclosures related to the transaction
To ensure that the transaction is recorded in the appropriate accounting period
To verify the existence of the transaction through external confirmation

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.
11 / 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
Obtain a management representation letter
Perform analytical procedures

Explanation: Testing the effectiveness of control procedures directly assesses the reliability of internal control systems.
12 / 40
Which of the following is an auditor’s primary concern when assessing the reasonableness of accounting estimates?
The presentation of the estimates in the financial statements
The mathematical accuracy of the estimates
The consistency of the estimates with historical trends
The appropriateness of the assumptions and methods used

Explanation: Evaluating the reasonableness of accounting estimates primarily involves assessing whether the assumptions and methods used are appropriate and reasonable.
13 / 40
Which of the following is a potential indicator of fraud?
A large number of audit adjustments
An unusually high number of year-end transactions
Management’s willingness to engage in a high level of risk-taking
A strong internal control environment

Explanation: An unusually high number of year-end transactions could indicate attempts to manipulate financial results, which is a potential indicator of fraud.
14 / 40
Which of the following is a primary reason for performing a risk assessment during an audit?
To design the nature, timing, and extent of further audit procedures
To evaluate the effectiveness of internal control activities
To confirm the accuracy of the financial statements
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.
15 / 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 experienced significant changes in its operations
The entity has frequent changes in its accounting personnel
The entity's internal control over financial reporting is weak
The entity has a complex organizational structure

Explanation: Weak internal control over financial reporting increases the risk of material misstatements, including completeness of disclosures.
16 / 40
Which of the following is the best indicator of a potential material misstatement due to fraud?
Effective segregation of duties in the accounting department
Unusual or unexpected relationships in financial data
Routine transactions that follow established procedures
Consistent financial results over several periods

Explanation: Unusual or unexpected relationships in financial data can be an indicator of potential material misstatements or fraudulent activities.
17 / 40
Which of the following would an auditor most likely consider when planning an audit?
The entity’s organizational structure
The risks of material misstatement
The entity’s compliance with laws and regulations
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.
18 / 40
Which of the following procedures is an auditor most likely to perform to test the valuation assertion for investments?
Confirming investment balances with the custodian
Inspecting investment documentation for ownership
Recalculating interest income on investments
Reviewing the market prices of investments

Explanation: Reviewing market prices helps verify that investments are valued accurately in accordance with relevant accounting standards.
19 / 40
Which of the following is an auditor most likely to use to evaluate the accuracy of the recorded amounts of inventory?
Observing the physical inventory count
Reviewing the client’s inventory valuation methods
Confirming inventory quantities with vendors
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.
20 / 40
Which of the following procedures would an auditor most likely use to test the valuation and allocation assertion for inventory?
Comparing the carrying amount of inventory to current market prices
Reviewing the purchase order and receiving report for a sample of inventory items
Observing the physical inventory count
Confirming inventory held on consignment by suppliers

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.
21 / 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 presence of a strong internal audit function
The results of preliminary analytical procedures
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.
22 / 40
Which of the following is an example of an audit procedure designed to test the occurrence assertion for expenses?
Recalculating the expense totals for accuracy
Comparing expenses to the prior year’s amounts
Confirming expenses with suppliers
Reviewing invoices and comparing them to recorded expenses

Explanation: Reviewing invoices and comparing them to recorded expenses helps verify that expenses recorded in the financial statements actually occurred.
23 / 40
Which of the following is least likely to be an appropriate audit procedure for assessing the accuracy of inventory records?
Comparing inventory records to purchase orders
Confirming inventory balances with suppliers
Observing the physical inventory count
Recalculating inventory cost

Explanation: Confirming inventory balances with suppliers is less relevant than procedures like observing the inventory count or recalculating costs for assessing accuracy.
24 / 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
Observing the client’s sales processes
Recalculating sales revenue totals

Explanation: Inspecting supporting documentation for sales transactions helps verify the accuracy and validity of recorded revenue.
25 / 40
Which of the following audit procedures is used to gather evidence about the accuracy of recorded transactions?
Reviewing the client’s compliance with laws and regulations
Observing inventory counts
Confirming balances with external parties
Tracing transactions from source documents to the financial statements

Explanation: Tracing transactions from source documents to the financial statements helps verify the accuracy of recorded transactions.
26 / 40
Which of the following is most likely to be an indicator of fraud risk?
Consistent financial performance across periods
A strong and consistent internal control environment
Frequent changes in accounting personnel
Regular reviews of financial statements by the audit committee

Explanation: Frequent changes in accounting personnel can be an indicator of fraud risk as it might suggest instability or potential concealment of fraudulent activities.
27 / 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
Regular updates to the accounts receivable aging report
Monthly reconciliation of the accounts receivable subsidiary ledger to the general ledger

Explanation: Regular reconciliation of subsidiary ledgers to the general ledger helps ensure the accuracy of accounts receivable balances.
28 / 40
When evaluating the results of analytical procedures, an auditor should consider:
The frequency of transactions performed
The client’s budget for the year
The nature and extent of identified variances
The materiality thresholds set by the client

Explanation: Evaluating the results of analytical procedures involves assessing the nature and extent of variances to determine whether they indicate potential misstatements.
29 / 40
Which of the following is an auditor’s primary concern when testing controls over cash disbursements?
Whether cash disbursements are made in accordance with the budget
Whether cash disbursements are approved by management
Whether cash disbursements are properly recorded
Whether cash disbursements are supported by appropriate documentation

Explanation: Testing controls over cash disbursements focuses on whether transactions are authorized by management to prevent unauthorized payments.
30 / 40
Which of the following procedures would an auditor most likely use to test the occurrence assertion for cash receipts?
Confirming cash receipts with customers
Tracing cash receipts from the bank statement to the cash receipts journal
Reviewing the client’s cash receipts journal
Reconciliating 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.
31 / 40
An auditor’s primary concern when performing a test of controls over payroll is to ensure:
Payroll transactions are recorded accurately in the financial statements
Payroll transactions are authorized and processed in accordance with company policies
Payroll expenses are appropriately allocated to different cost centers
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.
32 / 40
Which of the following is an auditor’s primary consideration when evaluating audit evidence?
The time it takes to obtain the evidence
The relevance and reliability of the evidence
The cost of obtaining the evidence
The complexity of 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.
33 / 40
An auditor’s primary concern when testing the cutoff assertion for revenues is to ensure:
Revenues are supported by appropriate documentation
Revenues are accurately measured and valued
Revenues are properly classified in the financial statements
Revenues are recorded in the correct accounting period

Explanation: The cutoff assertion focuses on ensuring that revenues are recorded in the appropriate accounting period to accurately reflect the financial position.
34 / 40
Which of the following is a primary purpose of obtaining a management representation letter?
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
To provide evidence about the completeness of transactions

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.
35 / 40
What is the primary objective of performing a substantive test of transactions?
To determine the accuracy of account balances
To assess the risk of material misstatement
To evaluate the design and effectiveness of internal controls
To obtain direct evidence about the validity of transactions

Explanation: Substantive tests of transactions provide direct evidence about whether transactions are valid and accurately recorded.
36 / 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 effectiveness of the controls in preventing or detecting material misstatements
The level of compliance with industry standards

Explanation: The primary concern is whether the controls are effective in preventing or detecting material misstatements in the financial statements.
37 / 40
An auditor most likely would use substantive procedures to test which of the following assertions?
Valuation and allocation
Information and communication
Segregation of duties
Control activities

Explanation: Substantive procedures are used to test assertions related to valuation and allocation, such as checking whether assets and liabilities are valued correctly.
38 / 40
An auditor discovers that a client’s financial statements are materially misstated due to a fraud committed by management. The auditor should:
Communicate the matter to the audit committee and consider the implications on the audit report
Report the fraud to the appropriate regulatory authorities
Modify the audit opinion to reflect the misstatement
Ignore the fraud if it is not material to the financial statements

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.
39 / 40
Which of the following is an effective audit procedure for verifying the existence of intangible assets?
Confirming the valuation of intangible assets with an independent appraiser
Reviewing the client’s internal controls over intangible assets
Inspecting legal documentation related to the intangible assets
Recalculating amortization expenses for intangible assets

Explanation: Inspecting legal documentation helps verify the existence and ownership of intangible assets.
40 / 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
Determine whether additional audit evidence may be needed
Evaluate the overall financial statement presentation
Identify potential risk areas

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.
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