-
web.groovymark@gmail.com
- December 12, 2024
Question 21
During a yearly audit, the audit team becomes aware of the company’s pressure to increase next year’s profit. Which factor should the audit team be on the lookout for in the near future?
a) Accruals for subsequent year sales in the current year
b) Disposals of inventory during the week before the current year-end
c) Payroll expenses incurred the month after the year-end and recorded in the last month of the year
d) Sales commissions paid to staff incurred during the last week of the year and not recorded in the current year
Answer: c) Payroll expenses incurred the month after the year-end and recorded in the last month of the year
Explanation: The company may record expenses in the wrong period to manipulate reported profits.
Question 22
Which management assertion states that financial and other information are disclosed fairly and in appropriate amounts?
a) Completeness
b) Accuracy and valuation
c) Classification and understandability
d) Occurrence and rights and obligations
Answer: b) Accuracy and valuation
Explanation: The accuracy and valuation assertion ensures that the financial amounts are correctly measured and disclosed.
Question 23
Which factor describes the sufficiency of audit evidence gathered?
a) Quantity of evidence
b) Documentation of evidence
c) How the evidence was obtained
d) When the evidence was obtained
Answer: a) Quantity of evidence
Explanation: Sufficiency refers to the quantity of audit evidence required to form a reasonable basis for conclusions.
Question 24
Which combination of assessed inherent risk and control risk will require the greatest amount of sufficient evidence?
a) Low inherent risk, low control risk
b) High inherent risk, low control risk
c) Low inherent risk, high control risk
d) High inherent risk, high control risk
Answer: d) High inherent risk, high control risk
Explanation: When both inherent and control risks are high, more evidence is required to mitigate the audit risk.
Question 25
Which type of procedure is being performed when an auditor selects transactions from a sales journal or ledger and then examines the underlying source documents?
a) Tracing
b) Vouching
c) Observing
d) Journaling
Answer: b) Vouching
Explanation: Vouching involves selecting entries from the financial records and tracing them back to the original source documents to verify their occurrence.
Question 26
Which dimension of the COSO framework identifies five integrated items of internal control?
a) Objectives
b) Components
c) Information technology
d) Organizational structure
Answer: b) Components
Explanation: The COSO framework identifies five components of internal control: control environment, risk assessment, control activities, information and communication, and monitoring.
Question 27
Which principle should an organization implement in order to have an effective risk assessment process?
a) The organization should demonstrate a commitment to integrity and ethical values.
b) The organization should select and develop general control activities over technology.
c) The organization should select and develop control activities that contribute to the mitigation of risk.
d) The organization should specify objectives with clarity to enable the identification and assessment of risks.
Answer: d) The organization should specify objectives with clarity to enable the identification and assessment of risks.
Explanation: Clear objectives are necessary for effective risk identification and assessment.
Question 28
Which action is considered a control activity that helps ensure management’s directives are carried out across the entity?
a) Conducting periodic evaluations of internal controls
b) Ensuring there are proper authorization control procedures
c) Committing to attract, develop, and retain competent employees
d) Implementing internal control recommendations when deficiencies are detected
Answer: b) Ensuring there are proper authorization control procedures
Explanation: Authorization control procedures are part of control activities to ensure that management directives are followed.
Question 29
Which type of audit test would help auditors determine whether the client has met the financial reporting objectives?
a) Substantive tests
b) Tests of controls
c) Tests of details
d) Risk assessment procedures
Answer: a) Substantive tests
Explanation: Substantive tests help auditors verify the correctness of financial records and ensure that financial reporting objectives have been met.
Question 30
When should auditors perform substantive procedures on a transaction?
a) When they do not intend to rely on internal controls
b) When they intend to place reliance on controls
c) When inherent risk is low
d) When they intend to increase detection risk
Answer: a) When they do not intend to rely on internal controls
Explanation: Substantive procedures are performed when auditors believe internal controls cannot be fully relied upon.
Question 31
Which activity occurs in the reporting phase of an audit?
a) Gaining an understanding of the client
b) Identifying material misstatements
c) Forming an opinion on the fair presentation of the financial statements
d) Developing the audit strategy
Answer: c) Forming an opinion on the fair presentation of the financial statements
Explanation: During the reporting phase, the auditor forms an opinion on whether the financial statements are presented fairly.
Question 32
Which audit procedure would provide evidence of the existence assertion for a client’s inventory balance?
a) Observation of physical inventory count
b) Inquiry of management
c) Review of purchase orders
d) Review of inventory valuation reports
Answer: a) Observation of physical inventory count
Explanation: Physically observing the inventory count provides evidence that the inventory exists.
Question 33
What must the audit team do during the risk response phase of the audit?
a) Understand the client’s business and environment
b) Gain an understanding of the client’s internal controls
c) Perform detailed substantive testing of transactions and accounts
d) Issue the audit report and opinion
Answer: c) Perform detailed substantive testing of transactions and accounts
Explanation: During the risk response phase, the audit team performs tests to gather evidence about the accounts and transactions.
Question 34
An auditor is testing a client’s payroll system and is concerned about the completeness of the recorded payroll expenses. Which action should the auditor perform?
a) Trace recorded payroll entries to underlying timesheets
b) Recalculate payroll expenses
c) Compare payroll reports to general ledger entries
d) Test payroll system controls
Answer: a) Trace recorded payroll entries to underlying timesheets
Explanation: Tracing ensures that payroll entries are complete and correspond to actual time worked.
Question 35
A client’s financial statements include an estimate for warranty expenses based on historical data. Which type of risk is associated with this estimate?
a) Detection risk
b) Control risk
c) Inherent risk
d) Audit risk
Answer: c) Inherent risk
Explanation: Estimates, such as warranty expenses, have inherent risks due to the uncertainty involved in making those estimates.
Question 36
Which of the following should an auditor use as the basis for determining a materiality threshold?
a) Net income
b) Working capital
c) Total assets
d) External audit reports
Answer: a) Net income
Explanation: Net income is often used as a benchmark for determining materiality since it represents the financial performance of the client.
Question 37
When auditors identify fraud risks that involve senior management, which course of action should they take?
a) Discuss the risks with the client’s legal counsel
b) Withdraw from the engagement
c) Report the risks to the client’s board of directors
d) Discuss the risks with external stakeholders
Answer: c) Report the risks to the client’s board of directors
Explanation: Fraud involving senior management must be reported to those charged with governance, such as the board of directors.
Question 38
Which characteristic of audit evidence would an auditor consider when determining whether it is appropriate?
a) Quantity
b) Reliability
c) Accessibility
d) Audit risk
Answer: b) Reliability
Explanation: The appropriateness of audit evidence is determined by its quality, specifically its relevance and reliability.
Question 39
What is the primary purpose of using analytical procedures during the planning phase of an audit?
a) To form an opinion on the financial statements
b) To identify potential risks of material misstatement
c) To confirm account balances
d) To determine whether internal controls are effective
Answer: b) To identify potential risks of material misstatement
Explanation: Analytical procedures in the planning phase help auditors identify unusual transactions or balances that could indicate risks of material misstatement.
Question 40
Which of the following is an example of a preventive control?
a) Reconciliation of bank statements
b) Physical counts of inventory
c) Segregation of duties
d) Review of financial statements by management
Answer: c) Segregation of duties
Explanation: Segregation of duties is a preventive control that helps prevent errors or fraud by dividing responsibilities among employees.
