Exam 3 CPA Questions with Quality
Answers.
The objective of tests of details of transactions performed as tests of controls is to
A. Monitor the design and use of entity documents such as pre numbered shipping forms
B. Determine whether controls have been implemented
C. Detect material misstatements in the account balances of the financial statements
D. Evaluate whether controls operated effectively - Answer D. Evaluate whether controls
operated effectively
Which of the following is the best example of a substantive procedure?
A. Examining a sample of cash disbursements to test whether expenses have been properly
approved.
B. Confirmation of balances of account receivable.
C. Comparison of signatures on checks to a list of authorized signers.
D. Flowcharting of the client's cash receipts system. - Answer B. Confirmation of balances of
account receivable. (Provide a test of ending account balance and is therefore a detailed test of
a balance, a type of substantive procedure)
The objective of tests of details of transactions performed as substantive procedures is to
A. Comply with generally accepted auditing standards.
B. Attain assurance about the reliability of the accounting system.
C. Detect material misstatements in the financial statements.
D. Evaluate whether management's policies and procedure operated effectively. - Answer C.
Detect material misstatements in the financial statements.
In the context of an audit of financial statements, substantive procedures are audit procedures
that
A. May be eliminated under certain conditions.
B. Are designed to discover significant subsequent events.
C. May be either tests of transactions, direct tests of financial balances, or analytical tests
D. Will increase proportionately with the auditor's reliance on internal control - Answer C. May
be either tests of transactions, direct tests of financial balances, or analytical tests/procedures
The auditor will most likely perform extensive tests for possible understatement of
A. Revenues
B. Assets
,C. Liabilities
D. Capital - Answer C. Liabilities (can result in overstated profits)
In determining whether transactions have been recorded, the direction of the audit should be
from the
A. General ledger balances
B. Adjusted trail balance
C. Original source documents
D. General ledger entries - Answer C. Original source documents to the recorded entries
The audit working paper that reflects the major components of an amount reported in the
financial statements is the
A. Interbank transfer schedule
B. Carry forward schedule
C. Supporting schedule
D. Lead schedule - Answer D. Lead schedule (Aggregates the major components to be
reported in the financial statements)
Which of the following sets of information does an auditor usually confirm on one form?
A. Accounts payable and purchase commitments
B. Cash in bank and collateral for loans
C. Inventory on consignment and contingent liabilities
D. Accounts receivable and accrued interest receivable - Answer B. Cash in bank and collateral
for loans
The usefulness of the standard bank confirmation requests may be limited because the bank
employee who completes the form may
A. Not believe that the bank is obligated to verify confidential information to a third party
B. Sign and return the form without inspecting the accuracy of the client's bank reconciliation
C. Not have access to the client's cute of bank statement
D. Be unaware of all the financial relationships that the bank has with the client - Answer D. Be
unaware of all the financial relationships that the bank has with the client (often not have
access to all financial relationships the bank has with the client)
An auditor most likely would limit substantive audit tests of sales transactions when control risk
is assessed as low for the occurrence assertion concerning sales transactions and the auditor
has already gathered evidence supporting
A. Opening and closing inventory balances
,B. Cash receipts and accounts receivable
C. Shipping and receiving activities
D. Cutoffs of sales and purchases - Answer B. Cash receipts and accounts receivable (May
analyze the completeness of sales using cash receipts and A/R)
An auditor should trace bank transfers for the last part of the audit period and first part of the
subsequent period to detect whether
A. The cash receipts journal was held open for a few days after the year-end
B. The last checks recorded before the year-end were actually mailed by the year-end
C. Cash balances were overstated because of kiting
D. Any unusual payments to or receipts from related parties occurred - Answer C. Cash
balances were overstated because of kiting (use bank transfer schedule to analyze transfers so
as to detect kiting that overstates cash balances)
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would
examine all of the following excepts
A. Cutoff bank statement
B. Year end bank statement
C. Bank confirmation
D. General ledger - Answer D. General ledger (contains only the client's cash balance, not the
balance per bank)
A cash shortage may be concealed by transporting funds from one location to another or by
converting negotiable assets to cash. Because of this, which of the following is vital?
A. Simultaneous confirmations
B. Simultaneous bank reconciliations
C. Simultaneous verification
D. Simultaneous surprise cash count - Answer C. Simultaneous verification
The primary purpose of sending a standard confirmation request to financial institutions with
which the client has done business during the year it to
A. Detect kiting activities that may otherwise not be discovered
B. Corroborate information regarding deposit and loan balances
C. Provide the data necessary to prepare a proof of cash
D. Request information about contingent liabilities and secured transactions - Answer B.
Corroborate information regarding deposit and loan balances (CPAs generally provide the
account info on the form and ask for balance corroboration)
, An auditor observes the mailing of monthly statements to a client's customers and reviews
evidence of follow-up on errors reported by the customers. This test of controls most likely is
performed to support management's financial statement assertion(s) of
A. Presentation and disclosure - Existence or occurrence
B. Presentation and disclosure
C. Existence or occurrence
D. None - Answer C. Existence or occurrence (observing the mailing of monthly statements
and follow-ip of errors will provide evidence to the auditor as the whether the receivable exist
at a given date)
Look at 49-50, 53, and 57- 58 in CPA Review - Answer
Which of the following statements is correct concerning the use of negative confirmation
requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence
B. Negative confirmation requests are effective when detection risk is low
C. Unreturned negative confirmation requests indicate that alternative procedures are
necessary
D. Negative confirmation requests are effective when understatements of account balances are
suspected - Answer A. Unreturned negative confirmation requests rarely provide significant
explicit evidence
When an auditor does not receive replies to positive requests for year-end accounts receivable
confirmations, the auditor most likely would
A. Inspect the allowance account to verify whether the accounts were subsequently written off
B. Increase the assessed level of detection risk for the valuation and completeness assertions
C. Ask the client to contact the customers to request that the confirmations be returned
D. Increase the assessed level of inherent risk for the revenue cycle - Answer C. Ask the client
to contact the customers to request that the confirmations be returned
In confirming a client's accounts receivable in prior years, an auditor found that there were
many differences between the recorded account balances and the confirmation replies. These
differences, which were not misstatements, required substantial time to resolve. In defining the
sampling unit for the current year's audit, the auditor most likely would choose
A. Individual overdue balance
B. Individual invoices
C. Small account balances
D. Large account balances - Answer B. Individual invoices
Answers.
The objective of tests of details of transactions performed as tests of controls is to
A. Monitor the design and use of entity documents such as pre numbered shipping forms
B. Determine whether controls have been implemented
C. Detect material misstatements in the account balances of the financial statements
D. Evaluate whether controls operated effectively - Answer D. Evaluate whether controls
operated effectively
Which of the following is the best example of a substantive procedure?
A. Examining a sample of cash disbursements to test whether expenses have been properly
approved.
B. Confirmation of balances of account receivable.
C. Comparison of signatures on checks to a list of authorized signers.
D. Flowcharting of the client's cash receipts system. - Answer B. Confirmation of balances of
account receivable. (Provide a test of ending account balance and is therefore a detailed test of
a balance, a type of substantive procedure)
The objective of tests of details of transactions performed as substantive procedures is to
A. Comply with generally accepted auditing standards.
B. Attain assurance about the reliability of the accounting system.
C. Detect material misstatements in the financial statements.
D. Evaluate whether management's policies and procedure operated effectively. - Answer C.
Detect material misstatements in the financial statements.
In the context of an audit of financial statements, substantive procedures are audit procedures
that
A. May be eliminated under certain conditions.
B. Are designed to discover significant subsequent events.
C. May be either tests of transactions, direct tests of financial balances, or analytical tests
D. Will increase proportionately with the auditor's reliance on internal control - Answer C. May
be either tests of transactions, direct tests of financial balances, or analytical tests/procedures
The auditor will most likely perform extensive tests for possible understatement of
A. Revenues
B. Assets
,C. Liabilities
D. Capital - Answer C. Liabilities (can result in overstated profits)
In determining whether transactions have been recorded, the direction of the audit should be
from the
A. General ledger balances
B. Adjusted trail balance
C. Original source documents
D. General ledger entries - Answer C. Original source documents to the recorded entries
The audit working paper that reflects the major components of an amount reported in the
financial statements is the
A. Interbank transfer schedule
B. Carry forward schedule
C. Supporting schedule
D. Lead schedule - Answer D. Lead schedule (Aggregates the major components to be
reported in the financial statements)
Which of the following sets of information does an auditor usually confirm on one form?
A. Accounts payable and purchase commitments
B. Cash in bank and collateral for loans
C. Inventory on consignment and contingent liabilities
D. Accounts receivable and accrued interest receivable - Answer B. Cash in bank and collateral
for loans
The usefulness of the standard bank confirmation requests may be limited because the bank
employee who completes the form may
A. Not believe that the bank is obligated to verify confidential information to a third party
B. Sign and return the form without inspecting the accuracy of the client's bank reconciliation
C. Not have access to the client's cute of bank statement
D. Be unaware of all the financial relationships that the bank has with the client - Answer D. Be
unaware of all the financial relationships that the bank has with the client (often not have
access to all financial relationships the bank has with the client)
An auditor most likely would limit substantive audit tests of sales transactions when control risk
is assessed as low for the occurrence assertion concerning sales transactions and the auditor
has already gathered evidence supporting
A. Opening and closing inventory balances
,B. Cash receipts and accounts receivable
C. Shipping and receiving activities
D. Cutoffs of sales and purchases - Answer B. Cash receipts and accounts receivable (May
analyze the completeness of sales using cash receipts and A/R)
An auditor should trace bank transfers for the last part of the audit period and first part of the
subsequent period to detect whether
A. The cash receipts journal was held open for a few days after the year-end
B. The last checks recorded before the year-end were actually mailed by the year-end
C. Cash balances were overstated because of kiting
D. Any unusual payments to or receipts from related parties occurred - Answer C. Cash
balances were overstated because of kiting (use bank transfer schedule to analyze transfers so
as to detect kiting that overstates cash balances)
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would
examine all of the following excepts
A. Cutoff bank statement
B. Year end bank statement
C. Bank confirmation
D. General ledger - Answer D. General ledger (contains only the client's cash balance, not the
balance per bank)
A cash shortage may be concealed by transporting funds from one location to another or by
converting negotiable assets to cash. Because of this, which of the following is vital?
A. Simultaneous confirmations
B. Simultaneous bank reconciliations
C. Simultaneous verification
D. Simultaneous surprise cash count - Answer C. Simultaneous verification
The primary purpose of sending a standard confirmation request to financial institutions with
which the client has done business during the year it to
A. Detect kiting activities that may otherwise not be discovered
B. Corroborate information regarding deposit and loan balances
C. Provide the data necessary to prepare a proof of cash
D. Request information about contingent liabilities and secured transactions - Answer B.
Corroborate information regarding deposit and loan balances (CPAs generally provide the
account info on the form and ask for balance corroboration)
, An auditor observes the mailing of monthly statements to a client's customers and reviews
evidence of follow-up on errors reported by the customers. This test of controls most likely is
performed to support management's financial statement assertion(s) of
A. Presentation and disclosure - Existence or occurrence
B. Presentation and disclosure
C. Existence or occurrence
D. None - Answer C. Existence or occurrence (observing the mailing of monthly statements
and follow-ip of errors will provide evidence to the auditor as the whether the receivable exist
at a given date)
Look at 49-50, 53, and 57- 58 in CPA Review - Answer
Which of the following statements is correct concerning the use of negative confirmation
requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence
B. Negative confirmation requests are effective when detection risk is low
C. Unreturned negative confirmation requests indicate that alternative procedures are
necessary
D. Negative confirmation requests are effective when understatements of account balances are
suspected - Answer A. Unreturned negative confirmation requests rarely provide significant
explicit evidence
When an auditor does not receive replies to positive requests for year-end accounts receivable
confirmations, the auditor most likely would
A. Inspect the allowance account to verify whether the accounts were subsequently written off
B. Increase the assessed level of detection risk for the valuation and completeness assertions
C. Ask the client to contact the customers to request that the confirmations be returned
D. Increase the assessed level of inherent risk for the revenue cycle - Answer C. Ask the client
to contact the customers to request that the confirmations be returned
In confirming a client's accounts receivable in prior years, an auditor found that there were
many differences between the recorded account balances and the confirmation replies. These
differences, which were not misstatements, required substantial time to resolve. In defining the
sampling unit for the current year's audit, the auditor most likely would choose
A. Individual overdue balance
B. Individual invoices
C. Small account balances
D. Large account balances - Answer B. Individual invoices
