Question 1

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?

Accepted Answer

Choice "B" is correct. The higher the auditor's risk assessment, the closer to period end substantive procedures should be performed. Conversely, effective controls reduce control risk and reduce the risk of material misstatement, allowing more interim testing to occur. Choice "A" is incorrect. A new sales incentive program results in an increase in the risk of material misstatement, making it less likely that interim testing will be performed. Choice "C" is incorrect. High turnover of senior management results in an increase in the risk of material misstatement, making it less likely that interim testing will be performed. Choice "D" is incorrect. In the first engagement of a new client, the auditor will have less knowledge of the client and therefore would be less inclined to utilize interim testing, which increases audit risk.

Question 2

To obtain audit evidence about control risk, an auditor ordinarily selects tests from a variety of techniques, including:

Accepted Answer

Choice "C" is correct. Reperforming the application of relevant controls provides evidence regarding their operating effectiveness. Choices "A", "B", and "D" are incorrect. Analysis, confirmation, and comparison are substantive tests of account balances, not tests of controls.

Question 3

As part of understanding internal control, an auditor is not required to:

Accepted Answer

Choice "D" is correct. As part of understanding internal control, an auditor is not required to obtain knowledge about the operating effectiveness of controls. Operating effectiveness is evaluated later, and only for those controls on which the auditor plans to rely. Choice "A" is incorrect. Considering factors that affect the risk of material misstatement is a part of understanding internal control. Choice "B" is incorrect. Ascertaining whether internal controls have been implemented is required as part of obtaining an understanding of internal control. Choice "C" is incorrect. Identifying the types of potential misstatements that can occur is part of understanding internal control.

Question 4

Internal control includes which of the following components:

Accepted Answer

Choice "C" is correct. Yes - Yes - Yes - Yes. In addition, "control activities" rounds out the five components of internal control. Choices "A", "B", and "D" are incorrect, per the above.

Question 5

Which of the following statements about performing tests of controls to support a lower level of control risk is not true?

Accepted Answer

Choice "B" is correct. Inquiry alone generally will not support a conclusion for a lower assessed level of control risk. Choices "A", "C", and "D" are incorrect, as the following are true: A. Observation by the auditor provides more assurance than audit evidence obtained by inquiry alone. C. Prior audits may be considered by the auditor in assessing control risk in the current audit. D. An audit of financial statements is a cumulative process.

Question 6

Which of the following is an inherent limitation in internal control?

Accepted Answer

Choice "C" is correct. Inherent limitations in internal control are limitations that exist despite implementation of appropriate controls. For example, faulty human judgment may result in errors in the design or use of internal controls. Choice "A" is incorrect. Assigning incompatible duties to a particular individual indicates a missing control, rather than an inherent limitation in internal control. Choice "B" is incorrect. Lack of segregation of duties indicates a missing control, rather than an inherent limitation in internal control. Choice "D" is incorrect. Lack of an audit committee indicates a missing control, rather than an inherent limitation in internal control.

Question 7

In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the:

Accepted Answer

Choice "B" is correct. No - Yes. In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the design of controls and whether they have been implemented. The auditor is not required to obtain knowledge about the "operating effectiveness of controls" as part of obtaining an understanding of internal control. Choices "A", "C", and "D" are incorrect, per the above explanation.

Question 8

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances the auditor most likely would:

Accepted Answer

Choice "B" is correct. The auditor uses tests of controls to evaluate control risk. In situations where there are a number of significant deficiencies in the operation of the client's internal controls, the auditor would increase the assessment of control risk (and the risk of material misstatement) and revise substantive testing accordingly (for example, by increasing the extent of substantive tests). Choice "A" is incorrect. An auditor is required to communicate significant deficiencies to management and those charged with governance, and a disclaimer of opinion on the effectiveness of controls would be included in this communication. However, such disclaimer would not be part of the auditor's report on the financial statements. Choice "C" is incorrect. Since the auditor's report provides an opinion on the financial statements (and not on internal control), significant deficiencies in internal control do not result in a qualified opinion. Choice "D" is incorrect. The auditor need not withdraw from an audit simply because internal controls are ineffective, but rather would increase the assessment of control risk and revise substantive testing accordingly.

Question 9

The objective of tests of details of transactions performed as tests of controls is to:

Accepted Answer

Choice "D" is correct. The objective of tests of details used as tests of controls is to evaluate whether an internal control operated effectively. Choice "A" is incorrect. Tests of details of transactions would not typically be used to monitor the design and use of entity documents. Choice "B" is incorrect. Tests of details of transactions would not typically be used to determine whether internal controls have been implemented. Choice "C" is incorrect. The objective of tests of details of transactions performed as substantive tests is to detect material misstatements in the financial statements.

Question 10

In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:

Accepted Answer

Choice "A" is correct. When an entity transmits, processes, maintains, or accesses significant information electronically, factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone. In such cases, tests of controls should be performed. Choices "B", "C", and "D" are incorrect. Certain factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone. In such cases, tests of controls should be performed to address the increased potential for unauthorized access, the risks of insufficient paper-based audit evidence, and the fact that the appropriateness and sufficiency of evidence may be dependent to some extent on computerized controls. Simply expanding the sample size, adjusting materiality levels, or applying analytical procedures will not address these concerns.

Question 11

Which of the following controls is least likely to be relevant to a financial statement audit?

Accepted Answer

Choice "A" is correct. Procedures to reduce inefficiency on the production line relate to operational objectives, and not necessarily to financial reporting objectives. Choices "B", "C", and "D" are incorrect. Compliance with income tax regulations, use of passwords to limit data access, and generation of reports to facilitate variance analysis are all important controls related to financial reporting.

Question 12

An auditor would most likely be concerned with internal controls that provide reasonable assurance about the:

Accepted Answer

Choice "D" is correct. An auditor would most likely be concerned with internal controls that provide reasonable assurance about the entity's ability to process and summarize financial data. Choice "A" is incorrect. The auditor is primarily concerned with the fair presentation of the financial statements, and would not particularly care about the efficiency of management's decision-making process. Choice "B" is incorrect. The auditor is primarily concerned with the fair presentation of the financial statements. Pricing decisions made by management would not be of much concern, as long as the related transactions were appropriately valued and recorded. Choice "C" is incorrect. The auditor is primarily concerned with the fair presentation of the financial statements. How the client assigns tasks to its employees generally is of little concern to the auditor.

Question 13

After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that:

Accepted Answer

Choice "C" is correct. After performing risk assessment procedures, an auditor might decide not to perform tests of controls because it would be inefficient. In other words, the time required to perform tests of controls would be greater than the reduction in time spent on substantive testing. Choice "A" is incorrect. The auditor might decide not to perform tests of controls if the available audit evidence obtained through those tests would not support a decrease (not increase) in the level of control risk. Choice "B" is incorrect. A reduction in the assessed level of control risk can only be justified based on tests of controls. If the auditor decides not to perform tests of controls, the assessed level of control risk may not be reduced. Choice "D" is incorrect. The relationship of inherent risk to control risk does not determine the level of control testing to be performed.

Question 14

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:

Accepted Answer

Choice "C" is correct. If an auditor wishes to perform a test of controls over a procedure that leaves no audit trail, then the auditor must use observation and inquiry to test the control. Choices "A", "B", and "D" are incorrect. Analytical procedures and confirmation are both substantive tests of balances, not tests of controls.

Question 15

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:

Accepted Answer

Choice "D" is correct. The auditor's ultimate purpose of assessing control risk is to evaluate the risk of financial statement misstatement. Choice "A" is incorrect. The auditor's evaluation of whether or not specific internal control activities are operating as designed is part of his/her assessment of control risk; however, the ultimate purpose of making this assessment is to evaluate the risk of financial statement misstatement. Choice "B" is incorrect. The auditor's evaluation of the collective effect of the control environment is part of his/her assessment of control risk; however, the ultimate purpose of making this assessment is to evaluate the risk of financial statement misstatement. Choice "C" is incorrect. Tests of controls are not used to identify activities relevant to assertions. Tests of controls are used to evaluate the operating effectiveness of internal control in preventing or detecting material misstatements.

Question 16

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:

Accepted Answer

Choice "B" is correct. For internal controls which leave no audit trail of documentary evidence (e.g., segregation of duties), the auditor must use inquiry and observation to test the procedures. Choice "A" is incorrect. Confirmation is a substantive audit procedure not appropriate for tests of controls. Choice "C" is incorrect. Analytical procedures and confirmation are substantive audit procedures not appropriate for tests of controls. Choice "D" is incorrect. Analytical procedures are substantive audit procedures not appropriate for tests of controls.

Question 17

Internal control over safeguarding of assets may include controls relating to:

Accepted Answer

Choice "A" is correct. Yes - Yes - No. Internal control over safeguarding of assets may relate to both financial reporting and operations objectives. For example, controls related to financial reporting might include: 1. Use of a lockbox system for collecting cash, or 2. Passwords for limiting access to accounts receivable data files. Controls related to operations might include controls to prevent the excess use of materials in production. Internal control over safeguarding of assets generally would not relate to compliance objectives. (Note that the auditor generally would only be concerned with the controls relevant to financial reporting, but this question does not ask which controls are important to the auditor.) Choices "B", "C", and "D" are incorrect, based on the above explanation.

Question 18

Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?

Accepted Answer

Choice "D" is correct. The examination of client records documenting the use of EDP programs is a test of controls. Choice "A" is incorrect. Confirmations of receivables verifying account balances is a substantive test, not a test of controls. Choice "B" is incorrect. Obtaining letters of representation corroborating inventory pricing is a substantive test, not a test of controls. Choice "C" is incorrect. Attorneys' responses to the auditor's inquiries are part of a substantive test, not a test of controls.

Question 19

Which of the following is necessary in a financial statement audit?

Accepted Answer

Choice "C" is correct. An understanding of internal control relevant to an entity's financial reporting objective is necessary as part of audit planning. Choices "A" and "B" are incorrect. An understanding of internal control relevant to each of an entity's operating units and business functions may not always be necessary. Choice "D" is incorrect. Not all compliance objectives are relevant to an audit, since some are not related to financial reporting.

Question 20

Objectives of an entity include:

Accepted Answer

Choice "D" is correct. No - Yes - Yes. An entity's objectives consist of financial reporting, operations, and compliance. Information and communication is a component of internal control, not an objective. Choices "A", "B", and "C" are incorrect, per the above.

Exam 1: CPA Auditing and Attestation Exam