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CPA AUD practice questions

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Question 1Ethics, Professional Responsibilities and General Principles

Under the AICPA Code of Professional Conduct, which characteristic best describes the principle of integrity?

  1. Charging fees that are reasonable for the services rendered
  2. Possessing the technical competence required to perform an engagement
  3. Being straightforward and honest in all professional and business relationships Correct answer.
  4. Avoiding conduct that appears improper to a reasonable observer

Explanation

Integrity requires a member to be straightforward and honest in all professional and business relationships, and it tolerates no knowingly misrepresented facts. It is a distinct principle from competence, fees, and appearance-based standards.

Question 2Ethics, Professional Responsibilities and General Principles

Which of the following best describes the role of the AICPA's Professional Ethics Division?

  1. It establishes the CPA examination content specifications
  2. It investigates and enforces compliance with the AICPA Code of Professional Conduct Correct answer.
  3. It licenses CPA firms to practice before the SEC
  4. It sets auditing standards that govern the conduct of audit engagements

Explanation

The Professional Ethics Division administers the Code and investigates alleged violations, referring matters to the Joint Trial Board when warranted. It does not set auditing standards or license firms.

Question 3Ethics, Professional Responsibilities and General Principles

A CPA in public practice is offered a commission by a software vendor for referring a client to the vendor's accounting system. Under the AICPA Code, which condition must be met for the CPA to accept the commission?

  1. The client must be a publicly traded entity
  2. The commission must be approved by the state board
  3. The referral must be unrelated to attest services
  4. The commission must be disclosed to the client Correct answer.

Explanation

The AICPA Code permits commissions in certain circumstances only if the member discloses the arrangement to the client. Disclosure allows the client to evaluate any conflict of interest.

Question 4Ethics, Professional Responsibilities and General Principles

A CPA firm provides bookkeeping services to a nonpublic audit client. Which safeguard is most relevant to reducing the threat to independence created by this arrangement?

  1. Requiring the client to sign an engagement letter acknowledging the services
  2. Charging a fixed fee rather than an hourly fee for the bookkeeping
  3. Ensuring management makes all decisions and accepts responsibility for the financial statements Correct answer.
  4. Having the audit partner review the bookkeeping work as part of the audit

Explanation

When a firm performs bookkeeping for an audit client, management must be able to make informed judgments and accept responsibility for the financial statements. This preserves management's role and mitigates the self-review threat.

Question 5Ethics, Professional Responsibilities and General Principles

A CPA leaves public accounting to become the controller of a former audit client. Which statement about the CPA's independence with respect to that client is correct?

  1. Independence is impaired only if the CPA retains an ownership interest in the client
  2. Independence is required only if the CPA continues to perform attest services
  3. The CPA must wait two years before accepting employment with a former audit client
  4. Independence is not required because the CPA is no longer in public practice Correct answer.

Explanation

Independence rules apply to members in public practice performing attest services. A controller employed by the client is not in public practice and therefore is not subject to the independence requirement for that client.

Question 6Ethics, Professional Responsibilities and General Principles

Under the AICPA Code, which of the following constitutes a direct financial interest that impairs a member's independence?

  1. Owning shares of the audit client held in a brokerage account Correct answer.
  2. Holding an interest in a diversified fund managed by an unrelated party
  3. Owning shares of a mutual fund that holds stock in the audit client
  4. Participating in a defined benefit pension plan that invests in the client

Explanation

A direct financial interest, such as owning the client's stock directly, impairs independence. Indirect interests through diversified funds or pension plans generally do not.

Question 7Ethics, Professional Responsibilities and General Principles

A CPA firm is asked to perform an attest engagement for a client that owes the firm significant unpaid fees from a prior engagement. Which statement is most accurate regarding independence?

  1. Independence is not affected as long as the firm discloses the receivable to the client
  2. Independence is never impaired by unpaid fees because they are a business matter
  3. Independence is impaired if the unpaid fees are material and the client has not paid them before the report is issued Correct answer.
  4. Independence is impaired only if the fees are more than one year overdue

Explanation

Unpaid fees from a prior engagement can create a self-interest threat. If the fees are material and remain unpaid when the current report is issued, independence is considered impaired.

Question 8Ethics, Professional Responsibilities and General Principles

Which of the following is a self-review threat to independence?

  1. A firm's partner has a spouse employed as a staff accountant by the client
  2. A firm's fee depends on the outcome of a tax ruling for the client
  3. A firm designed and implemented the client's internal control system and now audits it Correct answer.
  4. A firm markets its services to the client's competitors

Explanation

A self-review threat arises when a firm evaluates its own prior work, such as auditing internal controls it designed. The firm would be reviewing the adequacy of its own design.

Question 9Ethics, Professional Responsibilities and General Principles

A CPA is asked to prepare a tax return for a client and to represent the client before the IRS. Which principle most directly governs the CPA's obligation when the client insists on taking an undisclosed aggressive position?

  1. Objectivity and integrity require the CPA not to knowingly misrepresent facts Correct answer.
  2. Independence requires the CPA to withdraw from all tax services
  3. Confidentiality requires the CPA to keep the client's position secret from all parties
  4. Due care requires the CPA to charge a higher fee for risky positions

Explanation

Integrity and objectivity prohibit a member from knowingly misrepresenting facts or subordinating judgment to the client. The CPA must follow applicable tax standards and cannot knowingly sign a false return.

Question 10Ethics, Professional Responsibilities and General Principles

Under the AICPA Code, which of the following is an example of a confidential client communication that a CPA may disclose without client consent?

  1. Disclosing the client's tax strategy to a competitor
  2. Disclosing information in response to a valid court subpoena Correct answer.
  3. Disclosing the client's plans to a prospective buyer
  4. Disclosing the client's financial results to a trade association

Explanation

The confidentiality principle permits disclosure when required by law, such as a valid subpoena or court order. Other disclosures require client consent or fall within permitted exceptions.

Question 11Ethics, Professional Responsibilities and General Principles

A CPA in industry is asked by the controller to record a journal entry that the CPA believes misstates revenue. After raising the concern, the controller insists. What is the CPA's most appropriate next step under the AICPA Code?

  1. Escalate the concern to higher levels of management or the audit committee Correct answer.
  2. Discuss the matter with the external auditor without informing management
  3. Record the entry and document the controller's instruction
  4. Resign immediately without further communication

Explanation

A member in industry who encounters a disagreement should first attempt to resolve it internally and, if unresolved, escalate to higher authority such as the audit committee. Resigning is a last resort.

Question 12Ethics, Professional Responsibilities and General Principles

Which of the following best describes the AICPA's conceptual framework approach to independence?

  1. A requirement that all threats be eliminated entirely before accepting an engagement
  2. A process of identifying threats and evaluating safeguards to reduce threats to an acceptable level Correct answer.
  3. A checklist of prohibited services that applies uniformly to all clients
  4. A rule that independence is required only for public company audits

Explanation

The conceptual framework requires the member to identify threats to independence, evaluate their significance, and apply safeguards to reduce the threats to an acceptable level. It is not a rigid checklist.

Question 13Ethics, Professional Responsibilities and General Principles

A CPA firm performs an audit for a client and also provides valuation services that will be used to determine the client's financial statement amounts. Which statement is most accurate?

  1. The service is always permitted if the client approves
  2. The service creates a self-review threat and may impair independence if the valuation is material Correct answer.
  3. The service is permitted only if the CPA is not a partner
  4. The service is prohibited only for tax purposes

Explanation

Providing valuation services that management uses to determine material financial statement amounts creates a self-review threat because the firm would audit its own valuation. Independence may be impaired.

Question 14Ethics, Professional Responsibilities and General Principles

Which of the following statements about the AICPA Code's applicability to members in business is correct?

  1. Members in business are subject to the Code, including integrity and objectivity Correct answer.
  2. Members in business are subject to the Code only when they hold a CPA license in public practice
  3. Members in business are subject only to the confidentiality rules
  4. Members in business are exempt from the integrity and objectivity rules

Explanation

The AICPA Code applies to all members, including those in business, and the integrity and objectivity rules apply to them. Employment setting does not exempt a member from the Code.

Question 15Ethics, Professional Responsibilities and General Principles

A CPA firm advertises its services through a website that includes client testimonials and claims of being the "best accounting firm in the state." Under the AICPA Code, which statement is most accurate?

  1. Advertising is permitted only in print media
  2. Advertising requires pre-approval by the state board
  3. Advertising is prohibited entirely for CPA firms
  4. Advertising is permitted if it is not false, misleading, or deceptive Correct answer.

Explanation

The AICPA Code permits advertising and solicitation as long as it is not false, misleading, or deceptive. Unsubstantiated superiority claims may be misleading.

Question 16Ethics, Professional Responsibilities and General Principles

A CPA is offered a gift of significant value by a client's management in appreciation for the audit. Under the AICPA Code, how should the CPA evaluate the gift?

  1. Accept it because it is a personal matter unrelated to the engagement
  2. Accept it only if it is disclosed on the firm's website
  3. Accept it because gifts are permitted without restriction
  4. Evaluate whether the gift creates a self-interest or familiarity threat to independence Correct answer.

Explanation

Gifts can create self-interest or familiarity threats, and the member must evaluate whether the gift is significant enough to impair independence or objectivity. Trivial gifts generally are acceptable.

Question 17Ethics, Professional Responsibilities and General Principles

Which of the following best describes the AICPA's rule on contingent fees for attest clients?

  1. Contingent fees are permitted if disclosed to the client
  2. Contingent fees are permitted only for tax services to public companies
  3. Contingent fees are prohibited for attest clients because they create a self-interest threat Correct answer.
  4. Contingent fees are permitted if approved by the engagement partner

Explanation

Contingent fees for attest services are prohibited because the firm's fee depends on the outcome, creating a self-interest threat to objectivity and independence. Disclosure does not cure the prohibition.

Question 18Ethics, Professional Responsibilities and General Principles

A CPA firm is considering whether to accept an engagement where the predecessor auditor was dismissed after a disagreement over accounting principles. What is the most appropriate action for the successor auditor?

  1. Accept the engagement without contacting the predecessor to preserve client confidentiality
  2. Rely solely on the client's explanation of the disagreement
  3. Communicate directly with the predecessor auditor after obtaining client permission Correct answer.
  4. Report the client to the state board before accepting

Explanation

Professional standards require the successor auditor to communicate with the predecessor auditor, with the client's permission, to evaluate matters affecting acceptance. This helps assess the integrity of management and the reasons for the change.

Question 19Ethics, Professional Responsibilities and General Principles

Which of the following is a primary purpose of the AICPA Code of Professional Conduct?

  1. To guide members in performing their professional responsibilities ethically Correct answer.
  2. To establish the minimum audit procedures for all engagements
  3. To set the fees that CPAs may charge clients
  4. To determine the tax treatment of professional expenses

Explanation

The Code provides principles and rules to guide members in fulfilling their ethical and professional responsibilities. It is not a set of audit procedures or fee schedules.

Question 20Ethics, Professional Responsibilities and General Principles

A CPA prepares a client's financial statements and also performs a compilation engagement. Which statement best describes the CPA's responsibility regarding independence?

  1. Independence is required only if the financial statements are audited
  2. Independence is required for compilations of public companies only
  3. Independence is required for a compilation engagement
  4. Independence is not required for a compilation, but the CPA must disclose any lack of independence Correct answer.

Explanation

A compilation does not require independence, but if the CPA is not independent, that fact must be disclosed in the compilation report. This differs from audit and review engagements.

Question 21Ethics, Professional Responsibilities and General Principles

Under the AICPA Code, which of the following situations most likely creates an undue influence threat to a member's objectivity?

  1. A firm uses a standardized audit program
  2. A client's CEO threatens to replace the firm unless it agrees to a preferred accounting treatment Correct answer.
  3. A firm documents its audit work in an electronic file
  4. A firm rotates audit partners on a periodic basis

Explanation

An undue influence threat arises when a client pressures the member to act contrary to professional judgment. A threat to replace the firm unless a preferred treatment is accepted is a classic example.

Question 22Ethics, Professional Responsibilities and General Principles

A CPA provides investment advisory services to an audit client and has discretionary authority to make investment decisions for the client. Which statement is most accurate regarding independence?

  1. Independence is impaired only if the client is a public company
  2. Independence is impaired because the CPA is making management decisions for the client Correct answer.
  3. Independence is not impaired because the services are advisory
  4. Independence is not impaired if the CPA charges a flat fee

Explanation

Assuming management responsibilities, such as discretionary authority over client investments, impairs independence because the firm is acting as management. The client must retain decision-making authority.

Question 23Ethics, Professional Responsibilities and General Principles

Which of the following statements about the AICPA's peer review program is correct?

  1. Peer review is conducted only by state boards of accountancy
  2. Peer review replaces the need for continuing professional education
  3. Peer review is required for all CPAs regardless of practice type
  4. Peer review is required for firms that perform audits and other engagements under AICPA standards, as a condition of membership Correct answer.

Explanation

AICPA membership requires firms performing certain engagements, such as audits, to undergo peer review. It is a quality-assurance mechanism and does not replace CPE or state board oversight.

Question 24Ethics, Professional Responsibilities and General Principles

A CPA discovers that a client has engaged in illegal acts that could materially affect the financial statements. Under the AICPA Code and auditing standards, what is the CPA's most appropriate action?

  1. Ignore the matter because the CPA is not a law enforcement officer
  2. Resign immediately and take no further action
  3. Communicate the matter to the appropriate level of client management and those charged with governance Correct answer.
  4. Report the matter directly to law enforcement without informing the client

Explanation

The auditor should communicate illegal acts to the appropriate level of management and, when warranted, those charged with governance. Confidentiality may limit external reporting unless a legal or professional duty requires it.

Question 25Ethics, Professional Responsibilities and General Principles

A CPA is a member of a firm that performs an audit for a client. The CPA's spouse owns a small, immaterial direct interest in the client. How does the spouse's interest affect independence?

  1. It has no effect because the interest is immaterial
  2. It impairs independence because a direct financial interest held by an immediate family member is attributed to the member Correct answer.
  3. It has no effect because the spouse is a separate person
  4. It impairs independence only if the spouse is employed by the client

Explanation

Under the AICPA Code, a direct financial interest held by an immediate family member is generally treated as held by the member, and materiality does not cure a direct interest. This impairs independence.

Question 26Ethics, Professional Responsibilities and General Principles

Under the AICPA Code of Professional Conduct, which principle requires a member to be straightforward and honest in all professional and business relationships?

  1. Objectivity
  2. Due care
  3. Integrity Correct answer.
  4. Confidentiality

Explanation

Integrity is the principle that requires a member to be straightforward and honest, and it is the foundation of the ethical framework. Objectivity relates to impartiality, due care to competence and diligence, and confidentiality to protecting client information.

Question 27Ethics, Professional Responsibilities and General Principles

A CPA firm is considering whether to accept an audit engagement for a new client. The firm's policy is to document its evaluation of client integrity. Which of the following best describes the primary purpose of this evaluation?

  1. To determine whether the client's financial statements are materially correct
  2. To assess the risk of associating with a client whose management lacks integrity Correct answer.
  3. To satisfy the requirement that the firm obtain a predecessor auditor's communication
  4. To establish the firm's independence from the client

Explanation

Assessing client integrity helps the firm evaluate the risk that management may misrepresent information or engage in unethical behavior, which could impair the firm's ability to perform the engagement objectively. It is a client acceptance consideration, not a substitute for audit procedures or independence assessment.

Question 28Ethics, Professional Responsibilities and General Principles

A CPA is a member of a firm that provides bookkeeping services to a nonpublic client. The client's management has sufficient knowledge to accept responsibility for the financial statements. Under the AICPA Code, which of the following is the most significant threat to the firm's independence if the firm also performs an audit for the same client?

  1. Advocacy threat
  2. Intimidation threat
  3. Familiarity threat
  4. Self-review threat Correct answer.

Explanation

Performing bookkeeping services creates a self-review threat because the firm may later audit its own work, potentially impairing objectivity. Management's acceptance of responsibility mitigates but does not eliminate the threat.

Question 29Ethics, Professional Responsibilities and General Principles

Under the AICPA Code, which of the following statements about the form of a firm's advertising is correct?

  1. Advertising must be approved by the AICPA before publication.
  2. Advertising is prohibited for attest clients but allowed for non-attest clients.
  3. Advertising is allowed only in print media and not on the internet.
  4. Advertising is permitted only if it is not false, misleading, or deceptive. Correct answer.

Explanation

The AICPA Code permits advertising as long as it is not false, misleading, or deceptive. There is no prohibition based on client type, media, or prior approval.

Question 30Ethics, Professional Responsibilities and General Principles

A CPA firm is engaged to audit a nonpublic company. The firm's partner in charge of the engagement has a spouse who is employed by the client as a staff accountant. The spouse does not have significant influence over the client's financial reporting. Under the AICPA Code, which of the following best describes the effect on the firm's independence?

  1. Independence is not impaired because the spouse is not a CPA.
  2. Independence is impaired because the spouse is employed by the client.
  3. Independence is not impaired because the spouse does not have significant influence. Correct answer.
  4. Independence is impaired only if the spouse participates in the audit.

Explanation

Under the AICPA Code, a close family member's employment with a client impairs independence only if the family member has significant influence over the client's financial reporting or is in a position to exert direct influence over the audit. A staff accountant without significant influence does not impair independence.

Question 31Assessing Risk and Developing a Planned Response

An auditor is developing the planned response to assessed risks of material misstatement at the financial statement level. Which response is most appropriate for risks assessed at the financial statement level?

  1. Reduce the extent of tests of controls in all cycles
  2. Lower the assessed risk of material misstatement to avoid additional procedures
  3. Design additional substantive tests only for the cash account
  4. Assign more experienced staff and increase professional skepticism throughout the engagement Correct answer.

Explanation

Risks at the financial statement level are pervasive and affect the engagement as a whole, so the auditor responds with general changes such as assigning more experienced personnel, increased supervision, and heightened professional skepticism. These overall responses are then supplemented by responses at the assertion level.

Question 32Assessing Risk and Developing a Planned Response

The risk of material misstatement consists of which two components?

  1. Sampling risk and nonsampling risk
  2. Detection risk and audit risk
  3. Business risk and engagement risk
  4. Inherent risk and control risk Correct answer.

Explanation

The risk of material misstatement is the auditor's assessment of risk before considering the effect of audit procedures, and it comprises inherent risk and control risk. Detection risk is a separate element that the auditor controls through the nature, timing, and extent of procedures.

Question 33Assessing Risk and Developing a Planned Response

Which statement best describes the relationship between the assessed risk of material misstatement and detection risk?

  1. They are unrelated because detection risk is a function of sampling only
  2. They are directly related, so higher misstatement risk requires higher detection risk
  3. They are inversely related, so higher misstatement risk permits higher detection risk
  4. They are inversely related, so higher misstatement risk requires lower detection risk Correct answer.

Explanation

The audit risk model holds audit risk constant as an inverse relationship between the risk of material misstatement and detection risk. When misstatement risk is assessed higher, the auditor must accept less detection risk, meaning more effective and extensive procedures.

Question 34Assessing Risk and Developing a Planned Response

An auditor is performing risk assessment procedures for a new client. Which procedure is required to obtain an understanding of the entity and its environment?

  1. Confirming bank balances with third parties
  2. Inquiring of management and others within the entity Correct answer.
  3. Sending negative confirmations to customers
  4. Recalculating accrued liabilities at year-end

Explanation

Risk assessment procedures include inquiries of management and others within the entity, analytical procedures, observation and inspection, and other information-gathering procedures. Confirmations and recalculations are substantive procedures that occur later in the audit.

Question 35Assessing Risk and Developing a Planned Response

During a discussion among engagement team members, the auditor should specifically consider which matter related to fraud?

  1. The client's marketing strategy for the coming year
  2. The number of staff assigned to the prior-year engagement
  3. The exact amount of the prior-year audit fee
  4. How and where the financial statements might be susceptible to material misstatement due to fraud Correct answer.

Explanation

The engagement team discussion should include an exchange of ideas about how and where the financial statements might be susceptible to material misstatement due to fraud. This brainstorming helps identify fraud risks and design appropriate responses.

Question 36Assessing Risk and Developing a Planned Response

An auditor identifies a significant risk. What is the auditor required to do in response?

  1. Obtain substantive procedures specifically responsive to that risk Correct answer.
  2. Reduce the extent of substantive testing because the risk is already identified
  3. Perform only analytical procedures at an interim date
  4. Rely entirely on the entity's controls over that area

Explanation

For significant risks, the auditor must perform substantive procedures that are specifically responsive to the risk. Reliance on controls alone is not sufficient, and substantive procedures must be performed.

Question 37Assessing Risk and Developing a Planned Response

An entity has a complex information technology environment with automated controls over revenue recognition. The auditor plans to rely on those automated controls. What should the auditor do?

  1. Test only the manual controls that override the system
  2. Test the general IT controls and the automated application controls for operating effectiveness Correct answer.
  3. Assume the automated controls operate effectively without testing
  4. Ignore the automated controls because they cannot be tested

Explanation

When relying on automated controls, the auditor must test both the IT general controls that support the consistent operation of the system and the relevant automated application controls. Automated controls do not eliminate the need for testing.

Question 38Assessing Risk and Developing a Planned Response

An auditor assesses control risk at a lower level and plans to rely on controls. Which procedure is necessary to support that reliance?

  1. Perform a walkthrough only in the prior year
  2. Increase the assessed risk of material misstatement
  3. Perform analytical procedures in place of tests of controls
  4. Obtain audit evidence about the operating effectiveness of the controls Correct answer.

Explanation

To rely on controls, the auditor must obtain evidence that the controls operated effectively throughout the period of reliance. This typically involves tests of controls such as inquiry combined with inspection, observation, or reperformance.

Question 39Assessing Risk and Developing a Planned Response

An auditor is evaluating the design and implementation of internal controls. Which procedure is most directly suited to determining whether a control has been implemented?

  1. Reviewing subsequent cash receipts
  2. Recalculating depreciation expense
  3. Performing a walkthrough of a transaction from initiation through recording Correct answer.
  4. Sending a bank confirmation

Explanation

A walkthrough traces a transaction through the entity's system, allowing the auditor to evaluate both the design of controls and whether they have been implemented. Confirmations, recalculations, and subsequent receipts are substantive procedures.

Question 40Assessing Risk and Developing a Planned Response

An auditor is assessing inherent risk for an entity operating in a volatile industry with significant estimates. Which factor most likely increases inherent risk?

  1. A stable regulatory environment with no recent changes
  2. The use of routine, high-volume transactions with little judgment
  3. The existence of a strong internal audit function
  4. The presence of complex accounting estimates subject to significant measurement uncertainty Correct answer.

Explanation

Inherent risk increases when transactions involve complex estimates, significant judgment, or high measurement uncertainty. Routine transactions and stable environments generally reduce inherent risk.

Question 41Assessing Risk and Developing a Planned Response

An auditor determines that the entity's controls are weak and assesses control risk at the maximum. What is the effect on the auditor's substantive procedures?

  1. The auditor may omit substantive procedures entirely
  2. Substantive procedures must be more extensive and performed closer to period end Correct answer.
  3. Substantive procedures may be reduced to analytical procedures only
  4. The auditor may rely on the prior year's tests of controls without retesting

Explanation

When control risk is assessed at the maximum, the auditor cannot rely on controls and must obtain more assurance from substantive procedures. This generally means increasing the extent of testing and timing procedures closer to period end.

Question 42Assessing Risk and Developing a Planned Response

An auditor is designing procedures for a significant risk related to revenue recognition. Which approach best complies with auditing standards?

  1. Perform only inquiry of the sales manager
  2. Rely solely on the entity's monthly analytical review
  3. Reduce sample sizes because revenue is a routine account
  4. Perform substantive procedures specifically responsive to the risk, including tests of details Correct answer.

Explanation

Significant risks require substantive procedures specifically responsive to the risk, and the auditor should not rely solely on controls or analytical procedures. Tests of details are often necessary to obtain sufficient appropriate evidence.

Question 43Assessing Risk and Developing a Planned Response

An auditor is evaluating whether a risk is a significant risk. Which factor most likely indicates a significant risk?

  1. The control environment is strong and monitoring is effective
  2. The matter involves significant judgment and complex estimation Correct answer.
  3. The account balance is immaterial to the financial statements
  4. The transaction is routine and subject to systematic processing

Explanation

Significant risks often relate to nonroutine transactions, matters requiring significant judgment, complex estimates, or areas susceptible to fraud. Routine processing and strong controls generally reduce the likelihood of a significant risk.

Question 44Assessing Risk and Developing a Planned Response

An auditor plans to use the work of an internal audit function to modify the nature, timing, or extent of procedures. What should the auditor first evaluate?

  1. The internal auditors' prior-year vacation schedules
  2. The internal auditors' objectivity and competence, and apply a systematic and disciplined approach Correct answer.
  3. The internal auditors' salary levels and office location
  4. The internal auditors' membership in a professional association only

Explanation

Before using internal audit work, the auditor evaluates the objectivity of the internal audit function, its level of competence, and whether it applies a systematic and disciplined approach including quality control. This determines the extent to which the work can be used.

Question 45Assessing Risk and Developing a Planned Response

An auditor uses the work of a specialist to value complex financial instruments. Which action is most appropriate?

  1. Replace the specialist's work with the auditor's own valuation without documentation
  2. Rely on the specialist only if the specialist is a client employee
  3. Evaluate the specialist's competence, capabilities, and objectivity, and review the appropriateness of the work Correct answer.
  4. Accept the specialist's findings without evaluation because the specialist is an expert

Explanation

When using the work of a specialist, the auditor must evaluate the specialist's competence, capabilities, and objectivity, and assess the appropriateness of the specialist's work as audit evidence. The auditor retains responsibility for the conclusion.

Question 46Assessing Risk and Developing a Planned Response

An auditor is considering the entity's risk assessment process as part of understanding internal control. Which matter is most relevant?

  1. The entity's dividend policy
  2. The market price of the entity's common stock
  3. How management identifies, analyzes, and responds to business risks relevant to financial reporting Correct answer.
  4. The number of employees in the accounting department

Explanation

The entity's risk assessment process involves how management identifies business risks relevant to financial reporting objectives, estimates their significance, and decides how to respond. This understanding informs the auditor's own risk assessment.

Question 47Assessing Risk and Developing a Planned Response

An auditor identifies a risk of material misstatement due to fraud in revenue recognition. Auditing standards presume such a risk exists unless rebutted. What is the auditor's most appropriate response?

  1. Document the reasons for rebutting the presumption without further procedures
  2. Rely on management's representation that revenue is properly recorded
  3. Limit procedures to inquiry of the controller
  4. Treat the risk as a significant risk and design substantive procedures responsive to it Correct answer.

Explanation

There is a presumption that revenue recognition involves a fraud risk, and the auditor treats it as a significant risk unless the presumption is rebutted with documented evidence. The response must include substantive procedures specifically responsive to the risk.

Question 48Assessing Risk and Developing a Planned Response

An auditor is planning the nature, timing, and extent of audit procedures. Which factor would most likely cause the auditor to perform procedures closer to the balance sheet date?

  1. Higher assessed risk of material misstatement Correct answer.
  2. A larger number of immaterial accounts
  3. A shorter audit report deadline
  4. Lower assessed risk of material misstatement

Explanation

Higher assessed risk of material misstatement generally leads the auditor to perform procedures closer to or at period end and to increase the extent of testing. Lower risk may permit procedures at an interim date.

Question 49Assessing Risk and Developing a Planned Response

An auditor is determining whether to use audit evidence obtained in prior periods about the operating effectiveness of controls. Which statement is correct?

  1. Prior-period evidence may be used if controls have not changed, but some controls must be tested each year Correct answer.
  2. Prior-period evidence can always be used for three years without retesting
  3. Prior-period evidence can never be used under any circumstances
  4. Prior-period evidence may be used only for controls over cash

Explanation

Evidence about operating effectiveness from prior audits may be used in the current year if controls have not changed, but the auditor must test the operating effectiveness of some controls each year. Controls related to significant risks must be tested in the current period.

Question 50Assessing Risk and Developing a Planned Response

An auditor is evaluating the reliability of audit evidence obtained from an external source versus an internal source. Which evidence is generally more reliable?

  1. A confirmation received directly from an independent third party Correct answer.
  2. An internal memo prepared by the client's staff
  3. Oral representations from the controller
  4. A draft schedule prepared by the client's bookkeeper

Explanation

Evidence obtained from independent external sources is generally more reliable than evidence generated internally, especially when received directly by the auditor. Oral representations and client-prepared documents are less reliable.