AUD Sample CPA Exam Questions

Weekly Review Quiz #386 – AUD: Planning and Supervision

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Question 1

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

  1. Make inquiries of the client’s lawyer concerning pending litigation.
  2. Perform cutoff tests of cash receipts and disbursements.
  3. Compare financial information with nonfinancial operating data.
  4. Recalculate the prior year’s accruals and deferrals.

The correct answer is: C.

A. Incorrect… Inquiries of the entity’s lawyer(s) would be made during fieldwork, but not in connection with audit “planning” activities.

B. Incorrect… Cutoff procedures regarding cash receipts and disbursements would likely be performed during fieldwork, but not in connection with audit “planning” activities.

C. Correct! The auditor is required to perform analytical procedures in planning the audit engagement. By definition, analytical procedures may involve a study of plausible relationships among both financial and nonfinancial data, consistent with this answer.

D. Incorrect… Recalculating the prior year’s accruals and deferrals would not likely be necessary in connection with the current period’s audit, certainly not in connection with audit “planning” activities.

Question 2

The audit program usually cannot be finalized until the

  1. Consideration of the entity’s internal control structure has been completed.
  2. Engagement letter has been signed by the auditor and the client.
  3. Significant deficiencies have been communicated to the audit committee of the board of directors.
  4. Search for unrecorded liabilities has been performed and documented.

The correct answer is: A.

A. Correct!  The audit program documents the auditing procedures to be performed. It cannot be finalized until consideration of the entity and its environment, including internal control, has been completed. Recall that the auditors are required to obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement and to plan the audit and allow determination of the nature, timing, and extent of the tests to be performed. Thus, knowledge of the internal control structure is needed for the auditor to select the auditing procedures and decide when and how extensively to perform them.

B. Incorrect…While the audit program would not normally be finalized until after the engagement letter has been signed by the auditor and the client, this answer is not the best choice. The signing of the engagement letter should normally occur before audit planning begins at all. There is not a specific requirement, however, that states that the audit program cannot be completed before the engagement letter is signed.

C. Incorrect…Significant deficiencies in the internal control structure which are discovered during the audit are reportable to the audit committee of the board of directors. Waiting to finalize the audit program until significant deficiencies are communicated is clearly incorrect; significant deficiencies are discovered as a result of audit procedures (detailed in the audit program) being performed.

D. Incorrect…The search for unrecorded liabilities is a substantive audit procedure, that is completed at the close of fieldwork. Waiting to finalize the audit program until the search for unrecorded liabilities is performed is clearly incorrect; the search is an audit procedure detailed in the audit program.

Question 3

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity’s financial statements?

  1. Supporting records that should be readily available are frequently not produced when requested.
  2. Significant deficiencies previously communicated have not been corrected.
  3. Clerical errors are listed on a monthly computer-generated exception report.
  4. Differences are discovered during the client’s annual physical inventory count.

The correct answer is: A.

A. Correct!   An auditor would consider whether material misstatements exist if supporting records that should be readily available are frequently not produced when requested. This could indicate a lack of internal control and the possibility of management misrepresentation which, in turn, could indicate an opportunity for material misstatements to be present.

B. Incorrect… The existence of significant deficiencies previously communicated but still uncorrected is not, by itself, an indicator of potential material misstatements. Management may elect to live with a significant deficiency because of cost or other considerations.

C. Incorrect… The listing of clerical errors on a monthly computer-generated exception report is a control feature. It is not indicative of the possibility of material misstatements.

D. Incorrect… The discovery of differences during the client’s annual physical inventory count is a normal occurrence. It does not, by itself, indicate the possibility of material misstatements.

Question 4

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?

  1. Staff will need to be rescheduled to cover this new client.
  2. There will be a client-imposed scope limitation.
  3. The firm will have to hire a specialist in one audit area.
  4. The client’s financial reporting system has been in place for 10 years.

The correct answer is: B.

A. Incorrect… Rescheduling staff to add a new client is a common occurrence among CPA firms. It would not pose the greatest risk related to a new engagement. In fact, it may reduce the risk. For example, rescheduling staff may enable audit staff with greater industry experience to be assigned to the new client.

B. Correct!  ANY client-imposed scope limitation is a problem. When you add that problem to the greater risk arising from a new client, you have greatly increased the risk related to the new engagement. A new client, by definition, is a client that will require more time to study and understand in order to perform the audit. If the client is also telling the auditors that certain audit procedures will not be allowed, the risk of missing a material misstatement becomes very high.

C. Incorrect… While the need for a specialist may result from an audit area with greater risk and requiring particular expertise, the fact that the specialist will be hired reduces the risk for the audit engagement.

D. Incorrect… This is not a high risk factor. A 10 year system, while it may be a little slow and outdated, is a known commodity that the client fully understands. It will not increase risk for the auditor on a new engagement. A greater risk would occur if a new client had adopted a new system during the first year of the engagement.

Question 5

Which of the following procedures would an auditor most likely perform in the planning stage of an audit?

  1. Make a preliminary judgment about materiality.
  2. Confirm a sample of the entity’s accounts payable with known creditors.
  3. Obtain written representations from management that there are NO unrecorded transactions.
  4. Communicate management’s initial selection of accounting policies to the audit committee.

The correct answer is: A.

A. Correct!  In planning the overall audit strategy and designing the written audit plan, the auditor should consider materiality for the financial statements taken as a whole.

B. Incorrect… Even if the auditor were inclined to confirm selected accounts payable, that would not be done in connection with “planning.”

C. Incorrect… Such written representations from management are obtained by the auditor at the end of fieldwork, not in planning the engagement.

D. Incorrect… The auditor normally discusses the qualitative aspects of the entity’s significant accounting policies, among other matters, with those charged with governance at the conclusion of the audit engagement.

End of Quiz

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