Welcome to CPA BAR Part 4 Practice Questions (161–200). This section focuses on advanced auditing concepts including audit opinions, risk assessment, fraud detection, internal controls, and professional skepticism. Each MCQ includes a correct answer and detailed explanation, ensuring you understand both the “what” and the “why.”
📘 CPA BAR Practice Questions – Part 4 (Q151–200)
151. Which type of risk is associated with the possibility that financial statements are misstated before considering the effectiveness of internal controls?
A) Control risk
B) Detection risk
C) Inherent risk
D) Audit risk
✅ Answer: C) Inherent risk
Explanation: Inherent risk is the susceptibility of an assertion to material misstatement, assuming no internal controls. Control risk relates to failure of controls, while detection risk is linked to auditor procedures.
152. When an auditor uses analytical procedures as substantive tests, the auditor is primarily concerned with:
A) Identifying relationships inconsistent with expectations
B) Testing internal control compliance
C) Evaluating audit risk at planning stage
D) Confirming account balances
✅ Answer: A) Identifying relationships inconsistent with expectations
Explanation: Analytical procedures help auditors detect unusual trends or variances that may indicate misstatements.
153. Under GAAP, interim financial reporting requires:
A) Full set of financial statements with disclosures
B) Condensed statements with selected disclosures
C) Only balance sheet and income statement
D) Only statement of cash flows
✅ Answer: B) Condensed statements with selected disclosures
Explanation: Interim reports are typically condensed financial statements with fewer disclosures than annual reports, but still must follow GAAP principles.
154. In evaluating the sufficiency of audit evidence, auditors must consider:
A) Relevance and reliability of evidence
B) Only quantity of evidence
C) Only reliability of evidence
D) Materiality alone
✅ Answer: A) Relevance and reliability of evidence
Explanation: Both quality (reliability) and appropriateness (relevance) determine sufficiency of audit evidence, not just volume.
155. Which of the following is an example of a substantive audit procedure?
A) Inquiry of client personnel
B) Observation of controls
C) Reperformance of control activities
D) Confirmation of receivables
✅ Answer: D) Confirmation of receivables
Explanation: Confirmations directly test balances and are substantive procedures, while the others relate to internal control evaluation.
156. Which section of the audit report explains the auditor’s responsibilities?
A) Opinion section
B) Basis for opinion
C) Responsibilities of management
D) Auditor’s responsibilities
✅ Answer: D) Auditor’s responsibilities
Explanation: The “Auditor’s Responsibilities” section outlines the scope of work, audit standards followed, and responsibility to express an opinion.
157. Which type of audit evidence is considered the most reliable?
A) Internally generated documents
B) Oral representations from management
C) Evidence obtained directly by auditor
D) Documents prepared by client staff
✅ Answer: C) Evidence obtained directly by auditor
Explanation: Independent, direct evidence (e.g., bank confirmations) is more reliable than internal or verbal evidence.
158. Which of the following would NOT be considered part of the audit risk model?
A) Control risk
B) Inherent risk
C) Detection risk
D) Engagement risk
✅ Answer: D) Engagement risk
Explanation: Engagement risk relates to auditor’s exposure to loss due to client relationships, not part of the audit risk model.
159. Which factor would increase detection risk?
A) Weak internal controls
B) Auditor reduces sample size
C) High inherent risk
D) Increased substantive testing
✅ Answer: B) Auditor reduces sample size
Explanation: Smaller sample size decreases the likelihood of detecting misstatements, thus increasing detection risk.
160. Which financial statement assertion relates to whether recorded assets exist?
A) Completeness
B) Rights and obligations
C) Existence
D) Valuation
✅ Answer: C) Existence
Explanation: The existence assertion verifies that assets, liabilities, and equity balances actually exist at the reporting date.
161. Which type of sampling is most commonly used by auditors for substantive testing of account balances?
A) Judgmental sampling
B) Statistical sampling
C) Haphazard sampling
D) Random sampling
✅ Answer: B) Statistical sampling
Explanation: Auditors often rely on statistical sampling (e.g., attribute or variable sampling) to ensure objective, quantifiable results when testing balances.
162. An auditor discovers material misstatements that are not corrected by management. What type of audit opinion should be issued?
A) Unqualified
B) Qualified or adverse
C) Disclaimer
D) Standard clean opinion
✅ Answer: B) Qualified or adverse
Explanation: If misstatements are material but not pervasive → qualified opinion; if pervasive → adverse opinion.
163. Which auditing standard-setting body issues generally accepted auditing standards (GAAS) in the U.S.?
A) SEC
B) PCAOB
C) FASB
D) IRS
✅ Answer: B) PCAOB
Explanation: The Public Company Accounting Oversight Board (PCAOB) establishes GAAS for public companies in the U.S.
164. Which type of fraud involves intentional misstatement of financial statements?
A) Asset misappropriation
B) Corruption
C) Financial statement fraud
D) Collusion
✅ Answer: C) Financial statement fraud
Explanation: This involves deliberate manipulation of records to mislead stakeholders, distinct from theft or corruption.
165. Which of the following is NOT a management assertion?
A) Existence
B) Completeness
C) Independence
D) Valuation
✅ Answer: C) Independence
Explanation: Independence is an auditor quality, not a management assertion.
166. Which of the following controls is considered preventive rather than detective?
A) Bank reconciliations
B) Physical inventory counts
C) Approval of transactions
D) Internal audit reviews
✅ Answer: C) Approval of transactions
Explanation: Preventive controls (like authorization) stop errors before they occur, while reconciliations and audits detect issues afterward.
167. Which auditing procedure provides the strongest evidence for cash balances?
A) Inspecting client’s bank reconciliations
B) Reviewing petty cash vouchers
C) Obtaining bank confirmations
D) Counting cash on hand
✅ Answer: C) Obtaining bank confirmations
Explanation: Independent bank confirmations directly from financial institutions provide the most reliable evidence.
168. In the audit risk model, audit risk equals:
A) Control risk × inherent risk
B) Detection risk × engagement risk
C) Inherent risk × control risk × detection risk
D) Audit evidence ÷ risk factors
✅ Answer: C) Inherent risk × control risk × detection risk
Explanation: The audit risk model formula is AR = IR × CR × DR.
169. Which of the following is most likely considered a related-party transaction?
A) Sale to a customer at market price
B) Loan to a director’s company
C) Cash purchase from an approved vendor
D) Payment of regular payroll
✅ Answer: B) Loan to a director’s company
Explanation: Related-party transactions involve dealings with individuals or companies connected to management or ownership.
170. Which document provides evidence of an auditor’s planning, performance, and conclusions?
A) Engagement letter
B) Audit documentation (workpapers)
C) Management representation letter
D) Internal control questionnaire
✅ Answer: B) Audit documentation (workpapers)
Explanation: Audit workpapers are the primary evidence that auditors planned, performed, and reached conclusions in accordance with standards.
171. Which type of audit test is used to evaluate whether controls are operating effectively?
A) Substantive procedures
B) Test of controls
C) Analytical procedures
D) Dual-purpose tests
✅ Answer: B) Test of controls
Explanation: Control testing checks whether policies/procedures are implemented effectively to prevent or detect misstatements.
172. What is the primary purpose of a management representation letter?
A) Provide audit evidence
B) Shift responsibility for misstatements to management
C) Serve as a legal contract
D) Eliminate need for other evidence
✅ Answer: A) Provide audit evidence
Explanation: It confirms management’s responsibility and representations made during the audit; it complements, not replaces, other evidence.
173. If an auditor cannot obtain sufficient appropriate evidence and misstatements could be material and pervasive, what opinion should be issued?
A) Qualified
B) Adverse
C) Disclaimer of opinion
D) Standard clean opinion
✅ Answer: C) Disclaimer of opinion
Explanation: A disclaimer is given when scope limitations prevent the auditor from forming an opinion.
174. Which of the following is most closely associated with audit sampling risk?
A) Sampling error
B) Fraud detection
C) Audit documentation
D) Independence
✅ Answer: A) Sampling error
Explanation: Sampling risk is the risk that auditor’s conclusion based on a sample differs from the conclusion that would be drawn if the entire population were tested.
175. What does the “going concern” assumption imply?
A) Business will liquidate soon
B) Business will continue operations in foreseeable future
C) Assets are valued at liquidation value
D) Liabilities are due immediately
✅ Answer: B) Business will continue operations in foreseeable future
Explanation: Going concern assumes that the entity will not cease operations in the near term, unless evidence suggests otherwise.
176. Which of the following is an example of a substantive analytical procedure?
A) Comparing gross margin % to prior years
B) Recomputing payroll calculations
C) Confirming accounts receivable
D) Observing inventory count
✅ Answer: A) Comparing gross margin % to prior years
Explanation: Analytical procedures evaluate relationships between financial and non-financial data.
177. Which of the following audit opinions requires an explanatory paragraph?
A) Standard unmodified
B) Qualified
C) Disclaimer
D) All of the above
✅ Answer: D) All of the above
Explanation: Qualified, adverse, or disclaimer opinions require explanatory paragraphs; even standard unmodified opinions may include emphasis-of-matter paragraphs.
178. Which type of evidence is considered least reliable?
A) Bank confirmation
B) Written representation from management
C) Inspection of external documents
D) Physical observation
✅ Answer: B) Written representation from management
Explanation: Management representations are necessary but least reliable because they are internal and biased.
179. Which factor reduces detection risk?
A) Increasing sample size
B) Reducing substantive testing
C) Poorly designed audit procedures
D) Lack of auditor independence
✅ Answer: A) Increasing sample size
Explanation: Larger sample size increases likelihood of detecting misstatements, thus lowering detection risk.
180. Which section of the audit report identifies management’s responsibilities?
A) Opinion section
B) Basis for opinion
C) Management’s responsibility for the financial statements
D) Auditor’s responsibilities
✅ Answer: C) Management’s responsibility for the financial statements
Explanation: This section explains management’s role in preparing fair financial statements and maintaining internal controls.
181. Which of the following audit procedures is most effective for detecting kiting?
A) Reviewing accounts receivable confirmations
B) Bank transfer schedule
C) Physical inventory observation
D) Analytical review of expenses
✅ Answer: B) Bank transfer schedule
Explanation: Kiting involves recording the same cash in two bank accounts at once. Bank transfer schedules reveal such misstatements.
182. Which type of control ensures that transactions are recorded only once?
A) Authorization
B) Completeness control
C) Uniqueness control
D) Input validation
✅ Answer: C) Uniqueness control
Explanation: This prevents duplicate transactions, ensuring accuracy in financial reporting.
183. Which type of risk cannot be eliminated regardless of audit procedures?
A) Audit risk
B) Control risk
C) Inherent risk
D) Detection risk
✅ Answer: C) Inherent risk
Explanation: Inherent risk exists because some accounts are naturally prone to misstatements due to complexity or estimation.
184. Which evidence provides the highest level of assurance for accounts receivable existence?
A) Confirmations directly from customers
B) Inspection of invoices
C) Review of shipping documents
D) Analytical procedures
✅ Answer: A) Confirmations directly from customers
Explanation: Direct confirmations provide independent, external evidence of receivable balances.
185. Which is NOT a type of audit opinion?
A) Qualified opinion
B) Disclaimer of opinion
C) Adverse opinion
D) Reserved opinion
✅ Answer: D) Reserved opinion
Explanation: The standard types are unmodified, qualified, adverse, and disclaimer; “reserved” does not exist.
186. Which of the following best describes control risk?
A) The likelihood that audit procedures fail to detect misstatements
B) The likelihood that misstatements occur due to poor controls
C) The risk that financial statements are misstated due to fraud
D) The risk inherent in complex transactions
✅ Answer: B) The likelihood that misstatements occur due to poor controls
Explanation: Control risk is tied to deficiencies in internal controls.
187. What is dual-purpose testing in auditing?
A) Testing both assets and liabilities together
B) Testing both design and operating effectiveness
C) Testing both controls and substantive procedures
D) Testing both internal and external reports
✅ Answer: C) Testing both controls and substantive procedures
Explanation: Dual-purpose tests save time by combining control evaluation with substantive evidence collection.
188. Which is the auditor’s main consideration when assessing materiality?
A) Nature of misstatements only
B) Size and nature of misstatements
C) Auditor’s judgment only
D) Management’s threshold
✅ Answer: B) Size and nature of misstatements
Explanation: Both quantitative and qualitative factors determine materiality.
189. Which audit evidence is most reliable?
A) External confirmations
B) Internal documentation
C) Verbal representations
D) Analytical comparisons
✅ Answer: A) External confirmations
Explanation: Evidence from independent, external parties is always most reliable.
190. Which of the following is NOT a limitation of internal controls?
A) Human error
B) Collusion
C) Management override
D) Independent audit review
✅ Answer: D) Independent audit review
Explanation: An audit is not part of internal control; it’s an external assurance mechanism.
191. Which type of fraud risk factor relates to incentives/pressures?
A) Management override
B) Financial stability threats
C) Ineffective monitoring
D) Opportunity
✅ Answer: B) Financial stability threats
Explanation: Pressure on management due to financial stress creates incentive for fraud.
192. Which of the following is an auditor’s responsibility under PCAOB standards?
A) Expressing opinion on effectiveness of internal controls for public companies
B) Preparing financial statements
C) Maintaining independence of audit committee
D) Setting GAAP
✅ Answer: A) Expressing opinion on effectiveness of internal controls for public companies
Explanation: PCAOB requires auditors to issue an opinion on both financial statements and internal controls (integrated audit).
193. What is the main purpose of audit planning?
A) To prepare financial statements
B) To design effective audit procedures
C) To review prior year performance
D) To satisfy regulators
✅ Answer: B) To design effective audit procedures
Explanation: Audit planning ensures resources are used efficiently and risks are addressed.
194. Which type of opinion should be given if financial statements are materially misstated but not pervasive?
A) Disclaimer
B) Qualified opinion
C) Adverse opinion
D) Clean opinion
✅ Answer: B) Qualified opinion
Explanation: Material but not pervasive misstatements require a qualified opinion.
195. Which type of evidence involves physically verifying assets like inventory?
A) Confirmation
B) Observation
C) Inspection
D) Reperformance
✅ Answer: B) Observation
Explanation: Observing inventory counts provides direct, physical evidence.
196. An audit committee should be composed primarily of:
A) Internal managers
B) Independent directors
C) Company employees
D) External auditors
✅ Answer: B) Independent directors
Explanation: Independence ensures objectivity in oversight of financial reporting and audits.
197. Which of the following increases audit detection risk?
A) Inadequate testing procedures
B) Large sample size
C) Strong internal controls
D) Analytical review
✅ Answer: A) Inadequate testing procedures
Explanation: Poorly designed or insufficient procedures increase risk of missing misstatements.
198. What is the primary role of an internal auditor?
A) Issue an audit opinion
B) Evaluate internal controls and risk management
C) Approve financial statements
D) Monitor external auditors
✅ Answer: B) Evaluate internal controls and risk management
Explanation: Internal auditors focus on operational efficiency, risk, and controls—not issuing opinions.
199. Which is the most common type of modified audit opinion?
A) Qualified
B) Adverse
C) Disclaimer
D) Emphasis of matter
✅ Answer: A) Qualified
Explanation: Qualified opinions are issued more frequently than adverse or disclaimer due to less pervasive misstatements.
200. Which audit standard emphasizes professional skepticism?
A) IFRS
B) GAAS
C) PCAOB standards
D) All of the above
✅ Answer: D) All of the above
Explanation: All auditing standards emphasize the importance of professional skepticism in assessing evidence and fraud risk.
You’ve now completed CPA BAR Part 4 (Q161–200). This marks the final section of our BAR series, equipping you with practical, exam-style questions and in-depth explanations. Next, explore our CPA BAR Master Guide where all 200 questions are combined into one powerful study resource.
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