Question 1

Which of the following is not a type of financial statement assertion?

Accepted Answer

Choice "B" is correct. "Fairness and accuracy" is not a type of financial statement assertion. Choices "A", "C", and "D" are incorrect. The assertions include: Rights and obligations Valuation and allocation Understandability and classification

Question 2

As the acceptable level of detection risk decreases, an auditor may:

Accepted Answer

Choice "B" is correct. As the acceptable level of detection risk decreases, the assurance provided from substantive tests should increase. Consequently, the auditor should do one or more of the following: 1) change the nature of substantive tests from a less effective to a more effective procedure, 2) change the timing of the substantive tests, such as performing them at year-end rather than at an interim date, or 3) change the extent of substantive tests, such as using a larger sample size. Choice "A" is incorrect. As acceptable detection risk decreases, the extent of substantive tests should increase rather than decrease. The auditor cannot reassess inherent risk and control risk to compensate for the lower acceptable detection risk. Choice "C" is incorrect. Inherent risk is an integral part of the risk of material misstatement and cannot be eliminated from the computation of acceptable detection risk. Choice "D" is incorrect. The auditor cannot lower the assessed level of control risk unless tests of controls support that assessment.

Question 3

As the acceptable level of detection risk decreases, the assurance directly provided from:

Accepted Answer

Choice "A" is correct. As the acceptable level of detection risk (the risk that an auditor will not detect a material misstatement that exists in an assertion) decreases, the assurance directly provided from substantive tests should increase. The level of detection risk will decline as the benefit of direct tests increases. Choice "B" is incorrect. If the assurance directly provided from substantive tests decreased, detection risk would increase because the direct tests have become less beneficial. Choices "C" and "D" are incorrect. Changing the extent of tests of controls does not affect the level of detection risk.

Question 4

Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should:

Accepted Answer

Choice "D" is correct. When audit procedures are performed before year-end, the auditor must assess the incremental risk involved and determine whether sufficient alternative procedures exist to extend the interim conclusions to year-end. Choice "A" is incorrect. The risk of incorrect rejection relates to the efficiency of audit testing, since an item that is initially (and erroneously) rejected will be subject to additional audit testing that should correct the error. The likelihood of assessing this risk lower than it should be does not affect the auditor's decision regarding the appropriate timing of audit work. Choice "B" is incorrect. When audit procedures are performed before year-end, the auditor must assess the incremental risk involved, but this risk would not necessarily be assessed at the maximum level. Choice "C" is incorrect. Interim testing may be performed on material accounts, as long as the auditor assesses the incremental risk involved and determines whether sufficient alternative procedures exist to extend the interim conclusions to year-end. Immaterial accounts would not need to be tested.

Question 5

An auditor assesses control risk because it:

Accepted Answer

Choice "D" is correct. The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the assessed risk of material misstatement, which in turn affects the acceptable level of detection risk for financial statement assertions. Choice "A" is incorrect. The auditor assesses control risk after obtaining an understanding of internal control. Assessment is not required to obtain an understanding of the control environment or any of the other four components of internal control. Choice "B" is incorrect. Assessment of control risk is unrelated to assessments of materiality levels. Choice "C" is incorrect. Inherent risk is assessed independently of any consideration of relevant controls. Control risk does not affect inherent risk.

Question 6

When assessing an internal auditor's competence, a CPA ordinarily obtains information about all of the following, except:

Accepted Answer

Choice "D" is correct. The degree of access the independent auditor has to information about related parties provides no information regarding an internal auditor's competence. Choice "A" is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed. Choice "B" is incorrect. When considering the competence of internal auditors, the independent auditor should inquire about the qualifications of the internal audit staff, including for example, consideration of the client's practices for hiring, training, and supervising internal audit staff. This includes inquiries as to the internal auditor's educational level and professional experience. Choice "C" is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed.

Question 7

In developing an overall audit strategy, an auditor should consider:

Accepted Answer

Choice "D" is correct. In developing an overall audit strategy, an auditor should consider preliminary evaluations of materiality, audit risk, and internal control. Choice "A" is incorrect. Evaluation of results from sampling applications would be performed during fieldwork, after the planning process has been completed. Choice "B" is incorrect. Findings from interim audit testing would be considered during fieldwork, after the planning process has been completed. Choice "C" is incorrect. Inquiry of a client's attorney and evaluation of the attorney's response is performed during fieldwork, after the planning process has been completed.

Question 8

Samples to test internal control are intended to provide a basis for an auditor to conclude whether:

Accepted Answer

Choice "A" is correct. Samples to test internal control are intended to provide a basis for an auditor to conclude whether the control activities are operating effectively. Choice "B" is incorrect. Tests of controls may provide evidence regarding the likelihood of misstatement, but they do not provide a basis for concluding whether the financial statements are materially misstated. Choice "C" is incorrect. The risk of incorrect acceptance is an aspect of sampling risk related to substantive tests, not tests of controls. Choice "D" is incorrect. Samples to test controls do not provide evidence regarding materiality levels for planning purposes.

Question 9

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to:

Accepted Answer

Choice "B" is correct. A decrease in the amount of misstatements that the auditor can tolerate will cause the auditor to modify the nature, timing and/or extent of auditing procedures. Performing the planned procedures closer to the balance sheet date is a timing modification that addresses this change. Choice "A" is incorrect. The auditor would perform substantive procedures before year-end if the amount of misstatements the auditor could tolerate were increased. The earlier in the year that the auditor performs substantive testing, the greater the incremental risk the auditor accepts regarding the year-end financial statements. Choice "C" is incorrect. A change in the level of tolerable misstatement does not have a direct effect on the assessed level of control risk. Choice "D" is incorrect. A decrease in the amount of misstatements that can be tolerated would necessitate an increase in the extent of auditing procedures.

Question 10

An auditor uses the assessed level of control risk to:

Accepted Answer

Choice "D" is correct. An auditor uses the assessed level of control risk to determine the risk of material misstatement, which in turn determines the acceptable level of detection risk for financial statement assertions. Detection risk should bear an inverse relationship to control risk. For example, the less control risk an auditor believes exists, the greater the level of detection risk he or she can accept. Choice "A" is incorrect. The auditor's evaluation of the effectiveness of the entity's internal control is what the auditor uses to assess control risk, not vice versa. Choice "B" is incorrect. Inherent risk, which is the susceptibility of an assertion to a material misstatement based upon the nature of the account balance or transaction class, exists independently from and bears no direct relationship to control risk. Choice "C" is incorrect. Materiality thresholds for planning and evaluation purposes are based upon measurements of financial criteria, not the assessed level of control risk.

Question 11

An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

Accepted Answer

Choice "B" is correct. As part of audit planning, the auditor should obtain an understanding of the entity's business. This understanding enables the auditor to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests. Choice "A" is incorrect. Obtaining an understanding of the entity's business would not be particularly helpful in identifying significant deficiencies in internal control. Also, such deficiencies are typically identified during the fieldwork stage of the audit, while obtaining an understanding of the entity's business typically occurs during planning. Choice "C" is incorrect. Obtaining an understanding of the entity's business would not result in a more accurate performance of tests of controls. Accurate performance of audit tests is dependent upon factors such as existence of an appropriate audit trail, client cooperation, training and supervision of audit staff, etc. Choice "D" is incorrect. Analytical procedures are always required in an audit, during the planning and overall review stages.

Question 12

In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the:

Accepted Answer

Choice "D" is correct. In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the financial statement assertions. Choice "A" is incorrect. Although the timing of audit procedures is an important consideration in designing a written audit plan, obtaining audit evidence relating to the financial statement assertions is the primary objective. Choice "B" is incorrect. The cost-benefit of gathering evidence is an important consideration in establishing a written audit plan, but audit objectives are not based on such considerations. Choice "C" is incorrect. The specific audit objectives should relate primarily to financial statement assertions. Selected audit techniques are then developed in order to meet the identified objectives.

Question 13

Control risk should be assessed in terms of:

Accepted Answer

Choice "C" is correct. The auditor identifies internal controls relevant to specific financial statement assertions, and then performs tests of controls to evaluate their effectiveness in preventing material misstatements in those assertions. Control risk should be assessed in terms of financial statement assertions. Choice "A" is incorrect. Control risk is not assessed in terms of specific controls. Choice "B" is incorrect. Control risk is not assessed in terms of types of potential fraud. Choice "D" is incorrect. Control risk is not assessed in terms of control environment factors.

Question 14

Regardless of the assessed level of control risk, an auditor would perform some:

Accepted Answer

Choice "C" is correct. Regardless of the assessed level of control risk, an auditor would perform some level of substantive tests to restrict detection risk for significant transaction classes. Even with the lowest possible assessed level of control risk, substantive testing cannot be entirely eliminated for significant transaction classes or balances. Choice "A" is incorrect. An auditor generally would not perform tests of controls if it would not be efficient to do so. Choice "B" is incorrect. Analytical procedures are substantive audit procedures used by the auditor to test account balances, not to verify the design of internal controls. Choice "D" is incorrect. Dual purpose tests are often performed because they increase audit efficiency, but they are not required to be performed in every case.

Question 15

A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would:

Accepted Answer

Choice "C" is correct. When an entity transmits, processes, maintains, or accesses significant information electronically, some accounting data and source documents may be available only in electronic form, or only at a certain point in time. The auditor would generally perform tests of controls several times during the year to compensate for this limitation. Choice "A" is incorrect. Comparing a sample of paid vendors' invoices to receiving records provides evidence that the company received the goods for which it paid, but only if records are available in sufficient detail to make such a comparison. If detailed records are retained for only a short period of time, such comparisons would need to be performed throughout the year, not just at year-end. Choice "B" is incorrect. The auditor's judgment as to an appropriate level of tolerable misstatement is based on considerations of materiality and audit risk. Increasing this level implies that the auditor is willing to accept a larger error, which would not be an appropriate response to the limitation described. Choice "D" is incorrect. Increasing the sample size related to cutoff testing will not provide evidence about transactions occurring throughout the period under audit, since cutoff testing relates to year-end.

Question 16

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

Accepted Answer

Choice "C" is correct. The auditor would most likely use the entity's financial statements of the prior year in the preliminary determination of materiality. The prior year financial statements would be a good starting point in estimating the current year's expected results, especially for a continuing client. Choice "A" is incorrect. The assessment of control risk affects the design of audit procedures but is not relevant in determining materiality. Choice "B" is incorrect. The anticipated sample size for planned substantive tests is set after the preliminary materiality level is determined. Choice "D" is incorrect. Management assertions embodied in the financial statements have little relationship to materiality.

Question 17

Prior to commencing field work, an auditor usually discusses the general audit strategy with the client's management. Which of the following details do management and the auditor usually agree upon at this time?

Accepted Answer

Choice "C" is correct. Prior to commencing field work, the auditor would likely discuss with management any assistance desired from client staff. This is part of establishing an understanding with the client. Choice "A" is incorrect. Prior to commencing field work, the auditor likely would be unaware of the specific matters to be included in the communication to those charged with governance. Choice "B" is incorrect. While the auditor may set a preliminary measure of materiality, this is a matter of auditing judgment and would not typically be discussed with the client. In addition, significant internal control weaknesses are reported because they indicate a potential for material misstatement, regardless of whether any actual misstatements exceed a particular threshold. Choice "D" is incorrect. Prior to commencing field work, the auditor would be unlikely to have identified inadequate controls or evaluated their possible effects.

Question 18

An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor:

Accepted Answer

Choice "B" is correct. While a specialist who is unrelated to the client will provide the auditor with greater assurance of reliability, a specialist who is related to the client may be acceptable in certain circumstances. In such situations, the auditor would likely perform additional procedures to verify objectivity. Choice "A" is incorrect. If the auditor is expressing a standard unqualified opinion, no reference would be made to the specialist in the auditor's report. Choice "C" is incorrect. While a specialist who is unrelated to the client will provide the auditor with greater assurance of reliability, a specialist who is related to the client may be acceptable in certain circumstances. Choice "D" is incorrect. The fact that the actuary has a relationship with the client is not considered to be a significant deficiency in internal control

Question 19

An auditor's engagement letter most likely would include a statement regarding:

Accepted Answer

Choice "A" is correct. The auditor is required to establish an understanding with the client, and this understanding should be documented in the form of an engagement letter. The understanding (and therefore the letter) should encompass management's responsibilities, which include providing the auditor with a representation letter at the conclusion of the engagement. Choices "B", "C", and "D" are incorrect. An understanding generally is not obtained with respect to specific audit procedures, and therefore these items would not be included in an engagement letter.

Question 20

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk, and therefore the risk of material misstatement, from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

Accepted Answer

Choice "D" is correct. Decrease "detection risk." Overall audit risk is made up of the risk of material misstatement and detection risk. The risk of material misstatement is itself comprised of two separate risks, inherent risk and control risk. When the assessed level of control risk is increased, the risk of material misstatement also increases, and detection risk must be decreased to achieve an overall audit risk level that is substantially the same as the planned audit risk level. Choice "A" is incorrect. The auditor cannot change inherent risk. Choice "B" is incorrect. The established materiality level is not a component of overall audit risk. Choice "C" is incorrect. If the assurance directly provided from substantive tests decreased, detection risk would increase because direct tests have become less beneficial.

Exam 1: CPA Auditing and Attestation Exam