Auditing (D215)
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Free Auditing (D215) Questions
During a yearly audit, the audit team becomes aware of the company's pressure to increase next year's profit. Which factor should the audit team be on the lookout for in the near future
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Accruals for subsequent year sales in the current year
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Disposals of inventory during the week before the current year-end
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Payroll expenses incurred the month after the year-end and recorded in the last month of the year
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Sales commissions paid to staff incurred during the last week of the year and not recorded in the current year
Explanation
Correct Answer:
A. Accruals for subsequent year sales in the current year
Explanation
The audit team should be on the lookout for improper revenue recognition, such as accruals for sales in the current year that belong to the subsequent year. This practice would inflate the current year’s revenue and profit, driven by the company's pressure to increase next year's profit.
Why other options are wrong
B. Disposals of inventory during the week before the current year-end: While inventory disposals may be relevant, they are not as directly related to pressure for increasing next year's profit as improper revenue recognition.
C. Payroll expenses incurred the month after the year-end and recorded in the last month of the year: This involves the improper timing of expenses, but the main concern in this case is revenue recognition, not expense misclassification.
D. Sales commissions paid to staff incurred during the last week of the year and not recorded in the current year: This situation could be an issue of timing, but it is not directly related to increasing next year's profit through the premature recognition of revenue.
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.
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.
In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others
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Sufficient relevant data
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Objectivity and professional behavior
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Integrity and objectivity
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Independence
Explanation
Correct Answer:
C. Integrity and objectivity
Explanation:
Integrity and objectivity are fundamental ethical principles for CPAs. They require members to be honest, free from conflicts of interest, and not allow bias or external pressure to influence their professional judgment. These principles ensure credibility and reliability in financial reporting and auditing.
Why other options are wrong
A. Sufficient relevant data: This concept relates to gathering enough appropriate evidence to support conclusions in an audit or other engagements, but it does not specifically address integrity and objectivity.
B. Objectivity and professional behavior: While objectivity is part of the correct answer, "professional behavior" is not the standard term used in this ethical requirement.
D. Independence: Independence is a key requirement for auditors, but this question applies more broadly to all professional services, not just audits, making integrity and objectivity the best choice.
When should auditors consider sampling the entire population using audit data analytics
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When internal controls over the reliability of data are weak
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When evidence to support the audit test is not available in electronic form
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When there is a sufficiently small population and controls over the data are strong
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When the population is large, data is reliable and available in electronic form, and controls are strong
Explanation
Correct Answer:
D. When the population is large, data is reliable and available in electronic form, and controls are strong
Explanation
Audit data analytics (ADA) is a powerful tool for auditors when large volumes of data are involved, especially when data is reliable, available in electronic form, and controls over that data are strong. In these situations, auditors may consider testing the entire population rather than sampling, as the use of ADA allows for more efficient and thorough testing across all items in the population.
Why other options are wrong
A. When internal controls are weak, it may be riskier to rely on the full population and might require sampling and more detailed testing.
B. When evidence is not available in electronic form, ADA cannot be applied for testing the entire population.
C. A small population may not require testing the entire population; instead, auditors could test the sample that is representative.
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.
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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How much testing will be performed within a class of transactions or account balance – the extent of substantive procedures refers to "how much" testing will be performed within a class of transactions or account balance.
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A higher level of tolerable misstatement will be set.
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Smaller sample sizes will be chosen.
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Evaluate the effectiveness of compensating controls.
Explanation
Correct Answer:
C. Smaller sample sizes will be chosen.
Explanation:
When both control risk and inherent risk are assessed as low, the extent of substantive procedures can be reduced, meaning that the auditor can select smaller sample sizes for testing. Since past audits have shown a limited number of misstatements, the auditor has reasonable assurance that the inventory count is reliable, further supporting the decision to test a smaller sample size.
Why other options are wrong:
A. How much testing will be performed... – While this describes substantive procedures, it does not directly answer what will happen given the auditor's low-risk assessment.
B. A higher level of tolerable misstatement will be set – Tolerable misstatement refers to materiality, not sample size selection. The focus here is on how much testing will be performed rather than adjusting materiality thresholds.
D. Evaluate the effectiveness of compensating controls – This would be relevant if there were weaknesses in internal controls, but in this case, the control risk is already assessed as low.
Which piece of information is included in an unqualified opinion for an integrated audit report of a public company that is excluded if the company is private
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Effectiveness of internal controls
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Appropriateness of accounting policies used
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Overall presentation of the financial statements
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Reasonableness of accounting estimates by management
Explanation
Correct Answer:
A. Effectiveness of internal controls
Explanation:
For public companies, the auditor's unqualified opinion includes an assessment of the effectiveness of internal controls over financial reporting, as required by the Sarbanes-Oxley Act. This is a part of the integrated audit, which covers both the financial statements and internal controls. Private companies are not subject to this requirement and, therefore, do not include this information in their audit opinion.
Why other options are wrong
A. Effectiveness of internal controls: Correct answer, as explained above.
B. Appropriateness of accounting policies used: This is part of an audit for both public and private companies.
C. Overall presentation of the financial statements: This applies to both public and private companies, ensuring the financial statements are presented fairly.
D. Reasonableness of accounting estimates by management: This is also included in audits for both public and private companies, ensuring that management's estimates are reasonable.
The threat that a CPA will subordinate his or her judgment to an individual associated with a client or any relevant third party due to that individual's reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the CPA
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Advocacy threat
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Undue influence threat
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Management participation threat
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Self-interest threat
Explanation
Correct Answer:
B. Undue influence threat
Explanation:
An undue influence threat arises when a CPA’s professional judgment is compromised due to pressure, coercion, or dominance by a client or a third party. This can occur when the client has a strong reputation, an aggressive personality, or applies excessive influence over the CPA’s decisions.
Why other options are wrong
A. Advocacy threat: This occurs when a CPA promotes or defends a client’s interests to the extent that their independence is compromised, such as representing a client in a legal dispute.
C. Management participation threat: This happens when a CPA takes on management responsibilities for a client, making independent auditing impossible.
D. Self-interest threat: This arises when a CPA has a financial or personal interest in a client that could affect objectivity, such as owning shares in the client’s company.
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 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
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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
Explanation
Correct Answer:
B. Use audit data analytics (ADA) since reliable evidence is available in electronic form
Explanation
Given that a software system tracks the purchases and that reliable evidence is available in electronic form, using audit data analytics (ADA) allows the auditor to efficiently analyze a large volume of transactions. ADA can provide insights into trends, patterns, and anomalies, making it a suitable choice for analyzing fixed asset transactions. Since control and inherent risks are low, this approach helps in ensuring that the audit procedures are efficient and focused.
Why other options are wrong
A. Test 100% of the transactions because the population is large: Testing all transactions is typically unnecessary unless the risk is high or controls are weak. ADA can handle large datasets more efficiently.
C. Test a large percentage of transactions because detection risk is low: Low detection risk usually means that the auditor expects to detect misstatements if they exist, but it doesn’t mandate testing a large percentage of transactions. ADA offers a better approach in this case.
D. Use audit sampling of a small percentage since the account balance is high: Sampling is appropriate in certain cases, but with the presence of electronic evidence and ADA capabilities, this is not the most efficient method when the risk is low.
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