CPA Audit - A3-Test Questions And All
Actual Answers.
Why is the auditor required to perform risk assessment procedures, starting with obtaining an
understanding of the entity and its environment? - Answer To assess the risk of material
misstatement and to make informed judgments about other matters, such as:
- Materiality and tolerable misstatement
- The entity's selection and application of accounting procedures
- Areas that require audit consideration
- Design and performance of further audit procedures
What risk assessment procedures should the auditor use to obtain an understanding of the
entity and its environment? - Answer - Inquiry
- Analytical procedures
- Risk assessment discussion
- Audit data analytics
- Other procedures when applicable (such as reviewing external information)
What factors should be examined when obtaining an understanding of the entity and
environment? - Answer - Industry, regulatory, and other external factors
- Applicable financial reporting framework
- Technological factors
- Supply chain and economic factors
- The nature of the entity
- Objectives, strategies, and business risks
- the entity's financial performance
- The company's selection and application of accounting principles
What are the basic technological components of IT infrastructure? - Answer - Hardware
- Software
- Networks
- Operating system
- Data storage/databases
List government policies and actions that an auditor may consider. - Answer - Government
spending
, - Government taxation
- Interest rates
- Political stability
- Requirements for licenses and permits
What is the definition of a business cycle? - Answer Business cycles are defined as the rise and
fall of economic activity relative to its long-term growth trend. Business cycles consist of
economic fluctuations that vary in duration and severity. Some cycles are quite mild; others are
characterized by large increases in unemployment and/or inflation.
List and define the phases of a typical business cycle. - Answer Business cycles are typically
composed of: (1) an expansionary phase characterized by rising growth in economic activity
(real GDP); (2) a peak, or high point of economic activity; (3) a contractionary phase
charaacterized by declining growth in economic activity; (4) a trough, or low point of economic
activity; and (5) a recovery phase, during which economic activity starts to increase and return
to its long-term growth trend.
Differentiate the three economic indicators: leading, lagging, and coincident. - Answer Leading
indicators usually predict economic activity and tend to change before the economy follows that
trend (e.g., orders for goods).
Lagging indicators generally follow economic activity and change after an economic trend has
already begun (e.g., prime rate charged by banks).
Coincident indicators change at about the same time as the economic trend (e.g., industrial
production).
How are reconciliations used in business processes? - Answer Reconciliations are detective
controls that review changes in account balances due to business process activities.
How are process narratives used to understand business processes? - Answer Process
narratives are written documents that tell the story of a process.
Identify some inherent limitations that may exist even with an effective internal control system.
- Answer - Human error or faulty/biased judgment used in decision-making.
- Issues pertaining to the suitability of the entity's objectives
- External events beyond the control of the entity
- Management override of controls
- Deliberate circumvention of controls through collusion
Actual Answers.
Why is the auditor required to perform risk assessment procedures, starting with obtaining an
understanding of the entity and its environment? - Answer To assess the risk of material
misstatement and to make informed judgments about other matters, such as:
- Materiality and tolerable misstatement
- The entity's selection and application of accounting procedures
- Areas that require audit consideration
- Design and performance of further audit procedures
What risk assessment procedures should the auditor use to obtain an understanding of the
entity and its environment? - Answer - Inquiry
- Analytical procedures
- Risk assessment discussion
- Audit data analytics
- Other procedures when applicable (such as reviewing external information)
What factors should be examined when obtaining an understanding of the entity and
environment? - Answer - Industry, regulatory, and other external factors
- Applicable financial reporting framework
- Technological factors
- Supply chain and economic factors
- The nature of the entity
- Objectives, strategies, and business risks
- the entity's financial performance
- The company's selection and application of accounting principles
What are the basic technological components of IT infrastructure? - Answer - Hardware
- Software
- Networks
- Operating system
- Data storage/databases
List government policies and actions that an auditor may consider. - Answer - Government
spending
, - Government taxation
- Interest rates
- Political stability
- Requirements for licenses and permits
What is the definition of a business cycle? - Answer Business cycles are defined as the rise and
fall of economic activity relative to its long-term growth trend. Business cycles consist of
economic fluctuations that vary in duration and severity. Some cycles are quite mild; others are
characterized by large increases in unemployment and/or inflation.
List and define the phases of a typical business cycle. - Answer Business cycles are typically
composed of: (1) an expansionary phase characterized by rising growth in economic activity
(real GDP); (2) a peak, or high point of economic activity; (3) a contractionary phase
charaacterized by declining growth in economic activity; (4) a trough, or low point of economic
activity; and (5) a recovery phase, during which economic activity starts to increase and return
to its long-term growth trend.
Differentiate the three economic indicators: leading, lagging, and coincident. - Answer Leading
indicators usually predict economic activity and tend to change before the economy follows that
trend (e.g., orders for goods).
Lagging indicators generally follow economic activity and change after an economic trend has
already begun (e.g., prime rate charged by banks).
Coincident indicators change at about the same time as the economic trend (e.g., industrial
production).
How are reconciliations used in business processes? - Answer Reconciliations are detective
controls that review changes in account balances due to business process activities.
How are process narratives used to understand business processes? - Answer Process
narratives are written documents that tell the story of a process.
Identify some inherent limitations that may exist even with an effective internal control system.
- Answer - Human error or faulty/biased judgment used in decision-making.
- Issues pertaining to the suitability of the entity's objectives
- External events beyond the control of the entity
- Management override of controls
- Deliberate circumvention of controls through collusion
