AUD Sample CPA Exam Questions

Weekly Review Quiz #394 – AUD: Analytical Procedures

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Question 1

To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by

  1. The staff accountant who performed the substantive auditing procedures
  2. The managing partner who has responsibility for all audit engagements at that practice office.
  3. A manager or partner who has a comprehensive knowledge of the client’s business and industry.
  4. The CPA firm’s quality control manager or partner who has responsibility for the firm’s peer review program.

The correct answer is: C.

A. Incorrect…  The staff accountant would not have the experience or the broad knowledge necessary to complete the overall analytical review.

B. Incorrect…  The managing partner would not necessarily have the client and industry knowledge required for the overall analytical review.

C. Correct!  In the overall review stage, the purpose of analytical procedures is to evaluate the conclusions reached and the overall financial statement presentation. It is best performed by an experienced and knowledgeable individual. A manager or partner who has a comprehensive knowledge of the client’s business and industry would have the experience and knowledge necessary for this review.

D. Incorrect…  The CPA firm’s quality control manager or partner who has responsibility for the firm’s peer review program.

Question 2

Which of the following activities is an analytical procedure an auditor would perform in the final overall review stage of an audit to ensure that the financial statements are free from material misstatement?

  1. Reading the minutes of the board of directors’ meetings for the year under audit.
  2. Obtaining a letter concerning potential liabilities from the client’s attorney.
  3. Comparing the current year’s financial statements with those of the prior year.
  4. Ensuring that a representation letter signed by management is in the file.

The correct answer is: C.

A. Incorrect…  Reading the minutes is not an analytical procedure.

B. Incorrect…  Obtaining a lawyer’s letter is not an analytical procedure.

C. Correct!  Comparing the current and prior year’s financial statements is a legitimate analytical procedure performed both in planning and as a final review.

D. Incorrect…  Obtaining a management representations letter is not an analytical procedure.

Question 3

Which of the following would not be considered an analytical procedure?

  1. Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages.
  2. Developing the current year’s expected net sales based on the sales trend of similar entities within the same industry.
  3. Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.
  4. Estimating the current year’s expected expenses based on the prior year’s expenses and the current year’s budget.

The correct answer is: C.

A. Incorrect…  Comparing an entity’s financial information to industry averages is a common analytical procedure.

B. Incorrect…  Developing expectations for an entity based on industry circumstances is a common characteristic of analytical procedures.

C. Correct!  Evaluating the characteristics of a population by means of applying statistical sampling techniques, specifically projecting a deviation or error rate, is likely to be performed as part of “test of controls,” not an analytical procedure.

D. Incorrect…  Estimating the current year’s expected expenses based on the prior year’s expenses and the current year’s budget.

Question 4

A basic premise underlying the application of analytical procedures is that

  1. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.
  2. Statistical tests of financial information may lead to the discovery of material errors in the financial statements.
  3. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.
  4. These procedures cannot replace tests of balances and transactions.

The correct answer is: C.

A. Incorrect…  Analytical procedures incorporate both the study of financial ratios and the investigation of unusual fluctuations. One is not an alternative to the other. Analytical procedures involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Unusual fluctuations or differences are highlighted for further investigation.

B. Incorrect…  Analytical procedures are not statistical tests. They involve the comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Unusual fluctuations or differences are then investigated as they may lead to the discovery of material errors in the financial statements.

C. Correct!  Analytical procedures assume that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. For this reason, data can be used to predict future balances against which recorded balances may be compared.

D. Incorrect…  Analytical procedures performed as substantive tests may be used in lieu of tests of balances and transactions.

Question 5

An auditor’s decision either to apply analytical procedures as substantive tests or to perform tests of transactions and account balances usually is determined by the

  1. Availability of data aggregated at a high level.
  2. Relative effectiveness and efficiency of the tests.
  3. Timing of tests performed after the balance sheet date.
  4. Auditor’s familiarity with industry trends.

The correct answer is: B.

A. Incorrect…  The performance of analytical procedures as substantive tests would, typically, require data that is not aggregated at a high level.

B. orrect!  Evidence may be gathered by means of analytical tests (performed as substantive tests), tests of transactions, and tests of details of balances. The decision as to which means to employ is based on the auditor’s judgment of the expected effectiveness and efficiency of the available procedures.

C. Incorrect…  The decision as to which type of procedure to perform is not based on the timing of tests performed after the balance sheet date. Evidence may be gathered from analytical procedures performed as substantive tests, tests of transactions, and tests of details of balances both before year-end and after year-end.

D. Incorrect…  The decision as to which type of procedure to perform is not based on the auditor’s familiarity with industry trends.  Understanding industry trends enables the auditor to better understand the company, which then facilitates the auditor’s use of analytical procedures. Industry knowledge is a factor impacting the use of the different procedures; it is not the determining factor, however.

End of Quiz

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