CPA Auditing Principles & Procedures 3 — Questions and Answers
Question 1: Which engagement letter provision is considered most critical for defining the auditor-client relationship?
- The audit fee amount
- The scope of services and responsibilities of each party (Correct answer)
- The expected completion date
- The identity of the audit team members
Correct answer: The scope of services and responsibilities of each party
The engagement letter must clearly define the scope of the audit and the responsibilities of both the auditor and management to avoid misunderstandings.
Question 2: A walk-through test is primarily performed to:
- Detect material misstatements in account balances
- Confirm the auditor's understanding of the flow of transactions and related controls (Correct answer)
- Substitute for tests of controls
- Verify the accuracy of management's representations
Correct answer: Confirm the auditor's understanding of the flow of transactions and related controls
Walk-through tests follow a transaction from origination through processing to confirm the auditor's documented understanding of transaction flows and controls.
Question 3: If control risk is assessed as low, the auditor should:
- Increase the extent of substantive tests
- Reduce the extent of substantive tests (Correct answer)
- Eliminate substantive tests entirely
- Issue a disclaimer of opinion
Correct answer: Reduce the extent of substantive tests
When controls are deemed effective (low control risk), the auditor can reduce substantive testing because fewer misstatements are expected to pass through controls.
Question 4: Which of the following best describes 'professional skepticism' in an audit?
- Assuming management is dishonest until proven otherwise
- Questioning the competence of the audit team
- Maintaining a questioning mind and critically assessing audit evidence (Correct answer)
- Refusing to accept any client explanations without corroboration
Correct answer: Maintaining a questioning mind and critically assessing audit evidence
Professional skepticism requires auditors to maintain a questioning mind and critically assess evidence without assuming either honesty or dishonesty.
Question 5: An auditor selects 50 invoices for testing and finds 3 errors. Using attributes sampling, what does the auditor compute?
- The dollar magnitude of errors
- The sample deviation rate (Correct answer)
- The projected misstatement for the population
- The tolerable misstatement
Correct answer: The sample deviation rate
In attributes sampling, the auditor calculates the sample deviation rate (errors found / sample size) to evaluate the rate of control deviations.
Question 6: Which assertion is most relevant when testing accounts receivable for overstatement?
- Completeness
- Existence (Correct answer)
- Rights and obligations
- Presentation and disclosure
Correct answer: Existence
The existence assertion addresses whether recorded assets actually exist, making it the primary concern when testing for overstatement of receivables.
Question 7: The term 'management's specialist' in an audit context refers to:
- An auditor employed by the audit firm with specialized expertise
- An expert engaged by management to assist in preparing financial information (Correct answer)
- A consultant hired by the audit committee
- A PCAOB inspector reviewing the audit
Correct answer: An expert engaged by management to assist in preparing financial information
A management's specialist is an individual or organization with expertise in a field other than accounting engaged by management to help prepare financial statement information.
CPA Auditing Principles & Procedures 3
Which engagement letter provision is considered most critical for defining the auditor-client relationship?