Certified Public Accountant (CPA) Audit 3 — Questions and Answers
Question 1: Which of the following is an example of a substantive analytical procedure?
- Tracing recorded sales to shipping documents
- Comparing current-year gross margin to prior-year gross margin (Correct answer)
- Recomputing depreciation expense
- Observing the physical inventory count
Correct answer: Comparing current-year gross margin to prior-year gross margin
Comparing current-year gross margin percentage to prior years is an analytical procedure that evaluates financial data by studying plausible relationships.
Question 2: A client refuses to allow the auditor to confirm accounts receivable with customers. The auditor should:
- Issue an unmodified opinion if alternative procedures provide sufficient evidence (Correct answer)
- Always issue an adverse opinion
- Withdraw from the engagement immediately
- Issue a qualified opinion regardless of alternative procedures performed
Correct answer: Issue an unmodified opinion if alternative procedures provide sufficient evidence
If alternative procedures (such as examining subsequent cash receipts) provide sufficient appropriate evidence, an unmodified opinion may still be appropriate.
Question 3: The primary purpose of preparing a lead schedule during an audit is to:
- Document audit findings for communication to management
- Summarize account balances and link them to the financial statements and supporting schedules (Correct answer)
- Record adjusting journal entries proposed by the auditor
- List internal control deficiencies identified during testing
Correct answer: Summarize account balances and link them to the financial statements and supporting schedules
Lead schedules provide a summary of account balances, cross-reference to supporting workpapers, and tie account totals to the trial balance and financial statements.
Question 4: Which of the following most likely represents a significant deficiency in internal control?
- A single immaterial error in one account
- Lack of secondary authorization for small petty cash disbursements under $50
- The absence of a process to identify and review complex accounting estimates (Correct answer)
- A minor formatting inconsistency in journal entry documentation
Correct answer: The absence of a process to identify and review complex accounting estimates
The absence of a review process for complex accounting estimates represents a significant deficiency because estimates carry high inherent risk and lack of oversight could allow material errors.
Question 5: When auditing fair value measurements, the auditor's primary concern is typically:
- Whether the client used a third-party appraiser
- Whether the valuation method is consistent with prior years only
- Whether the assumptions and methods are reasonable and supportable (Correct answer)
- Whether fair value equals historical cost
Correct answer: Whether the assumptions and methods are reasonable and supportable
Auditors evaluate whether the entity's assumptions, inputs, and valuation techniques are reasonable and consistent with market-based evidence.
Question 6: Under AU-C 560, which events after the balance sheet date require adjustment to the financial statements?
- Events that provide new information about conditions that existed at the balance sheet date (Correct answer)
- Events that reveal conditions that arose after the balance sheet date
- All events discovered before the audit report date
- Only events disclosed by management in writing
Correct answer: Events that provide new information about conditions that existed at the balance sheet date
Type I subsequent events provide evidence of conditions existing at the balance sheet date and require adjustment to the financial statements.
Question 7: An auditor who concludes that a material uncertainty about going concern exists but management's disclosures are adequate should:
- Issue an adverse opinion
- Issue a qualified opinion
- Issue an unmodified opinion with an emphasis-of-matter paragraph (Correct answer)
- Withdraw from the engagement
Correct answer: Issue an unmodified opinion with an emphasis-of-matter paragraph
When going concern disclosures are adequate, AU-C 570 requires an unmodified opinion with a separate emphasis-of-matter paragraph drawing attention to the uncertainty.
Certified Public Accountant (CPA) Audit 3
Which of the following is an example of a substantive analytical procedure?