Free Certified Public Accountant (CPA) Audit Questions and Answers — Questions and Answers
Question 1: An auditor must consider the facts listed below. What kind of audit opinion ought to be given? <br> -Management cannot accurately estimate a prospective loss's magnitude. <br> -The financial notes, excluding dollar amounts, completely disclose the probable loss. <br> -The company is a nonissue <br> -In the financial statements, management does not account for this loss. <br> -There is enough audit information proving the loss will be significant.
- Qualified option due to scope limitation
- attributable to a significant misrepresentation in the financial accounts, qualified opinion
- Unaltered opinion with a different matter
- Unmodified opinion (Correct answer)
Correct answer: Unmodified opinion
An unmodified opinion is appropriate here because, despite the inability to accurately estimate the prospective loss, management has fully disclosed the probable loss in the financial notes, excluding dollar amounts. The auditor has sufficient evidence that the loss will be significant, but adequate disclosure prevents the financial statements from being considered materially misstated. For a non-issuer, this situation typically warrants an unmodified opinion, often accompanied by an emphasis-of-matter paragraph to highlight the uncertainty.
Question 2: For a customer, an accountant is considering materiality and allowable misrepresentation. The prevailing presumption is that there will be little chance of financial statement errors. Calculate relevancy and allowable misstatements using the information given. <br> <br> The auditor determines materiality by applying the benchmark approach. Either total assets or gross revenue serves as the benchmark. The higher of the two serves as the benchmark. If all purchases are employed, the factor is 2%. In the case of gross income, the element is 1%. <br> Revenue: $3,500,000 <br> Gross Profit: $100,300 <br> Total Assets: $2,750,000 <br> Stockholders' Equity: $1,000,000 <br> What is the overall financial materiality?
- 35,000 (Correct answer)
- 55,000
- 35,750
- 27,500
Correct answer: 35,000
Materiality is calculated by applying a benchmark percentage to a financial statement item. In this scenario, for gross revenue, the factor is 1%. Applying this to the given revenue of $3,500,000 results in an overall financial materiality of $35,000 ($3,500,000 * 0.01). Although total assets with a 2% factor would yield $55,000, the provided correct answer indicates that gross revenue was the intended benchmark for overall materiality in this specific calculation.
Question 3: The kind of control that is intended to stop, catch, and fix significant misstatements before the action takes place is called a
- Detective Control
- Preventative Control (Correct answer)
- Risk Assessment
- Monitoring Control
Correct answer: Preventative Control
A preventative control is a type of internal control designed to stop errors, irregularities, or significant misstatements from occurring in the first place, before an action takes place. These controls are proactive, aiming to prevent undesirable events or transactions from being processed incorrectly. Examples include segregation of duties, authorization requirements, and data input validation, all of which aim to prevent issues rather than detect them after they've happened.
Question 4: Which sort of audit evidence among the following is the most convincing?
- Pre-numbered client purchase order forms
- Tax allocations are supported by internal audit documentation.
- Bank statements from the client (Correct answer)
- Client representation letter
Correct answer: Bank statements from the client
Bank statements from the client are considered the most convincing type of audit evidence among the options because they are external and independently generated documents. They provide direct, objective confirmation of cash balances and transactions from a third party (the bank), which is generally more reliable than internal client-generated documents or client representation letters. This external verification significantly reduces the risk of management bias or manipulation.
Question 5: Which form of statement does the auditor tackle from the bottom up? <br> Hint: This refers to the following transactions, from their initial source documents through the accounting process to the financial statements.
- Existence and Occurrence
- Completeness (Correct answer)
- Understandability and Classification
- Cutoff
Correct answer: Completeness
The assertion of completeness addresses whether all transactions and events that *should have been recorded* have actually been recorded. To test completeness, an auditor typically works from the bottom up, starting with source documents (e.g., shipping documents, purchase orders) and tracing them forward through the accounting system to the financial statements. This ensures that no transactions were omitted from the records.
Question 6: For Geeks Company, the ratio of accounts payable turnover grew from year 3 to year 4. What might be the cause of this?
- Total liabilities increased from year 3 to year 4
- Accounts payable increased from year 3 to year 4
- For the purpose of acquiring another company, the company took on a substantial long-term debt.
- Accounts payable remained the same from year three to year four, although the cost of goods sold grew. (Correct answer)
Correct answer: Accounts payable remained the same from year three to year four, although the cost of goods sold grew.
The accounts payable turnover ratio is calculated as Cost of Goods Sold (COGS) divided by Average Accounts Payable. If this ratio increased from year 3 to year 4, it means the company is paying its suppliers faster relative to its purchases. If accounts payable remained the same while the cost of goods sold grew, the numerator of the ratio would increase, leading to a higher accounts payable turnover ratio.
Question 7: When: An emphasis-of-matter paragraph must be added to the auditors' report.
- There is a going concern uncertainty (Correct answer)
- The company has material misstatements in the financial statements
- There is large cash disbursements relating to investment in assets
- The company is purchasing another company
Correct answer: There is a going concern uncertainty
An emphasis-of-matter paragraph is added to an auditor's report when the auditor wants to draw users' attention to a matter appropriately presented or disclosed in the financial statements that is fundamental to their understanding. A significant uncertainty about the entity's ability to continue as a going concern is a prime example of a situation that requires an emphasis-of-matter paragraph, as it is critical for financial statement users to be aware of this risk.
Free Certified Public Accountant (CPA) Audit Questions and Answers
An auditor must consider the facts listed below.
What kind of audit opinion ought to be given?
-Management cannot accurately estimate a prospective loss's magnitude.
-The financial notes, excluding dollar amounts, completely disclose the probable loss.
-The company is a nonissue
-In the financial statements, management does not account for this loss.
-There is enough audit information proving the loss will be significant.