Auditing (D215)
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Free Auditing (D215) Questions
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.
Which group performs an audit and review of financial statements to ensure financial statement users' needs are met
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Internal auditors
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The Internal Revenue Service (IRS)
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Independent third-party auditors
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The Financial Accounting Standards Board (FASB)
Explanation
Correct Answer:
C. Independent third-party auditors
Explanation
Independent third-party auditors perform audits and reviews of financial statements to provide an objective evaluation and ensure that the financial statements meet the needs of users, such as investors, creditors, and regulatory authorities.
Why other options are wrong
A. Internal auditors: Internal auditors assess and improve an organization's internal controls and processes but do not typically perform external audits or reviews for financial statement users.
B. The Internal Revenue Service (IRS): The IRS is responsible for enforcing tax laws and regulations, not for auditing financial statements for external users.
D. The Financial Accounting Standards Board (FASB): FASB sets accounting standards but does not perform audits or reviews of financial statements.
Which extent of substantive audit procedures is warranted when auditing sales with records totaling $75 million that are in a reliable electronic format and the internal control risk of the sales cycle is low
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Detection risk is low, and a small percentage of transactions should be tested.
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Use of audit data analytics (ADA) should be used because evidence is available in this form.
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Test 100% of the transactions because the population of transactions is large.
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Audit sampling of a small percentage should be used due to the high account balance.
Explanation
Correct Answer:
B. Use of audit data analytics (ADA) should be used because evidence is available in this form.
Explanation
Since the sales records are in a reliable electronic format and the internal control risk is low, audit data analytics (ADA) is an effective and efficient way to test the transactions. ADA can process large amounts of data, which helps the auditor evaluate trends and patterns in the sales cycle, making it appropriate to test a larger volume of transactions with minimal effort.
Why other options are wrong
A. Detection risk is low, and a small percentage of transactions should be tested: This isn't the most efficient approach since ADA can handle more transactions while reducing manual testing.
C. Test 100% of the transactions because the population of transactions is large: It’s not necessary to test all transactions when ADA can process the data more effectively.
D. Audit sampling of a small percentage should be used due to the high account balance: While sampling could be used, ADA provides a more comprehensive approach for large data sets and low internal control risk.
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.
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.
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 advise of an incorrect calculation
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To report other significant findings or issues
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To disclose a disagreement with management
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To present the business conditions affecting the company
Explanation
Correct Answer:
C. To disclose a disagreement with management
Explanation:
When auditors disagree with management's approach, especially in a situation that could materially affect the accuracy of the financial statements, they are required to communicate this disagreement. A letter to the audit committee serves as a formal way to disclose and address the issue, ensuring that the committee is aware of the differing views and the potential impact on the audit.
Why other options are wrong
A. To advise of an incorrect calculation: The issue at hand is a disagreement regarding the method used for inventory counting, not an incorrect calculation.
B. To report other significant findings or issues: While this could be a significant issue, the main purpose is to communicate a specific disagreement with management’s method.
D. To present the business conditions affecting the company: This is not the primary purpose of the letter, which focuses on a specific disagreement related to the audit process.
An auditor is planning to rely on a client's internal controls over financial reporting. How should this auditor respond when tests of 50 general ledger journal entries for proper authorization yield 15 instances of improper authorization
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Ignore the findings and proceed with the audit as planned.
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Evaluate the effectiveness of compensating controls.
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Assume all controls are functioning correctly.
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Increase the number of unauthorized entries to assess risk.
Explanation
Correct Answer:
B. Evaluate the effectiveness of compensating controls.
Explanation:
When a high number of unauthorized journal entries are identified (15 out of 50, or 30%), this raises concerns about the effectiveness of internal controls. The auditor must determine whether other controls exist that mitigate this deficiency. Compensating controls, such as detection mechanisms or secondary approvals, could reduce the risk of material misstatement.
Why other options are wrong:
A. Ignore the findings and proceed with the audit as planned. – Ignoring the findings violates auditing standards; auditors must assess and respond to control weaknesses.
C. Assume all controls are functioning correctly. – The test results indicate significant control failures, meaning the assumption is incorrect.
D. Increase the number of unauthorized entries to assess risk. – While auditors may expand testing, they should first assess compensating controls before deciding on further action.
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.
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.
Assurance, attestation, and auditing are similar because all three represent a common process of _____
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Taking information prepared by someone else and comparing that information to an established set of criteria.
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The auditor would ordinarily set out the purpose of the tests of the controls identified.
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It expresses an opinion on the fair presentation of the financial statements.
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Monitoring.
Explanation
Correct Answer:
A. Taking information prepared by someone else and comparing that information to an established set of criteria.
Explanation:
Assurance, attestation, and auditing all involve an independent examination of information prepared by a client or third party. The auditor or practitioner evaluates this information against an established set of criteria, such as financial reporting standards, regulatory requirements, or contractual obligations, to provide credibility and reliability to users of the information.
Why other options are wrong:
B. The auditor would ordinarily set out the purpose of the tests of the controls identified. – This relates to tests of controls in an audit, not the overall concept of assurance, attestation, and auditing.
C. It expresses an opinion on the fair presentation of the financial statements. – This specifically describes an audit, but assurance and attestation engagements can cover non-financial information as well.
D. Monitoring. – Monitoring is a component of internal control, not a general description of assurance, attestation, and auditing.
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