Auditing (D215)
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Free Auditing (D215) Questions
An auditor is vigilant in preparing a working paper in great detail regarding the controls selected. This is done so the same conclusion can be reached by someone other than the auditor who prepared the working paper. Which individual needs to be able to reach this same conclusion
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Client's accountant
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Audit partner
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IRS agent
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Client
Explanation
Correct Answer:
B. Audit partner
Explanation:
Audit working papers serve as documentation of the procedures performed, evidence obtained, and conclusions reached. They must be sufficiently detailed so that an experienced auditor, such as an audit partner or another team member reviewing the work, can reach the same conclusions without needing additional explanations from the preparer. This ensures consistency and reliability in the audit process.
Why other options are wrong
A. Client's accountant: The working papers are for the auditor's use, not the client’s. The client’s accountant is not expected to evaluate or verify audit conclusions.
C. IRS agent: While IRS agents may review financial records, audit working papers are primarily used for internal audit review and quality control, not for tax audits.
D. Client: The client does not need to reach the same audit conclusions; their role is to provide necessary information and respond to audit inquiries.
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 audit team is reviewing the financial statement disclosures that are presented by a client. The auditors determine that the client has departed from the accounting standards in the required disclosure but will not correct this issue. The auditors are trying to clarify the magnitude of this issue to determine which type of opinion to issue. In which situation should the auditors issue an adverse opinion due to these disclosures
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The disclosures are describing a correction of a prior-period error.
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The disclosures are related to uncertainties of a future litigation outcome.
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The disclosures are confined to a specific immaterial item in the financial statements.
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The disclosures are fundamental to the users' understanding of the financial statements.
Explanation
Correct Answer:
D. The disclosures are fundamental to the users' understanding of the financial statements.
Explanation:
An adverse opinion is issued when financial statements are materially misstated and misleading as a whole. If the omitted or misstated disclosures are fundamental to users' understanding, they significantly impact the reliability and completeness of the financial statements, warranting an adverse opinion.
Why other options are wrong
A. The disclosures are describing a correction of a prior-period error: Corrections of prior-period errors are disclosed according to accounting standards but do not typically lead to an adverse opinion unless they are intentionally misleading.
B. The disclosures are related to uncertainties of a future litigation outcome: Disclosure of uncertainties is important, but unless the omission is pervasive and misleading, it would not require an adverse opinion.
C. The disclosures are confined to a specific immaterial item in the financial statements: If the issue is immaterial, it does not significantly impact users' understanding of the financial statements, so an adverse opinion would not be necessary.
Which entity may obtain audited financial statements to ensure a company is complying with industry regulations
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Lenders
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Consumers
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Governments
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General public
Explanation
Correct Answer:
C. Governments
Explanation
Governments, especially regulatory bodies, may require audited financial statements to ensure that companies are adhering to industry regulations and tax laws. These audits help in verifying compliance.
Why other options are wrong
A. Lenders: While lenders may require financial statements to assess credit risk, they are not typically seeking compliance with industry regulations.
B. Consumers: Consumers do not generally obtain audited financial statements to check for regulatory compliance.
D. General public: The general public does not typically obtain audited financial statements for regulatory compliance, although they may access them for other purposes, such as investment decisions.
Why is the term practitioner used instead of auditor in terms of audit services
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These services encompass more than just the audit of historical financial statements and internal controls
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These services are limited to tax preparation and filing
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These services are only for large corporations and not applicable to small businesses
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These services focus solely on compliance with regulations
Explanation
Correct Answer:
A. These services encompass more than just the audit of historical financial statements and internal controls
Explanation:
The term practitioner is used instead of auditor because audit services extend beyond just financial statement audits. Practitioners perform a broader range of assurance and attestation services, including:
Reviews (providing limited assurance)
Agreed-upon procedures
Examinations of internal controls, compliance, and other subject matter
The term "auditor" specifically refers to professionals conducting financial statement audits, while "practitioner" is a broader term covering all assurance-related engagements.
Why other options are wrong:
B. These services are limited to tax preparation and filing – Assurance services go beyond tax services, which do not fall under audit services.
C. These services are only for large corporations and not applicable to small businesses – Audit and assurance services apply to entities of all sizes, including small businesses and nonprofits.
D. These services focus solely on compliance with regulations – While compliance audits exist, assurance services cover a wider scope beyond just regulatory compliance.
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.
A client has 15,000 accounts receivable customers and a resulting allowance for doubtful accounts balance of $1 million. The allowance balance is calculated using factors that require judgment by the controller in collaboration with other accounting employees of the client. The auditor is concerned that a larger sample size will be needed as a result of several of these factors. Which factor will cause this result
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Lower variability of audit population
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Lower levels of desired assurance
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Higher variability of tolerable misstatement
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Higher amounts of expected misstatements
Explanation
Correct Answer:
D. Higher amounts of expected misstatements
Explanation
When there are higher amounts of expected misstatements, auditors need to increase the sample size to ensure they obtain sufficient and appropriate audit evidence. The greater the amount of potential misstatement expected, the larger the sample size required to obtain a reasonable assurance that the financial statements are free from material misstatements.
Why other options are wrong
A. Lower variability in the audit population would lead to a smaller sample size, not a larger one.
B. Lower levels of desired assurance would generally reduce the sample size, as the auditor is willing to accept a higher risk of undetected misstatement.
C. Higher variability of tolerable misstatement would mean the auditor is willing to accept more misstatements within the tolerable range, which would likely reduce the sample size.
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.
A CPA is auditing a car dealership and is identifying factors that affect the likelihood of overstated revenue. During which phase of the audit does the CPA take this action
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Reporting
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Regulatory
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Risk response
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Risk assessment
Explanation
Correct Answer:
D. Risk assessment
Explanation
The CPA performs risk assessment procedures during the early phase of the audit to identify and assess the risks of material misstatement in the financial statements, such as the likelihood of overstated revenue.
Why other options are wrong
A. Reporting: The reporting phase involves the preparation of the audit report, not the assessment of risks related to the financial statements.
B. Regulatory: Regulatory refers to compliance with legal and professional standards but does not directly involve identifying audit risks.
C. Risk response: The risk response phase focuses on the auditor's actions to address identified risks, such as designing procedures to mitigate the risk of overstated revenue.
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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Issue an audit report that includes a qualified opinion
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Avoid referencing the subsequent events in the audit report
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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:
When significant subsequent events have occurred, and the auditor believes that there is a risk that users of the financial statements may draw improper conclusions, the auditor should include an emphasis-of-matter paragraph. This paragraph draws attention to the relevant footnote disclosure regarding the subsequent events, providing clarity to financial statement users.
Why other options are wrong
A. Refuse to issue an audit report for the client: Refusing to issue an audit report would not be necessary if the appropriate disclosure is made and is deemed adequate.
B. Issue an audit report that includes a qualified opinion: A qualified opinion is typically issued when there is a material misstatement or limitation of scope. In this case, the issue is related to clarity, not a misstatement.
C. Avoid referencing the subsequent events in the audit report: Avoiding reference to the subsequent events would not resolve the potential misunderstanding by users of the financial statements. An emphasis-of-matter paragraph is the proper response.
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