Auditing (D215)
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Free Auditing (D215) Questions
A CPA is determining the extent of substantive procedures needed to test a client's sales. Sales are composed of 2,550 sales transactions in the last week of the fiscal year. In the first week of the new year, 2,750 sales transactions occurred. After examining all risks, the CPA has determined few substantive procedures are required. Which risk evaluation led the auditor to make this determination
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Inherent risk is low.
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Control risk is high.
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Audit risk is high.
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Detection risk is low
Explanation
Correct Answer:
A. Inherent risk is low.
Explanation
Inherent risk refers to the susceptibility of an account or transaction to misstatement, assuming no internal controls are in place. If the CPA has determined that few substantive procedures are required, this indicates that the inherent risk of material misstatement in the sales transactions is low. Low inherent risk implies that the transactions are not likely to have significant errors or misstatements, reducing the need for extensive testing.
Why other options are wrong
B. Control risk is high: High control risk would require more substantive testing, not fewer procedures.
C. Audit risk is high: High audit risk would lead to more testing, not fewer.
D. Detection risk is low: A low detection risk would imply that the auditor is confident in detecting material misstatements if they exist, but it does not explain why fewer substantive procedures are needed.
A junior accountant is providing tax and audit services to a large company that is pressuring the accountant to reduce the amount of taxes the company owes. The junior accountant decides to use last year's tax laws instead of the current year's laws since the older laws will save the company money. Which general standard of the AICPA Code of Professional Conduct is the junior accountant violating
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Due Professional Care
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Sufficient Relevant Data
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Planning and Supervision
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Professional Competence
Explanation
Correct Answer:
A. Due Professional Care
Explanation
The junior accountant is violating the standard of Due Professional Care by knowingly using outdated tax laws instead of the current laws. This failure to apply the most up-to-date and accurate information shows a lack of care in fulfilling professional responsibilities.
Why other options are wrong
B. Sufficient Relevant Data: The issue here is not the quantity or relevance of data, but the use of outdated tax laws.
C. Planning and Supervision: This standard relates to the need for proper planning and oversight in the performance of professional services, which is not the main issue in this scenario.
D. Professional Competence: While competence is important, the problem here is a violation of due care, not a lack of competence in the tax laws themselves.
Which dimension of the COSO framework identifies five integrated items of internal control
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Objectives
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Components
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Information technology
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Organizational structure
Explanation
Correct Answer:
B. Components
Explanation
The COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework identifies five integrated components of internal control: Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring Activities. These components work together to ensure effective internal control within an organization.
Why other options are wrong
A. Objectives: Objectives are the goals the organization aims to achieve, but they are not the framework's integrated components.
C. Information technology: Information technology supports various control components but does not represent a specific dimension within the COSO framework.
D. Organizational structure: While organizational structure plays a role in the control environment, it is not the dimension that identifies the five components of internal control.
Auditors deem that a full physical item count of inventory is critical for a company. However, the company's management disagrees and performs cycle counts instead. Why does the audit team write a letter to the audit committee of the company regarding this issue
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To disclose a disagreement with management
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To advise of an incorrect calculation
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To report other significant findings or issues
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To present the business conditions affecting the company
Explanation
Correct Answer:
A. To disclose a disagreement with management
Explanation:
Auditors are required to communicate significant disagreements with management to the audit committee, especially when they affect the reliability of financial reporting. If auditors believe a full physical inventory count is necessary but management insists on cycle counts, this represents a disagreement on audit procedures that must be disclosed.
Why other options are wrong
B. To advise of an incorrect calculation: The issue is not a miscalculation but a fundamental disagreement about the appropriate audit procedures.
C. To report other significant findings or issues: While the disagreement is significant, the primary reason for the letter is to document a specific dispute with management, not just general findings.
D. To present the business conditions affecting the company: The issue relates to audit methodology, not general business conditions.
How does the inclusion of a non-executive individual in the composition of the board of directors affect an auditor's risk assessment
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It increases the risk of a material misstatement due to a lack of expertise.
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It reduces the risk of a material misstatement because they are more impartial.
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It increases the risk of a material misstatement due to a lack of a vested interest in the company.
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It reduces the risk of a material misstatement because they are outside of corporate governance.
Explanation
Correct Answer:
B. It reduces the risk of a material misstatement because they are more impartial.
Explanation
Including a non-executive individual on the board of directors can reduce the risk of material misstatements because they are more impartial and independent from the day-to-day operations of the company. Their objectivity helps improve oversight and governance, which reduces the likelihood of biased financial reporting.
Why other options are wrong
A. It increases the risk of a material misstatement due to a lack of expertise: Non-executive board members often bring different expertise and perspectives, but they do not typically lack expertise in ways that would increase audit risk.
C. It increases the risk of a material misstatement due to a lack of a vested interest in the company: Non-executive directors are still involved in governance and oversight, even if they don’t have the same direct interest as executive directors. Their impartiality doesn't inherently increase risk.
D. It reduces the risk of a material misstatement because they are outside of corporate governance: Non-executive members are typically part of the corporate governance structure and serve a key role in oversight, which actually helps reduce risk.
A CPA firm has a new audit client that is an electronics distributor. In planning the audit, the auditors documented their understanding of the inventory receipt process. They concluded that the receipt of inventory is inherently risky, and the internal controls are not adequate
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Withdraw from the audit
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Reduce control risk to the minimum level
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Conduct additional initial audit procedures
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Perform substantive procedures targeted to the risk
Explanation
Correct Answer:
D. Perform substantive procedures targeted to the risk
Explanation
Since the auditors have concluded that the receipt of inventory is inherently risky and the internal controls are inadequate, the most appropriate response is to perform substantive procedures targeted at addressing this specific risk. These procedures will help gather evidence regarding the accuracy and completeness of inventory, especially considering the heightened risk of misstatements in this area.
Why other options are wrong
A. Withdraw from the audit: There is no indication that the risk is so severe that the auditors should withdraw from the audit, though they may need to adjust their approach.
B. Reduce control risk to the minimum level: Given that the internal controls are not adequate, it is not feasible to reduce control risk to the minimum level.
C. Conduct additional initial audit procedures: While initial procedures are important, the focus here should be on performing substantive procedures that directly address the identified risk.
Which sampling method involves the selection of a sample for testing by dividing the number of items in a population by the sample size, resulting in the sampling interval (n)
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Block
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Random
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Haphazard
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Systematic
Explanation
Correct Answer:
D. Systematic
Explanation
In systematic sampling, the auditor selects items by dividing the total population by the desired sample size, which gives the sampling interval (n). For example, if the population is 100 items and the auditor wants to sample 10 items, the sampling interval would be 10. The auditor would then select every 10th item for testing.
Why other options are wrong
A. Block: Block sampling involves selecting a group or "block" of consecutive items in the population, not a regular interval.
B. Random: In random sampling, items are selected randomly from the population without a fixed interval.
C. Haphazard: Haphazard sampling is an informal method where items are selected without any structured pattern or interval.
An auditor uses financial statement assertions to guide the identification of possible errors or misstatements in the financial statement. Which procedure should the auditor perform next
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Perform tests of controls
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Review the entity-level controls
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Identify the relevant controls to test
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Determine the preliminary audit strategy
Explanation
Correct Answer:
C. Identify the relevant controls to test
Explanation
After identifying financial statement assertions and possible misstatements, the auditor should identify the relevant controls to test. This helps to assess whether the client's internal controls can prevent or detect misstatements, enabling the auditor to determine the reliance on those controls and the scope of further audit procedures.
Why other options are wrong
A. Perform tests of controls: Testing controls comes after identifying the relevant controls that need to be assessed, so it is not the next immediate step.
B. Review the entity-level controls: While this is part of understanding the internal control system, the auditor should first identify the relevant controls to test at the assertion level.
D. Determine the preliminary audit strategy: The audit strategy is refined after assessing the control environment, so identifying the relevant controls to test is a precursor to determining the strategy.
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.
Which extent of substantive audit procedures is warranted when a client moves fixed assets continually across dozens of locations, the fixed asset population is large, a software system is used to track purchases, and control and inherent risk are assessed as low
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Test a large percentage of transactions because detection risk is low
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Use audit sampling of a small percentage since the account balance is high
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Test 100% of the transactions because the population is large
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Use audit data analytics (ADA) since reliable evidence is available in electronic form
Explanation
Correct Answer:
D. Use audit data analytics (ADA) since reliable evidence is available in electronic form
Explanation:
Since the company uses a software system to track purchases and both control and inherent risk are assessed as low, the best approach is to use audit data analytics (ADA). ADA allows the auditor to efficiently analyze large populations of transactions, identify anomalies, and focus substantive procedures on high-risk items while minimizing unnecessary work.
Why other options are wrong
A. Test a large percentage of transactions because detection risk is low: This is incorrect because detection risk would actually be higher when inherent and control risks are low, allowing for a reduced level of substantive testing.
B. Use audit sampling of a small percentage since the account balance is high: The size of the account balance does not necessarily dictate the sampling approach; ADA provides a more efficient way to analyze the population.
C. Test 100% of the transactions because the population is large: Testing 100% of transactions is generally impractical and unnecessary when reliable electronic records exist and risks are low.
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