Auditing (D215)
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Free Auditing (D215) Questions
Which classification should be used for a deficiency in internal control that would affect the decisions of the users of financial statements
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Control outlier
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Material weakness
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Significant deficiency
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Acceptable irregularity
Explanation
Correct Answer:
B. Material weakness
Explanation
A material weakness in internal control refers to a deficiency or combination of deficiencies that could lead to a material misstatement of the financial statements, which, in turn, would influence the decisions of users of those statements. It is the most severe classification for internal control deficiencies.
Why other options are wrong
A. Control outlier: This is not a recognized term within the classification of internal control deficiencies.
C. Significant deficiency: A significant deficiency is a less severe issue than a material weakness, but it still requires attention. However, it does not have the same potential to significantly affect financial statement users' decisions as a material weakness.
D. Acceptable irregularity: This is not a standard classification for internal control deficiencies and would not be used to describe significant issues.
What is the applicable financial framework
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Involves the regulations surrounding tax reporting and compliance
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Describes the ethical standards for financial advisors
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Performed when an independent practitioner, or CPA, is engaged to issue a report on subject matter that is the responsibility of another party.
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Refers to the set of standards used in preparing the historical financial statements such as GAAP, IFRS, or governmental accounting standards for governmental entities.
Explanation
Correct Answer:
D. Refers to the set of standards used in preparing the historical financial statements such as GAAP, IFRS, or governmental accounting standards for governmental entities.
Explanation:
The applicable financial reporting framework refers to the set of standards and principles that entities use to prepare their financial statements. These frameworks provide consistency, comparability, and transparency in financial reporting.
Common frameworks include:
GAAP (Generally Accepted Accounting Principles) – Used in the U.S.
IFRS (International Financial Reporting Standards) – Used globally
Governmental accounting standards – Used for public sector financial reporting
Why other options are wrong:
A. Involves the regulations surrounding tax reporting and compliance – This relates to tax frameworks, not financial reporting frameworks.
B. Describes the ethical standards for financial advisors – Ethics for financial professionals are covered by organizations like AICPA or CFA Institute, not financial reporting frameworks.
C. Performed when an independent practitioner, or CPA, is engaged to issue a report on subject matter that is the responsibility of another party – This describes attestation engagements, not financial reporting frameworks.
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.
During fieldwork, an auditor noted several significant subsequent events that arose after the balance sheet date. The auditor has reviewed the client's footnote disclosure for the subsequent events and believes the disclosure is appropriate. However, the auditor is concerned that a financial statement user may reach improper conclusions about the client's financial condition if the disclosure about subsequent events is not noted by the user. How should the auditor respond to this situation
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Refuse to issue an audit report for the client
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Avoid referencing the subsequent events in the audit report
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Issue an audit report that includes a qualified opinion
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Include an emphasis-of-matter paragraph after the opinion in the audit report
Explanation
Correct Answer:
D. Include an emphasis-of-matter paragraph after the opinion in the audit report
Explanation:
An emphasis-of-matter paragraph is used when the auditor wants to draw attention to an issue that is appropriately disclosed in the financial statements but is significant enough that financial statement users should be aware of it. Since the subsequent events are properly disclosed but could still be misinterpreted, the emphasis-of-matter paragraph helps highlight their importance without modifying the opinion.
Why other options are wrong
A. Refuse to issue an audit report for the client: This action is extreme and only considered in cases of severe scope limitation or fraudulent activity, neither of which applies here.
B. Avoid referencing the subsequent events in the audit report: Since the auditor believes there is a risk of misinterpretation, ignoring the issue would not be a responsible course of action.
C. Issue an audit report that includes a qualified opinion: A qualified opinion is used when the financial statements are materially misstated or there is a scope limitation. Here, the disclosure is adequate, so a qualification is unnecessary.
An auditor is trying to decide how many items to test count during inventory observation of 25,000 items. Based on past experience with this client, the auditor is convinced there will only be a limited number of misstatements on the financial statements. Consistent with prior years, control risk and inherent risk have been established as low by the audit team. What is an outcome based upon the auditor's expectations
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Stratified
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Smaller sample sizes will be chosen
Explanation
Correct Answer:
B. Smaller sample sizes will be chosen
Explanation:
When control risk and inherent risk are assessed as low, the auditor has greater confidence in the reliability of financial reporting and internal controls. As a result, a smaller sample size can be used while still maintaining an acceptable level of audit risk.
Why other options are wrong
A. Stratified: Stratified sampling involves dividing the population into different subgroups based on certain characteristics to ensure more representative sampling. While it can be useful in some inventory audits, the scenario does not specifically indicate the need for stratification.
An audit firm is finalizing the acceptance of an audit by sending the client an engagement letter. Which piece of information should be included in this letter
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Client's reason for switching audit firms
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Client's confirmation of management integrity
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Client's statement that no conflict of interest exists
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Client's responsibility for the preparation of the financial statements
Explanation
Correct Answer:
D. Client's responsibility for the preparation of the financial statements
Explanation
The engagement letter outlines the terms of the audit, including the client's responsibility for preparing the financial statements. This ensures clarity regarding each party's responsibilities in the audit process.
Why other options are wrong
A. Client's reason for switching audit firms: The reason for switching audit firms is not required to be included in the engagement letter.
B. Client's confirmation of management integrity: While management's integrity is important, this is typically addressed during the audit planning phase, not in the engagement letter.
C. Client's statement that no conflict of interest exists: This is not typically included in the engagement letter, although conflicts may be discussed separately.
A CPA firm is testing the existence assertion for inventory. The inventory balance represents 5% of total assets on the balance sheet. The firm's client uses a perpetual inventory system to account for inventory and performs cycle counts throughout the year. For the current year, the adjustments made to the inventory balance based on these counts have been immaterial. The client does plan to perform a physical inventory count at the end of the year. Based upon this information, an auditor would like to perform interim substantive testing on the existence of inventory
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No, because internal controls appear to be ineffective.
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Yes, because the assessed risk of material misstatement appears to be low.
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No, because the inventory existence assertion is required to be performed at year-end.
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Yes, because additional procedures are unable to be performed after the interim period
Explanation
Correct Answer:
B. Yes, because the assessed risk of material misstatement appears to be low.
Explanation
Given that the client's internal controls over inventory are functioning well (as evidenced by the periodic cycle counts and immaterial adjustments), and the inventory represents a relatively small percentage of total assets, the assessed risk of material misstatement is low. Since the client plans to perform a physical count at year-end, interim substantive testing is appropriate in this case.
Why other options are wrong
A. No, because internal controls appear to be ineffective: The internal controls appear to be effective based on the use of cycle counts and the immaterial adjustments.
C. No, because the inventory existence assertion is required to be performed at year-end: While year-end testing is critical, interim testing is allowed when the risk is low and adequate procedures are in place.
D. Yes, because additional procedures are unable to be performed after the interim period: This is incorrect because the auditor can still perform substantive testing at year-end; there is no restriction preventing testing at that time.
If the auditor's opinion on the revised financial statements is different from the previously issued audit report, then a/an _______ should be added to the revised audit report
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Taking information prepared by someone else and comparing that information to an established set of criteria.
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Reperformance.
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Emphasis-of-matter paragraph.
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Emphasis-of-matter paragraph.
Explanation
Correct Answer:
C. Emphasis-of-matter paragraph.
Explanation:
When an auditor issues a revised audit report with an opinion that differs from the previously issued report, an emphasis-of-matter paragraph should be included to draw attention to the revised information. This paragraph is placed after the opinion paragraph in the standard audit report and highlights the nature of the changes without modifying the opinion itself.
Why other options are wrong:
A. Taking information prepared by someone else and comparing that information to an established set of criteria. – This defines the general process of assurance, attestation, and auditing, not a reporting requirement.
B. Reperformance. – Reperformance is an audit procedure used to test the effectiveness of internal controls, not a requirement for revising an audit report.
D. Emphasis-of-matter paragraph. – This is a duplicate answer choice.
Which management assertion states that financial and other information are disclosed fairly and in appropriate amounts
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Completeness
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Accuracy and valuation
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Classification and understandability
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Occurrence and rights and obligations
Explanation
Correct Answer:
C. Classification and understandability
Explanation
The assertion of classification and understandability ensures that financial information is disclosed in a clear and understandable manner, and that it is presented in the appropriate amounts. This assertion directly relates to fair and appropriate disclosure.
Why other options are wrong
A. Completeness: Completeness ensures that all relevant information is included, but it does not specifically address whether information is disclosed fairly or in appropriate amounts.
B. Accuracy and valuation: This assertion focuses on ensuring that information is accurate and appropriately valued, not necessarily on its fairness or the appropriateness of the disclosure amounts.
D. Occurrence and rights and obligations: This assertion concerns whether transactions and events actually occurred and whether the entity has rights to assets and obligations for liabilities, rather than how information is disclosed.
Which type of control is applied to each transaction during normal processing in order to stop fraud or errors from occurring
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Detective
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Corrective
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Preventative
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Environment
Explanation
Correct Answer:
C. Preventative
Explanation
Preventative controls are designed to stop fraud or errors from occurring in the first place. These controls are applied during the normal processing of transactions to ensure that mistakes or fraudulent activities are avoided before they happen. Examples include segregation of duties and approval processes.
Why other options are wrong
A. Detective: Detective controls are designed to identify errors or fraud after they have occurred, not to prevent them.
B. Corrective: Corrective controls are designed to correct errors or fraud after detection, but they do not prevent them from occurring initially.
D. Environment: Environment controls relate to the overall control environment of the organization and are not transaction-specific controls to prevent errors or fraud.
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