AICPA Released Questions AUD 2015 Moderate

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AUD 2015 AICPA Released Questions Testlet Level: Moderate

Please Note: These questions are released to the CPA Review providers with the letter answer only (i.e. no explanation given).

This document contains copyrighted material from the American Institute of Certified Public Accountants and is licensed to NINJA CPA Review for use by its customers only.

Answers are on Page 13.

1. Reporting standards for financial audits under Government Auditing Standards differ from reporting standards under generally accepted auditing standards in that Government Auditing Standards require the auditor to

Describe the scope of the auditor's tests of compliance with laws and regulations.

Provide positive assurance that the entity's audit committee is adequately informed about the effects of any illegal acts.

Present the results of the auditor's tests of economy and efficiency regarding the use of the entity's resources.

Provide negative assurance that the auditor discovered no transactions that were indicative of illegal acts.


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2. Which of the following procedures would most likely assist an auditor in identifying related party transactions?

Evaluate the reasonableness of management's accounting estimates

that are subject to bias.

Retest ineffective internal control activities for evidence of management override.

Review the minutes of the meetings of the board of directors and its committees.

Send second requests for unanswered positive confirmations of accounts receivable.

3. Which of the following factors would most likely influence the form and extent of the auditor's documentation of an entity's internal control environment?

Complexity and size of the entity.

Amount of audit work performed at an interim date.

Amount of audit work performed by the internal auditor.

Results of verifying material account balances.


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4. According to the AICPA Code of Professional Conduct, which of the following actions will impair independence?

Preparing client financial statements based on information in a trial

balance.

Processing payroll for a client's signature based on client recordkeeping.

Participating in the hiring or termination of a client's employees.

Assisting a client in drafting a stock-offering document or memorandum.

5. When an accountant compiles the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services, the accountant's report should include

A statement that the accountant is not aware of material modifications

that should be made to the financial statements for them to be in conformity with GAAP.

A statement regarding the accountant's assessment of fraud risk.

A statement that the accountant does not express an opinion on the financial statements.

A statement regarding the entity's compliance with laws and regulations.


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6. In which of the following circumstances is an auditor most likely to rely on work done by internal auditors?

If financial statement amounts are material and the degree of

subjectivity in evaluating the audit evidence is high.

If the internal auditors have concluded that the risk of material misstatement at the overall financial level is negligible.

For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence.

For financial statement amounts determined largely or entirely on the basis of estimates made by management.

7. Which of the following statements is correct regarding a management representation letter?

A representation letter can be used in place of specific, previously identified

audit procedures.

A representation letter encompasses a different set of assertions than those inherent in the financial statements.

The date of the representation letter should typically be the same as the audit report.

The representations made apply until the date of a client's financial statements.


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8. Which of the following components of internal control would be considered the foundation for the other components?

Information and communication.

Risk assessment.

Control environment.

Control activities. 9. Which of the following activities by small-business client’s best demonstrates management integrity in the absence of a written code of conduct?

Emphasizing ethical behavior through oral communication and

management example.

Developing and maintaining formal descriptions of accounting procedures.

Documenting internal control procedures using flowcharts rather than narratives.

Reporting regularly to the board of directors about operations and finances.


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10. Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable?

Trace transactions from the subsidiary ledger to the general ledger.

Send confirmations to customers.

Trace a sample of invoices to recording in the general ledger.

Determine that all shipments before year end are recorded as sales. 11. A company's management provided its auditors with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of corroborating management's information?

Inquiring of company's outside counsel.

Meeting with the company's audit committee.

Meeting with the company's Chairman of the Board.

Inquiring of the company's in-house counsel.

12. Which of the following would cause an auditor of an entity's financial statements to issue either a qualified opinion or a disclaimer of opinion?

Scope limitation involving a recorded uncertainty.

Inadequate disclosure of an uncertainty.

The use of inappropriate accounting principles.

Unreasonable accounting estimates.


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13. At the completion of an audit, which of the following entities has ownership of the audit working papers?

The client.

The client's audit committee.

The CPA firm that performed the audit.

The client's stockholders.

14. Which of the following services would constitute a management function under Government Auditing Standards, and result in the impairment of a CPA's independence if performed by the CPA?

Developing entity program policies.

Providing methodologies, such as practice guides.

Providing accounting opinions to a legislative body.

Recommending internal control procedures.


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15. Which of the following best characterizes an auditor's exercise of professional skepticism?

Conducting all fraud-related inquiries in a non confrontational manner.

Obtaining adequate conclusive evidence in support of the fairness of the financial statements.

Having an attitude that includes a questioning mind.

Taking into account past relationships and experiences with management.

16. Before accepting an engagement to compile or review the financial statements of a nonissuer, which of the following specific inquiries should a successor accountant consider making to the predecessor accountant?

How cooperative was the owner's lawyer in providing a legal opinion?

How did you assess inherent risk and control risk?

How would you describe the integrity of the owner?

What evaluation did you make of any accounting estimates?


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17. An entity has failed to provide documentation for a newly acquired material asset and informs its auditors that the documentation is lost. According to generally accepted government auditing standards what would this situation typically indicate to the auditors?

Fraudulent activity.

Abusive activity.

Misappropriation of assets.

A heightened risk of fraud.

18. An accountant performing a compilation for a nonissuer believes that the financial statements might be materially misstated. The client refuses to provide additional or revised information. How should the accountant respond?

By requesting that the engagement be changed from a compilation to a

review or audit.

By issuing a compilation report that is qualified for a scope limitation.

By withdrawing from the compilation engagement.

By issuing an adverse report on the compilation.


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19. During an audit of a nonissuer's financial statements, an auditor should perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if

The auditor does not presume that client management has committed fraud.

More financial documentation is available through tests of controls.

Substantive procedures alone cannot provide sufficient appropriate audit evidence.

The auditor does not intend to rely on the operating effectiveness of controls.

20. In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result?

Modify the scope of the engagement to include an analysis of the budget for the new product line and consider the new risk in conjunction with other risks after the budget items have been analyzed.

Analyze the newly identified risk in conjunction with economic circumstances related exclusively to the new product line and consider whether there is an immediate consequence for the risk of material misstatement for affected classes of transactions.

Modify the financial statement disclosures to include the newly identified risk if it is likely that the new product line will have an adverse effect on the company's profitability.

Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.


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21. If interim substantive procedures for an account identified no exceptions, which of the following would the auditor not perform on that account at year end?

Tests of details for the entire year under audit.

Tests of details of activity during the period since the interim testing date.

Reconciliation of year-end balances to interim balances.

Substantive analytical procedures of the period since the interim testing date.

22. In communicating with those charged with governance, the auditor must decide whether to communicate with the audit committee or the client's entire board of directors. Which of the following considerations will be least relevant to this decision?

Whether the audit committee will be able to provide further information

and explanations that the auditor may require while performing the audit.

The nature of the matters to be communicated.

Management's preference.

Regulatory requirements related to audit communications with those charged with governance.


12

23. According to the Sarbanes-Oxley Act of 2002, the PCAOB has the legal authority to perform each of the following, except:

Prosecute suspected criminal violations by registered public accounting

firms.

Process, review, and approve the registration of public accounting firms that audit issuers.

Inspect and review selected audit engagements of registered public accounting firms.

Establish auditing, quality control, and independence standards for audits of issuers.

24. Which of the following best describes the effect of a contingent fee arrangement on the auditor's independence?

The contingent fee arrangement does not impair independence if it is

consistent with the registered public accounting firm's quality control policies.

The contingent fee arrangement impairs independence.

The contingent fee arrangement does not impair independence unless more than half of the fee is subject to contingencies.

The contingent fee arrangement impairs independence unless approved by the client's audit committee.


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25. An accountant is engaged to perform compilation services for a new client in an industry with which the accountant has no previous experience. How should the accountant obtain sufficient knowledge of the industry to perform the compilation service?

By obtaining the most recent letter of credit from the entity's primary

financial institution.

By consulting AICPA guides, industry publications, or individuals knowledgeable about the industry.

By researching the entity's Internet site and searching for current press releases.

By reviewing the predecessor accountant's workpapers without the knowledge of the entity.

Answers:

1. Reporting standards for financial audits under Government Auditing Standards differ from reporting standards under generally accepted auditing standards in that Government Auditing Standards require the auditor to

Describe the scope of the auditor's tests of compliance with laws and regulations.

Provide positive assurance that the entity's audit committee is adequately informed about the effects of any illegal acts.

Present the results of the auditor's tests of economy and efficiency regarding the use of the entity's resources.

Provide negative assurance that the auditor discovered no transactions that were indicative of illegal acts.


14

2. Which of the following procedures would most likely assist an auditor in identifying related party transactions?

Evaluate the reasonableness of management's accounting estimates

that are subject to bias.

Retest ineffective internal control activities for evidence of management override.

Review the minutes of the meetings of the board of directors and its committees.

Send second requests for unanswered positive confirmations of accounts receivable.

3. Which of the following factors would most likely influence the form and extent of the auditor's documentation of an entity's internal control environment?

Complexity and size of the entity.

Amount of audit work performed at an interim date.

Amount of audit work performed by the internal auditor.

Results of verifying material account balances.


15

4. According to the AICPA Code of Professional Conduct, which of the following actions will impair independence?

Preparing client financial statements based on information in a trial

balance.

Processing payroll for a client's signature based on client recordkeeping.

Participating in the hiring or termination of a client's employees.

Assisting a client in drafting a stock-offering document or memorandum.

5. When an accountant compiles the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services, the accountant's report should include

A statement that the accountant is not aware of material modifications

that should be made to the financial statements for them to be in conformity with GAAP.

A statement regarding the accountant's assessment of fraud risk.

A statement that the accountant does not express an opinion on the financial statements.

A statement regarding the entity's compliance with laws and regulations.


16

6. In which of the following circumstances is an auditor most likely to rely on work done by internal auditors?

If financial statement amounts are material and the degree of

subjectivity in evaluating the audit evidence is high.

If the internal auditors have concluded that the risk of material misstatement at the overall financial level is negligible.

For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence.

For financial statement amounts determined largely or entirely on the basis of estimates made by management.

7. Which of the following statements is correct regarding a management representation letter?

A representation letter can be used in place of specific, previously identified

audit procedures.

A representation letter encompasses a different set of assertions than those inherent in the financial statements.

The date of the representation letter should typically be the same as the audit report.

The representations made apply until the date of a client's financial statements.


17

8. Which of the following components of internal control would be considered the foundation for the other components?

Information and communication.

Risk assessment.

Control environment.

Control activities. 9. Which of the following activities by small-business client’s best demonstrates management integrity in the absence of a written code of conduct?

Emphasizing ethical behavior through oral communication and

management example.

Developing and maintaining formal descriptions of accounting procedures.

Documenting internal control procedures using flowcharts rather than narratives.

Reporting regularly to the board of directors about operations and finances.


18

10. Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable?

Trace transactions from the subsidiary ledger to the general ledger.

Send confirmations to customers.

Trace a sample of invoices to recording in the general ledger.

Determine that all shipments before year end are recorded as sales. 11. A company's management provided its auditors with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of corroborating management's information?

Inquiring of company's outside counsel.

Meeting with the company's audit committee.

Meeting with the company's Chairman of the Board.

Inquiring of the company's in-house counsel.

12. Which of the following would cause an auditor of an entity's financial statements to issue either a qualified opinion or a disclaimer of opinion?

Scope limitation involving a recorded uncertainty.

Inadequate disclosure of an uncertainty.

The use of inappropriate accounting principles.

Unreasonable accounting estimates.


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13. At the completion of an audit, which of the following entities has ownership of the audit working papers?

The client.

The client's audit committee.

The CPA firm that performed the audit.

The client's stockholders.

14. Which of the following services would constitute a management function under Government Auditing Standards, and result in the impairment of a CPA's independence if performed by the CPA?

Developing entity program policies.

Providing methodologies, such as practice guides.

Providing accounting opinions to a legislative body.

Recommending internal control procedures.


20

15. Which of the following best characterizes an auditor's exercise of professional skepticism?

Conducting all fraud-related inquiries in a non confrontational manner.

Obtaining adequate conclusive evidence in support of the fairness of the financial statements.

Having an attitude that includes a questioning mind.

Taking into account past relationships and experiences with management.

16. Before accepting an engagement to compile or review the financial statements of a nonissuer, which of the following specific inquiries should a successor accountant consider making to the predecessor accountant?

How cooperative was the owner's lawyer in providing a legal opinion?

How did you assess inherent risk and control risk?

How would you describe the integrity of the owner?

What evaluation did you make of any accounting estimates?


21

17. An entity has failed to provide documentation for a newly acquired material asset and informs its auditors that the documentation is lost. According to generally accepted government auditing standards what would this situation typically indicate to the auditors?

Fraudulent activity.

Abusive activity.

Misappropriation of assets.

A heightened risk of fraud.

18. An accountant performing a compilation for a nonissuer believes that the financial statements might be materially misstated. The client refuses to provide additional or revised information. How should the accountant respond?

By requesting that the engagement be changed from a compilation to a

review or audit.

By issuing a compilation report that is qualified for a scope limitation.

By withdrawing from the compilation engagement.

By issuing an adverse report on the compilation.


22

19. During an audit of a nonissuer's financial statements, an auditor should perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if

The auditor does not presume that client management has committed fraud.

More financial documentation is available through tests of controls.

Substantive procedures alone cannot provide sufficient appropriate audit evidence.

The auditor does not intend to rely on the operating effectiveness of controls.

20. In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result?

Modify the scope of the engagement to include an analysis of the budget for the new product line and consider the new risk in conjunction with other risks after the budget items have been analyzed.

Analyze the newly identified risk in conjunction with economic circumstances related exclusively to the new product line and consider whether there is an immediate consequence for the risk of material misstatement for affected classes of transactions.

Modify the financial statement disclosures to include the newly identified risk if it is likely that the new product line will have an adverse effect on the company's profitability.

Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.


23

21. If interim substantive procedures for an account identified no exceptions, which of the following would the auditor not perform on that account at year end?

Tests of details for the entire year under audit.

Tests of details of activity during the period since the interim testing date.

Reconciliation of year-end balances to interim balances.

Substantive analytical procedures of the period since the interim testing date.

22. In communicating with those charged with governance, the auditor must decide whether to communicate with the audit committee or the client's entire board of directors. Which of the following considerations will be least relevant to this decision?

Whether the audit committee will be able to provide further information

and explanations that the auditor may require while performing the audit.

The nature of the matters to be communicated.

Management's preference.

Regulatory requirements related to audit communications with those charged with governance.


24

23. According to the Sarbanes-Oxley Act of 2002, the PCAOB has the legal authority to perform each of the following, except:

Prosecute suspected criminal violations by registered public

accounting firms.

Process, review, and approve the registration of public accounting firms that audit issuers.

Inspect and review selected audit engagements of registered public accounting firms.

Establish auditing, quality control, and independence standards for audits of issuers.

24. Which of the following best describes the effect of a contingent fee arrangement on the auditor's independence?

The contingent fee arrangement does not impair independence if it is

consistent with the registered public accounting firm's quality control policies.

The contingent fee arrangement impairs independence.

The contingent fee arrangement does not impair independence unless more than half of the fee is subject to contingencies.

The contingent fee arrangement impairs independence unless approved by the client's audit committee.


25

25. An accountant is engaged to perform compilation services for a new client in an industry with which the accountant has no previous experience. How should the accountant obtain sufficient knowledge of the industry to perform the compilation service?

By obtaining the most recent letter of credit from the entity's primary

financial institution.

By consulting AICPA guides, industry publications, or individuals knowledgeable about the industry.

By researching the entity's Internet site and searching for current press releases.

By reviewing the predecessor accountant's workpapers without the knowledge of the entity.

Documents

AICPA Released Questions AUD 2015 Moderate