Audit CPA Exam questions and answers
Existence Assertion - AnswerAssets/revenues: whether the account actually exists & they are not
overstated
Completeness Assertion - AnswerLiabilities/expenses: whether the items were actually recorded &
the accounts are not understated
Confirmations - Answer-provide evidence of existence
-2 forms of confirmation: positive & negative (blank)
-electronic confirmations must be verified & non-responses must be followed up or alt procedures (if
not GAAP problem)
Revenue cycle - Answersales, accounts receivable, and cash receipts
Expenditure cycle - Answerpurchases, accounts payable, and cash disbursements
Purchasing department - AnswerThis department enters/approves Purchase Order and participates
in vendor selection
Receiving department - Answeraccepts goods for approved purchases, counts and inspects goods,
and prepares a receiving report.
Accounts payable department - Answerrecords the payable and approves the invoice
Treasurer department - Answer- should make the payment
- once signed, the check should be mailed to the payee by the check signer or an employee
operating under the supervision of the check signer to prevent defalcations of checks.
Cash cycle - Answercash receipts and disbursements
What is Lapping?
How Can Lapping be deterred?
,What are the auditing procedures for Lapping? - Answer- a defalcation in which a cash shortage is
concealed by applying later customer remittances to a receivable account from which money was
stolen
- can be deterred by appropriate segregation of duties between receiving cash and posting to the
accounts receivable ledger. This makes it more difficult for the employee who is stealing the cash to
cover it up through inappropriate remittance credits.
- an auditor would compare the date the checks are deposited per bank statements with the date
remittance credits are recorded (not by reviewing bank transfers)
What is Kiting?
What does frequent Kiting result in?
How does an auditor detect Kiting? - Answer- concealing a cash shortage by depositing in one bank
an unrecorded check of another disbursement bank, effectively recording the same funds in both
bank accounts
- Frequent kiting may result in a high level of deposits coupled with a low average balance.
-An auditor would most likely detect kiting by reviewing the bank transfer schedule and following-up
on all transfers for which the receipt date per bank is recorded in the accounting period before the
disbursement date.
Relevant assertions for auditing cash - Answercompleteness, valuation and allocation, and existence
Inventory cycle - Answerpurchases and sales of inv
Investment cycle - Answerpurchases and sales of stocks, bonds, and derivative instruments
Auditing procedures for investments - Answer-confirmation
-examination of securities on hand
-cutoff testing
-review of board minutes
-recalculation
Investments should be measured at - Answerfair value
, Other transaction cycles: PPE - Answer-includes all tangible assets used in the operation of a
business and not acquired for resale
-includes purchases, R&M, depreciation, disposal, and leasing
Other transaction cycles: Payroll and personnel cycle - Answerrecord keeping of employees and
calculation and authorization of payroll disbursements
Completeness assertion for PPE - Answerselect a sample of fixed asset purchase requisitions and
trace to receiving reports and the fixed asset subsidiary ledger
Segregation of duties for payroll - Answer-authorization: operating managers and personnel
-record keeping: payroll
-custody: treasurer
Financing cycle - Answerincludes all debt and equity transactions
An Entity's Ability to Continue as a Going Concern - AnswerNon-issuer: When an auditor concludes
that substantial doubt remains about an entity's ability to continue as a going concern the auditor
should add a separate section to the auditors report with the heading "substantial doubt about the
entity's ability to continue as a going concern" to the UM opinion
Issuer: When an auditor concludes that substantial doubt remains about an entity's ability to
continue as a going concern the auditor should add an explanatory paragraph to the auditors report
with the heading "substantial doubt about the entity's ability to continue as a going concern" to the
UQ opinion
At conclusion of fieldwork the auditor is required to - Answerobtain a management representation
letter which is dated the same date as the audit report
Managements refusal to furnish written rep results in - Answereither a disclaimer of opinion or
withdrawal from the engagement
For FS audit of a non-issuer SD & MW - Answermust be communicated to mngmt and those charged
with governance in writing within 60 days of report release date
Existence Assertion - AnswerAssets/revenues: whether the account actually exists & they are not
overstated
Completeness Assertion - AnswerLiabilities/expenses: whether the items were actually recorded &
the accounts are not understated
Confirmations - Answer-provide evidence of existence
-2 forms of confirmation: positive & negative (blank)
-electronic confirmations must be verified & non-responses must be followed up or alt procedures (if
not GAAP problem)
Revenue cycle - Answersales, accounts receivable, and cash receipts
Expenditure cycle - Answerpurchases, accounts payable, and cash disbursements
Purchasing department - AnswerThis department enters/approves Purchase Order and participates
in vendor selection
Receiving department - Answeraccepts goods for approved purchases, counts and inspects goods,
and prepares a receiving report.
Accounts payable department - Answerrecords the payable and approves the invoice
Treasurer department - Answer- should make the payment
- once signed, the check should be mailed to the payee by the check signer or an employee
operating under the supervision of the check signer to prevent defalcations of checks.
Cash cycle - Answercash receipts and disbursements
What is Lapping?
How Can Lapping be deterred?
,What are the auditing procedures for Lapping? - Answer- a defalcation in which a cash shortage is
concealed by applying later customer remittances to a receivable account from which money was
stolen
- can be deterred by appropriate segregation of duties between receiving cash and posting to the
accounts receivable ledger. This makes it more difficult for the employee who is stealing the cash to
cover it up through inappropriate remittance credits.
- an auditor would compare the date the checks are deposited per bank statements with the date
remittance credits are recorded (not by reviewing bank transfers)
What is Kiting?
What does frequent Kiting result in?
How does an auditor detect Kiting? - Answer- concealing a cash shortage by depositing in one bank
an unrecorded check of another disbursement bank, effectively recording the same funds in both
bank accounts
- Frequent kiting may result in a high level of deposits coupled with a low average balance.
-An auditor would most likely detect kiting by reviewing the bank transfer schedule and following-up
on all transfers for which the receipt date per bank is recorded in the accounting period before the
disbursement date.
Relevant assertions for auditing cash - Answercompleteness, valuation and allocation, and existence
Inventory cycle - Answerpurchases and sales of inv
Investment cycle - Answerpurchases and sales of stocks, bonds, and derivative instruments
Auditing procedures for investments - Answer-confirmation
-examination of securities on hand
-cutoff testing
-review of board minutes
-recalculation
Investments should be measured at - Answerfair value
, Other transaction cycles: PPE - Answer-includes all tangible assets used in the operation of a
business and not acquired for resale
-includes purchases, R&M, depreciation, disposal, and leasing
Other transaction cycles: Payroll and personnel cycle - Answerrecord keeping of employees and
calculation and authorization of payroll disbursements
Completeness assertion for PPE - Answerselect a sample of fixed asset purchase requisitions and
trace to receiving reports and the fixed asset subsidiary ledger
Segregation of duties for payroll - Answer-authorization: operating managers and personnel
-record keeping: payroll
-custody: treasurer
Financing cycle - Answerincludes all debt and equity transactions
An Entity's Ability to Continue as a Going Concern - AnswerNon-issuer: When an auditor concludes
that substantial doubt remains about an entity's ability to continue as a going concern the auditor
should add a separate section to the auditors report with the heading "substantial doubt about the
entity's ability to continue as a going concern" to the UM opinion
Issuer: When an auditor concludes that substantial doubt remains about an entity's ability to
continue as a going concern the auditor should add an explanatory paragraph to the auditors report
with the heading "substantial doubt about the entity's ability to continue as a going concern" to the
UQ opinion
At conclusion of fieldwork the auditor is required to - Answerobtain a management representation
letter which is dated the same date as the audit report
Managements refusal to furnish written rep results in - Answereither a disclaimer of opinion or
withdrawal from the engagement
For FS audit of a non-issuer SD & MW - Answermust be communicated to mngmt and those charged
with governance in writing within 60 days of report release date
