CPA Level I Practice Exam Q&A 2024, Exams of Accounting

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CPA LEVEL I

AUD, BEC, FAR, REG

PRACTICE EXAM Q & A

1. Which of the following is an example of an attestation engagement? A) A review of a company's financial statements by an independent auditor B) A compilation of a company's financial statements by a bookkeeper C) A preparation of a company's tax return by a CPA D) A valuation of a company's assets by an appraiser Answer: A. An attestation engagement is one in which a practitioner expresses a conclusion about the reliability of a subject matter or an assertion that is the responsibility of another party. A review of financial statements is an attestation engagement, while the other options are not.
2. What is the difference between a positive and a negative assurance in an attestation report? A) A positive assurance states that the subject matter or assertion is fairly presented, while a negative assurance states that nothing came to the practitioner's attention that causes them to believe otherwise. B) A positive assurance states that the practitioner performed sufficient procedures to obtain reasonable assurance, while a negative assurance states that the practitioner performed limited procedures to obtain moderate assurance. C) A positive assurance states that the practitioner is responsible for the subject matter or assertion, while a negative assurance states that the responsibility lies with

scope limitation. Which of the following is not a primary objective of an audit conducted in accordance with generally accepted auditing standards (GAAS)? a. Obtaining reasonable assurance about whether the financial statements are free from material misstatement b. Expressing an opinion on the effectiveness of internal control over financial reporting c. Reporting on the financial statements taken as a whole d. Identifying and assessing the risks of material misstatement in the financial statements Answer: b. Expressing an opinion on the effectiveness of internal control over financial reporting Rationale: The primary objective of an audit conducted in accordance with GAAS is to express an opinion on the financial statements, not on the effectiveness of internal control over financial reporting. Which of the following is not a characteristic of internal control? a. Reliability of financial reporting b. Compliance with laws and regulations c. Effectiveness and efficiency of operations d. Independence of the external auditors

Answer: d. Independence of the external auditors Rationale: Independence of the external auditors is not a characteristic of internal control; instead, it pertains to the auditors themselves. When assessing the risk of material misstatement, which of the following is not considered an inherent risk factor? a. Complexity of transactions b. Management override of controls c. Susceptibility of assets to theft d. Ineffective oversight by the board of directors Answer: d. Ineffective oversight by the board of directors Rationale: Ineffective oversight by the board of directors is a control risk factor, not an inherent risk factor. Which of the following is not a required communication by the auditor to those charged with governance? a. Significant deficiencies in internal control b. Disagreements with management c. Material misstatements identified during the audit d. Management's responsibility for the financial statements Answer: c. Material misstatements identified during the audit

Answer: c. The level at which misstatements would be considered material Rationale: Materiality refers to the level at which misstatements would be considered material in the context of an audit. Which of the following is not a type of audit report that may be issued by an auditor? a. Unqualified opinion b. Qualified opinion c. Adverse opinion d. Agreed-upon procedures report Answer: d. Agreed-upon procedures report Rationale: An agreed-upon procedures report is not an audit report but a separate engagement where the auditor performs specific procedures and reports the findings. When assessing control risk, the auditor is primarily concerned with: a. The risk that the financial statements are materially misstated b. The risk that the auditor will not detect a material misstatement c. The risk that the entity's internal control will fail to prevent or detect material misstatements d. The risk that management will override internal controls

Answer: c. The risk that the entity's internal control will fail to prevent or detect material misstatements Rationale: Control risk refers to the risk that the entity's internal control will fail to prevent or detect material misstatements in the financial statements. Which of the following is not a component of the risk assessment standards in an audit? a. Understanding the entity and its environment b. Assessing the risks of material misstatement c. Performing tests of controls d. Obtaining evidence about the risks identified Answer: c. Performing tests of controls Rationale: Performing tests of controls is part of the audit procedures, not the risk assessment standards. In the context of an audit, what is the purpose of analytical procedures? a. To obtain an understanding of internal control b. To identify and assess the risks of material misstatement c. To provide reasonable assurance of detecting material misstatements d. To enhance the auditor's understanding of the entity's operations

Rationale: The auditor's responsibility when issuing an audit report is to express an opinion on the financial statements based on the audit conducted. Which of the following is not a requirement of the auditor's report on internal control over financial reporting? a. Stating that management is responsible for internal control b. Expressing an opinion on the effectiveness of internal control c. Identifying the auditor's responsibility for the audit of internal control d. Describing the scope of testing of internal control Answer: b. Expressing an opinion on the effectiveness of internal control Rationale: The auditor's report on internal control over financial reporting does not include expressing an opinion on the effectiveness of internal control, but rather on the fairness of the financial statements. Which of the following is a key consideration when evaluating the sufficiency and appropriateness of audit evidence? a. Independence of the external auditors b. Number of audit procedures performed c. Cost-effectiveness of the audit engagement d. Relevance and reliability of the audit evidence

obtained Answer: d. Relevance and reliability of the audit evidence obtained Rationale: When evaluating the sufficiency and appropriateness of audit evidence, the key consideration is the relevance and reliability of the evidence obtained. When assessing the risk of material misstatement, which of the following is not a type of risk the auditor should consider? a. Inherent risk b. Control risk c. Detection risk d. Entity risk Answer: d. Entity risk Rationale: "Entity risk" is not a type of risk that the auditor considers when assessing the risk of material misstatement; instead, it is typically referred to as "business risk" in the context of an audit.

1. Which of the following best describes the concept of materiality in auditing? a. The degree to which an error or omission in financial

d. To eliminate all risks and uncertainties associated with an organization's operations Answer: c. To provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements Rationale: An internal control system aims to provide reasonable assurance that financial transactions are recorded accurately and completely. It is designed to minimize the risk of material misstatements and provide reliable financial reporting, ensuring that financial statements fairly represent an organization's financial situation.

3. Which of the following is an inherent limitation of an internal control system? a. It ensures the complete elimination of all risks and uncertainties. b. It cannot prevent collusion among employees to override controls. c. It guarantees the detection of all instances of fraud within an organization. d. It enables an organization to achieve strict compliance with all regulatory requirements. Answer: b. It cannot prevent collusion among employees to override controls. Rationale: Even with a well-designed and implemented

internal control system, collusion among employees may circumvent or override controls. This highlights one of the inherent limitations of internal controls, as individuals may conspire to override checks and balances.

4. In the context of auditing, what is meant by the term "professional skepticism"? a. Having a cynical attitude towards management's integrity and motives. b. Approaching the audit with a preconceived notion about the accuracy of financial statements. c. A mindset that includes a questioning attitude, critical assessment of evidence, and being alert to potential biases. d. An audit approach that prioritizes speed and efficiency over thoroughness. Answer: c. A mindset that includes a questioning attitude, critical assessment of evidence, and being alert to potential biases. Rationale: Professional skepticism is an attitude and mindset that requires auditors to maintain a questioning attitude throughout the audit process. It involves critically assessing evidence, challenging assumptions, and being alert to potential biases or misstatements. It is a vital attribute for auditors to ensure the integrity and reliability of financial statements.
5. Which of the following statements accurately characterizes control risk?

of an entity's internal control to assess the risks of material misstatement in the financial statements. d. The auditor's responsibility is to make management aware of all risks identified through the audit process. Answer: c. The auditor's responsibility is to obtain an understanding of an entity's internal control to assess the risks of material misstatement in the financial statements. Rationale: The auditor's responsibility regarding risk assessment procedures is to obtain sufficient understanding of an entity's internal control systems to assess the risks of material misstatement. This understanding helps the auditor plan and perform further audit procedures to respond to assessed risks effectively.

7. Which of the following is an example of an analytical procedure used in auditing? a. Testing a sample of inventory items for physical existence and valuation. b. Observing the count of cash in the organization's cash register. c. Comparing financial ratios of the current year to those of previous years. d. Inspecting vendor invoices and purchase orders for proper authorization. Answer: c. Comparing financial ratios of the current year to those of previous years.

Rationale: Analytical procedures involve the evaluation of financial information, through analysis or comparison, to identify significant fluctuations or relationships that may be indicative of potential material misstatements. Comparing financial ratios across multiple periods is a commonly used analytical procedure to identify trends or anomalies in an organization's financial performance.

8. When auditing financial statements, what is the purpose of substantive procedures? a. To evaluate the effectiveness of an entity's internal control system. b. To gather evidence about the completeness and accuracy of financial statement account balances. c. To ensure that financial statements are presented in accordance with regulatory requirements. d. To test the effectiveness of an organization's risk management procedures. Answer: b. To gather evidence about the completeness and accuracy of financial statement account balances. Rationale: Substantive procedures are performed to obtain evidence about the completeness, accuracy, and validity of account balances and transactions recorded in financial statements. These procedures are designed to detect material misstatements, either individually or collectively, and provide assurance regarding the reliability of financial reporting.

b. Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly. c. Evidence obtained through computer systems and controls is more reliable. d. Evidence obtained through inquiry and verbal discussion is less reliable. Answer: c. Evidence obtained through computer systems and controls is more reliable. Rationale: All the listed characteristics are relevant in evaluating the reliability of evidence. However, evidence obtained through computer systems and controls is not inherently more reliable than evidence obtained through other means. The reliability of computer-based evidence depends on factors like the integrity of the system, proper controls, and validation procedures.

11. In which of the following circumstances would the auditor consider obtaining written management representations? a. When the auditor faces a management-imposed scope limitation that prevents sufficient audit procedures. b. When the auditor identifies a significant risk of misstatement due to fraud in the financial statements. c. When the auditor suspects that an entity's management is involved in illegal activities. d. When the auditor has completed all audit procedures satisfactorily and does not require any further evidence.

Answer: a. When the auditor faces a management-imposed scope limitation that prevents sufficient audit procedures. Rationale: Obtaining written management representations is a standard auditing procedure, but it becomes particularly important when the auditor is unable to perform all necessary procedures due to scope limitations imposed by management. Written representations help address the auditor's responsibility for the financial statements and clarify the limitations on the scope of the audit.

12. Which of the following audit procedures is designed to test the valuation and allocation assertions for an organization's inventory? a. Physical observation of inventory counts and quantities. b. Confirmation of inventory balances with vendors and customers. c. Comparison of the cost of inventory with the purchasing records. d. Review of the entity's purchasing and payment policies and procedures. Answer: a. Physical observation of inventory counts and quantities. Rationale: Physical observation of inventory counts and quantities is an audit procedure commonly used to test the valuation and allocation assertions for inventory. By physically witnessing and verifying the physical existence