Auditing (D215)
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Free Auditing (D215) Questions
An accounting firm is conducting the annual audit of a bookstore and has determined that there were some misstatements in accounts receivable due to human error. The bookstore feels that it is unnecessary to make corrections to these errors at this time since they will eventually be reversed. Under which circumstance should an auditor be inclined to issue a modified opinion
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Disclosures are made regarding the insignificant errors.
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Accounts receivable represents a significant portion of current assets.
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Misstatements are immaterial but not confined to accounts receivable.
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The bookstore agrees to correct the misstatements in the current year.
Explanation
Correct Answer:
B. Accounts receivable represents a significant portion of current assets.
Explanation:
If accounts receivable represents a significant portion of the bookstore's current assets, the auditor may be inclined to issue a modified opinion due to the material effect of the misstatements on the financial statements. Even if the errors are eventually reversed, their impact on a key asset category could be significant, necessitating a modification of the audit opinion.
Why other options are wrong
A. Disclosures are made regarding the insignificant errors: If the errors are deemed insignificant, and appropriate disclosures are made, no modification to the opinion would typically be necessary.
B. Accounts receivable represents a significant portion of current assets: Correct answer, as explained above.
C. Misstatements are immaterial but not confined to accounts receivable: If the misstatements are immaterial, this may not require a modified opinion, especially if they are not widespread or significant.
D. The bookstore agrees to correct the misstatements in the current year: If the bookstore agrees to correct the errors, and they are corrected, the opinion may not need modification, as the auditor's concern would be resolved.
Which level of assurance regarding a private company's internal control over financial reporting is provided in a management letter
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None
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Limited
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Absolute
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Reasonable
Explanation
Correct Answer:
B. Limited
Explanation
A management letter typically provides a limited level of assurance regarding a company's internal control over financial reporting. It may highlight deficiencies or improvements that management should consider, but it does not provide the same level of assurance as an audit opinion, which offers reasonable assurance.
Why other options are wrong
A. None: A management letter does offer some level of assurance, so "none" is incorrect.
C. Absolute: Absolute assurance is not achievable in internal control assessments due to inherent limitations in controls and audit procedures.
D. Reasonable: Reasonable assurance is typically provided in an audit opinion, not in a management letter, which provides a limited level of assurance.
An auditor is testing controls on interest revenue. One of the controls established is to prepare a monthly bank reconciliation. During the testing of the bank reconciliation process, it is determined that the bank reconciliations were prepared appropriately. However, it is determined that the timing of the bank reconciliation preparation was sometimes late, which resulted in the interest revenue being recorded in the wrong month. Which conclusion should the auditor draw in this situation
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A compensating control is in place.
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A control exception exists.
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Inspect the physical locations.
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The audit procedures are insufficient.
Explanation
Correct Answer:
B. A control exception exists.
Explanation:
A control exception occurs when a control does not operate as intended. In this case, the control (bank reconciliation) is not being performed in a timely manner, which results in misstatements in the interest revenue. This indicates a weakness in control effectiveness.
Why other options are wrong
A. A compensating control is in place: A compensating control is an alternative control that mitigates the risk when a primary control fails. There is no mention of an alternative control in this scenario.
C. Inspect the physical locations: Physical inspections are not relevant to the issue of timing errors in recording interest revenue.
D. The audit procedures are insufficient: The auditor has already identified the issue; the problem is with control effectiveness, not the audit procedures.
A new CPA is aware of how accounting affects stakeholders. Which characteristic of professionalism is motivating this awareness
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Level of expertise
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Advanced certification
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Professional judgment
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Concern for the public interest
Explanation
Correct Answer:
D. Concern for the public interest
Explanation
Concern for the public interest reflects a professional's responsibility to act in ways that benefit society and stakeholders, motivating the CPA to be aware of how accounting decisions impact various groups.
Why other options are wrong
A. Level of expertise: While expertise is important, it refers to the CPA’s technical skills and knowledge, not their awareness of the broader impact of accounting decisions.
B. Advanced certification: Advanced certification refers to additional qualifications or credentials, which do not directly relate to the CPA's awareness of stakeholder impacts.
C. Professional judgment: Professional judgment involves making decisions based on knowledge and experience but does not specifically highlight awareness of stakeholder effects.
A large client asks a CPA firm for consulting help with their quarterly sales and use tax reporting. The CPA firm specializes in audit and tax preparation and has not dealt with this type of work in the past but would like to add it. The firm decides to accept the job. Which step is required to maintain compliance with the general standards of the AICPA Code of Professional Conduct
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The CPA firm must send the CPAs to a continuing professional education course on sales and use tax reporting.
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The CPA firm must be independent of the client to perform consulting services on sales and use tax reports.
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The CPA firm must develop this line of work by adding additional clients who need assistance with sales and use tax reports.
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The CPA firm must collect sufficient relevant data to complete sales and use tax reports.
Explanation
Correct Answer:
A. The CPA firm must send the CPAs to a continuing professional education course on sales and use tax reporting.
Explanation
The AICPA Code of Professional Conduct requires that professionals maintain competence in areas of work they take on. Since the firm is new to consulting on sales and use tax reporting, sending CPAs to a continuing education course will ensure they have the knowledge to handle the work effectively.
Why other options are wrong
B. The CPA firm must be independent of the client to perform consulting services on sales and use tax reports: Independence is important for audit services but is not necessarily a requirement for consulting work, such as in this case.
C. The CPA firm must develop this line of work by adding additional clients who need assistance with sales and use tax reports: Adding additional clients is not a requirement to maintain compliance with general standards; competence is key.
D. The CPA firm must collect sufficient relevant data to complete sales and use tax reports: While gathering data is essential for the job, the primary issue for compliance with the general standards is ensuring the firm has the necessary competence, which can be addressed by further education.
If tests of controls indicate that a key control is not functioning as designed, and if other compensating controls do not exist, the auditor should _______
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Small private companies often do not want or need services as extensive as an audit of the financial statements in which the auditor has to express an opinion on the fair presentation of the financial statements.
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There are numerous transactions or items within an account balance.
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Increase the assessed level of control risk.
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All of these answer choices are correct.
Explanation
Correct Answer:
D. All of these answer choices are correct.
Explanation:
When a key control is not functioning as intended and there are no compensating controls, the auditor should:
Increase the assessed level of control risk because the control failure increases the likelihood of material misstatements.
Decrease the level of assessed detection risk since more reliance must be placed on substantive procedures rather than controls.
Make appropriate changes to the nature, timing, and extent of substantive tests to ensure that material misstatements are properly identified and addressed.
Why other options are wrong
A. Small private companies...: This statement is unrelated to the question and refers to the level of service private companies may need rather than how an auditor responds to control deficiencies.
B. There are numerous transactions...: This is a general statement about audit sampling and does not directly address what the auditor should do when a control fails.
C. Increase the assessed level of control risk: While this is correct, the best answer is D, as it includes all necessary actions the auditor should take.
On March 25 of Year 2, auditors discovered new information that would cause a qualified opinion on the financial statements for Year 1 of a calendar-year company. The end of fieldwork date is February 20 of Year 2. The report release date is March 1 of Year 2, and a standard unmodified opinion was issued. Which notification procedure should be used
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Auditors should notify potential financial statement users of the new information.
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Auditors should inform financial statement users to rely on the report dated March 1 of Year 2
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Management should provide notification that the original financial statements are not to be relied upon.
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Management should inform financial statement users to rely on the report dated March 1 of Year 2
Explanation
Correct Answer:
C. Management should provide notification that the original financial statements are not to be relied upon.
Explanation:
When auditors discover material misstatements or new information that would have led to a different audit opinion after the audit report has been issued, the responsibility to notify financial statement users primarily lies with management. Management must take action to inform users that the original financial statements should not be relied upon and, if necessary, restate the financials. The auditors may assist in ensuring the appropriate actions are taken, but the primary responsibility belongs to management.
Why other options are wrong
A. Auditors should notify potential financial statement users of the new information: While auditors have a responsibility to follow up, the formal notification should come from management.
B. Auditors should inform financial statement users to rely on the report dated March 1 of Year 2: This is incorrect because the original opinion is no longer appropriate given the newly discovered information.
D. Management should inform financial statement users to rely on the report dated March 1 of Year 2: This is incorrect because the report issued on March 1 is now known to be based on incomplete or incorrect information, making it unreliable.
Which statement accurately describes the nature of detective controls
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They are entity-level controls.
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They stop fraud from occurring.
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They identify whether errors have occurred.
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They are applied to each transaction during normal processing.
Explanation
Correct Answer:
C. They identify whether errors have occurred.
Explanation
Detective controls are designed to identify errors or fraud after they have occurred. They do not prevent the issues from happening but help to detect them early so that corrective actions can be taken. Examples of detective controls include reconciliations, reviews, and audits.
Why other options are wrong
A. They are entity-level controls: While detective controls can exist at the entity level, they are more commonly applied to specific processes or transactions, not necessarily at the entity level.
B. They stop fraud from occurring: Detective controls do not stop fraud or errors; their purpose is to detect them after they occur.
D. They are applied to each transaction during normal processing: Detective controls typically identify errors after transactions have occurred, not during their processing.
What are the three AICPA Codes of Professional Conduct
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Principles, Rules of Conduct, Interpretations
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Guidelines, Best Practices, Recommendations
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Policies, Frameworks, Strategies
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Standards, Procedures, Protocols
Explanation
Correct Answer:
A. Principles, Rules of Conduct, Interpretations
Explanation:
The AICPA Code of Professional Conduct consists of three key components:
Principles – These provide a conceptual framework for ethical conduct and establish broad responsibilities.
Rules of Conduct – These are legally enforceable standards that CPAs must follow.
Interpretations – These offer guidance on applying the rules in specific situations.
Why other options are wrong:
B. Guidelines, Best Practices, Recommendations – These terms suggest non-binding advice, whereas the Code of Professional Conduct is enforceable.
C. Policies, Frameworks, Strategies – These terms are more commonly used for corporate governance or business planning, not ethical codes.
D. Standards, Procedures, Protocols – These are terms used in quality control and operational compliance, not ethical guidelines for CPAs.
A CPA firm has been retained to audit a client's financial statements. The client's bank has requested audited financial statements in order to approve or deny a loan to the client. The client has suggested that the CPA firm will earn a $20,000 bonus if the bank grants the loan to the client. Which statement characterizes the permissibility of this fee structure
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The CPA will need to obtain a ruling letter from the AICPA before agreeing to this fee structure.
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This fee structure is not permitted under ethical standards applicable to the auditing profession.
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The CPA will need to obtain written permission from the client's bank before agreeing to this fee structure.
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This fee structure is an acceptable arrangement under ethical standards applicable to the auditing profession.
Explanation
Correct Answer:
B. This fee structure is not permitted under ethical standards applicable to the auditing profession.
Explanation
Under AICPA ethical standards, auditors must maintain independence in both appearance and fact. Accepting a contingent fee, such as the $20,000 bonus linked to the approval of a loan, violates this principle and creates a conflict of interest.
Why other options are wrong
A. The CPA will need to obtain a ruling letter from the AICPA before agreeing to this fee structure: A ruling letter is not required because the arrangement is clearly prohibited under ethical standards.
C. The CPA will need to obtain written permission from the client's bank before agreeing to this fee structure: Permission from the bank does not resolve the conflict of interest inherent in this fee structure.
D. This fee structure is an acceptable arrangement under ethical standards applicable to the auditing profession: This arrangement violates the AICPA's independence requirement and is therefore not acceptable.
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