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.
AUD 2015: Moderate 1
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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.

AUD 2015: Moderate 2

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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.

AUD 2015: Moderate 3

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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.

AUD 2015: Moderate 4

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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 clients 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.

AUD 2015: Moderate 5

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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.
AUD 2015: Moderate 6
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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.

AUD 2015: Moderate 7

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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?

AUD 2015: Moderate 8

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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.

AUD 2015: Moderate 9

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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.
AUD 2015: Moderate 10
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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.

AUD 2015: Moderate 11

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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.

AUD 2015: Moderate 12

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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.

AUD 2015: Moderate 13

www.another71.com

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.

AUD 2015: Moderate 14

www.another71.com

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.

AUD 2015: Moderate 15

www.another71.com

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.

AUD 2015: Moderate 16

www.another71.com

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 clients 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.

AUD 2015: Moderate 17

www.another71.com

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.
AUD 2015: Moderate 18
www.another71.com

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.

AUD 2015: Moderate 19

www.another71.com

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?

AUD 2015: Moderate 20

www.another71.com

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.

AUD 2015: Moderate 21

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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.
AUD 2015: Moderate 22
www.another71.com

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.

AUD 2015: Moderate 23

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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.

AUD 2015: Moderate 24

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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.

AUD 2015: Moderate 25

www.another71.com