FREE Certified Public Accountant (CPA) Audit Questions and Answers

Question 1

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.

Accepted Answer

Unmodified opinion

Answer

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.

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%.
Revenue: $3,500,000
Gross Profit: $100,300
Total Assets: $2,750,000
Stockholders' Equity: $1,000,000
What is the overall financial materiality?

Accepted Answer

35,000

Answer

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

Accepted Answer

Preventative Control

Answer

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?

Accepted Answer

Bank statements from the client

Answer

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?
Hint: This refers to the following transactions, from their initial source documents through the accounting process to the financial statements.

Accepted Answer

Completeness

Answer

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.

Certified Public Accountant Practice Test

Certified Public Accountant Practice Test

FREE Certified Public Accountant (CPA) Audit Questions and Answers