AUD - 2017 AICPA Released Questions PDF

2017 AICPA Newly Released Questions—Auditing
AUDITING
2017 AICPA Newly
Released MCQs
Page 1 of 50
Registered to Andrea Rosillo (#818104)

2017 AICPA Auditing Newly Released MCQs—Medium (Moderate) Rating
1. CPA-06155
As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive
testing sample size if all other factors remain constant?
a. The sample size would be irrelevant.
b. The sample size would be higher.
c. The sample size would be lower.
d. The sample size would be unaffected.
Unit & Module to be Assigned To: A-3, M-2

Representative Task: AII-E3.1
Skill Level (Must be R&U or Application Only): Application
Page Reference: 14
Correct Answer Choice: C
ANSWER:
Choice "c" is correct. A reduction in control risk would result in a lower substantive testing sample size.
Choice "a" is incorrect. Control risk has a direct relationship with substantive testing sample size (i.e., a
reduction in control risk results in a decrease in sample size).
Choice "b" is incorrect. A reduction in control risk would result in a lower, not higher, substantive testing
sample size.
Choice "d" is incorrect. Sample size would be affected. Control risk has a direct relationship with
substantive testing sample size (i.e., a reduction in control risk results in a decrease in sample size).
Page 2 of 50

2. CPA-06191
An auditor who performed analytical procedures that compared current-year financial information to the
comparable prior period noted a significant increase in net income. Given this result, which of the
following expectations of recorded amounts would be unreasonable?
a. A decrease in costs of goods sold as a percentage of sales.
b. A decrease in accounts payable.
c. A decrease in retained earnings.
d. A decrease in notes payable.

Representative Task: AIII-C1.3
Page Reference: 48
ANSWER:
Choice "c" is correct. A decrease in retained earnings would be an unreasonable expectation because the
auditor noticed a significant increase in net income. Net income closes to retained earnings; therefore,
absent any other information, the auditor would expect there would be an increase in retained earnings.
Choice "a" is incorrect. A decrease in cost of goods sold as a percentage of sale would be a reasonable
expectation. This could explain the increase in net income.
Choice "b" is incorrect. A decrease in accounts payable would be a reasonable expectation for the
increase in net income because accounts payable may have decreased as a result of decreases in
expenses. A decrease in expenses results in an increase in net income.
Choice "d" is incorrect. A decrease in notes payable would be a reasonable expectation for the increase
in net income as the decrease in notes payable may result in less interest expense. A decrease in interest
expense would result in an increase in net income.
Page 3 of 50

3. CPA-06192
Which of the following procedures would an auditor most likely use to identify unusual year-end
transactions?
a. Obtaining a client representation letter.
b. Obtaining a legal inquiry letter.
c. Performing analytical procedures.
d. Testing arithmetic accuracy of the accounting records.

Skill Level (Must be R&U or Application Only): R&U
Page Reference: 46
ANSWER:
Choice "c" is correct. An auditor most likely would perform analytical procedures to identify unusual year-
end transactions. Analytical procedures consist of evaluations of financial information made by a study of
meaningful relationships among data, which often help highlight unusual fluctuation.
Choice "a" is incorrect. The client representation letter is unlikely to help the auditor identify unusual year-
end transactions. This letter does not describe specific transactions.
Choice "b" is incorrect. Obtaining a legal inquiry letter is helpful in identifying contingencies, but is unlikely
to help identify unusual year-end transactions.
Choice "d" is incorrect. Testing the arithmetic accuracy of accounting records is likely to help discover
mathematical errors, but is unlikely to help identify unusual year-end transactions.
Page 4 of 50

4. CPA-06193
Which of the following statements would an auditor most likely require management to indicate in a
written representation letter obtained for an audit?
a. Management acknowledges its responsibilities for the design and implementation of programs and
controls to detect fraud.
b. Management plans to expand into international operations during the next few years.
c. Management believes the financial statements are accurately stated in accordance with generally
accepted auditing standards (GAAS).
d. Management believes the company is the premier company in its industry regarding service to
customers.

Representative Task: AIII-F1.1
Page Reference: 64
Correct Answer Choice: A
ANSWER:
Choice "a" is correct. The auditor is likely to require management to acknowledge its responsibilities for
the design and implementation of programs and controls to detect fraud.
Choice "b" is incorrect. The auditor is unlikely to request that management acknowledge their plan to
expand into international operations in future years in the management representation letter. The
management representation letter discusses management assertions at a very high level and generally
does not discuss detailed information.
Choice "c" is incorrect. Management would acknowledge that the financial statements are fairly stated in
accordance with U.S. generally accepted accounting principles (GAAP) or another applicable financial
reporting framework, not generally accepted auditing standards (GAAS).
Choice "d" is incorrect. The auditor is unlikely to require management to comment on their service to
customers in the management representation letter.
Page 5 of 50

5. CPA-06194
An auditor is reporting on comparative financial statements for three years. Which of the following
statements is correct regarding written representations from management?
a. The representation letter needs to address the prior-year's financial statements not covered in the
report.
b. The representation letter needs to address only the most current year covered in the report.
c. The representation letter needs to address only the two most recent years covered in the report.
d. The representation letter needs to address all of the years being covered in the report.

Representative Task: AIII-F1.1
Page Reference: 63
Correct Answer Choice: D
ANSWER:
Choice "d" is correct. Management representation letters need to address all of the years being covered
in the report.
Choices "a", "b", and "c" are incorrect, per the above explanation.
Page 6 of 50

6. CPA-06195
Which of the following could indicate source document fraud?
a. The same customer purchase order number appears on different customer invoices.
b. The same item code appears on different invoices.
c. The same invoice number appears on different invoices.
d. The same invoice date appears on different invoices.

Representative Task: AII-D1.1
Page Reference: 8
ANSWER:
Choice "c" is correct. The same invoice number appearing on different invoices could indicate source
document fraud. Each invoice should have its own unique number.
Choice "a" is incorrect. The same purchase order number may appear on different invoices. For example,
a purchase order may be issued for two items. If one of the items is on back order, the entity may issue
an invoice for the shipped item and then issue another invoice for the back-ordered item once it ships.
Both invoices would refer to the same purchase order.
Choice "b" is incorrect. The same item code may appear on different invoices. For example, different
customers may have ordered the same item, so the same item code would appear on different invoices.
Choice "d" is incorrect. The same invoice date may appear on different invoices, especially if multiple
sales occurred on the same day.
Page 7 of 50

7. CPA-06196
A client uses a service organization to process its payroll. Which of the following statements is correct
regarding the user auditor's use of the service auditor's report on internal controls placed in operation?
a. The client's auditor can use the service auditor's report to jointly determine the materiality level.
b. The client's auditor can use the service auditor's report without inquiring about the service auditor's
reputation.
c. The service auditor's report should be referred to in the report of the client's auditor.
d. The client's auditor can use the service auditor's report as audit evidence for the client's internal
controls.

Representative Task: AII-C3.2
Page Reference: 60
ANSWER:
Choice "d" is correct. The client's auditor can use the service auditor's report as audit evidence for the
client's internal control.
Choice "a" is incorrect. The client's auditor should not use the service auditor's report to jointly determine
the materiality level. Materiality is determined by the auditor's assessment of the needs of financial
statement users and not by the service auditor's report.
Choice "b" is incorrect. In considering whether the service auditor's report is satisfactory for his or her
purposes, the user auditor should make inquiries concerning the service auditor's professional reputation.
Choice "c" is incorrect. The client's auditor should not make reference to the service auditor's report when
issuing an unmodified opinion. The client’s auditor is permitted, but is not required, to make reference to
the work of a service auditor to explain a modification of the user auditor’s opinion.
Page 8 of 50

8. CPA-06197
During the course of an audit, an auditor finds evidence that an officer has entered fraudulent
transactions in the financial statements. The fraudulent transactions can be adjusted so the statements
are not materially misstated. What should the auditor do?
a. Report the matters to regulatory authorities.
b. Consider the fraud a scope limitation and disclaim an opinion.
c. Communicate the matter to those charged with governance.
d. Immediately withdraw from the engagement.

Representative Task: AI-E3.1
Page Reference: 9
ANSWER:
Choice "c" is correct. Fraud involving an officer should be reported to those charged with governance.
Choice "a" is incorrect. Disclosure of fraud to a regulatory agency is not required in this situation.
Ordinarily, the disclosure of fraud to parties outside of senior management and those charged with
governance is not part of the auditor's responsibility.
Choice "b" is incorrect. This situation does not represent a scope limitation. The auditor was able to
gather enough evidence to know the amount of the fraud.
Choice "d" is incorrect. The auditor does not need to immediately withdraw. Instead, the auditor should
first notify those charged with governance. If those charged with governance do not take appropriate
action, then the auditor should consider withdrawing.
Page 9 of 50

9. CPA-06198
Which of the following control objectives is achieved by reviewing and testing control procedures over
physical inventory count?
a. Validation of purchase transactions.
b. Verification of existence of inventory.
c. Authorization of the manufacturing orders.
d. Posting and summarization of inventory transactions.

Page Reference: 21
Correct Answer Choice: B
ANSWER:
Choice "b" is correct. The control objective of verification of the existence of inventory is achieved when
reviewing and testing control procedures over the physical inventory count. In a physical inventory count,
the auditor inspects the inventory to verify its existence and condition.
Choice "a" is incorrect. The control objective of validation of the purchase transaction objective would not
be achieved by reviewing and testing control procedures related to the physical inventory count.
Purchase (and sale) transactions do not typically occur during a physical inventory count, and therefore
are unlikely to be part of the control procedures and testing for the physical inventory count.
Choice "c" is incorrect. The control objective of authorization of manufacturing orders would not be
achieved by reviewing and testing control procedures related to the physical inventory count. The testing
of proper authorization of manufacturing orders would occur as a separate test, not during the physical
inventory count.
Choice "d" is incorrect. The control objective of posting and summarization of inventory transactions
would not be met by reviewing and testing control procedures related to the physical inventory count.
Generally, no inventory transactions (i.e., purchases or sales) occur during the physical count.
Page 10 of 50

10. CPA-06199
Which of the following procedures is performed first for unreturned positive confirmations of accounts
receivable?
a. Comparing current sales with budgeted sales.
b. Sending second requests for confirmation of accounts receivable.
c. Performing subsequent procedures.
d. Asking the client to obtain additional correspondence from the customers.

Page Reference: 9
ANSWER:
Choice "b" is correct. When there are unreturned positive confirmations of accounts receivable, the
auditor would first respond by sending second confirmation requests.
Choice "a" is incorrect. Comparing current sales with budgeted sales is a high-level analytical procedure
that is often performed during the planning stage. This would not be an appropriate response for
unreturned positive confirmations, which require more detailed evidence.
Choice "c" is incorrect. An auditor will generally perform subsequent procedures, such as reviewing
subsequent cash receipts or inspecting shipping documents after the auditor has not received responses
to the second (and sometimes third) confirmation requests.
Choice "d" is incorrect. The auditor may ask the client to contact the customer; however, this is usually
requested after second confirmation requests do not yield a response.
Page 11 of 50

11. CPA-06200
Which of the following audit procedures most likely will involve sampling?
a. Risk assessment procedures performed to obtain an understanding of internal control.
b. Tests of automated application controls when effective information technology general controls are
present.
c. Analyses of controls to determine the appropriate segregation of duties.
d. Testing of process for approval of credit to customers for sales on account.

Representative Task: AIII-B1.1
Page Reference: 71
ANSWER:
Choice "d" is correct. An auditor most likely would use sampling when testing the process for approval of
credit to customers for sales on account. Audit sampling is the application of an audit procedure to less
than 100 percent of the items in the account balance or class of transactions for the purpose of evaluating
some characteristic (in this case, proper approval).
Choice "a" is incorrect. An auditor generally does not use sampling when performing risk assessment
procedures to obtain an understanding of internal control. The primary goal of risk assessment
procedures is to gain an understanding of the accounting system or other relevant parts of the internal
control, rather than to evaluate a characteristic of all transactions processed.
Choice "b" is incorrect. Sampling generally does not apply to tests of automated application controls when
effective information technology general controls are present. When IT general controls are tested and
determined to be effective, a single test of an automated control may be sufficient to place reliance on the
control. As such, testing of these controls generally do not rely on the concepts of risk and tolerable
deviation as applied in other sampling procedures.
Choice "c" is incorrect. Sampling generally does not apply to controls that do not provide documentary
evidence of performance, such as controls to determine the appropriate segregation of duties.
Page 12 of 50

12. CPA-06201
Which of the following statements is correct about actions taken after the documentation completion
date?
a. An auditor must not make any amendments to audit documentation before the end of the specified
retention period.
b. An auditor must not make any additions to audit documentation before the end of the specified
retention period.
c. An auditor must not make any changes to audit documentation before the end of the specified
retention period.
d. The auditor must not make any deletions to audit documentation before the end of the specified
retention period.

Representative Task: AI-D1.2
Page Reference: 14
ANSWER:
Choice "d" is correct. An auditor is not allowed to make any deletions to audit documentation before the
end of the specified retention period.
Choice "a" is incorrect. An auditor is allowed to amend documentation before the end of the specified
retention period.
Choice "b" is incorrect. An auditor is allowed to add documentation before the end of the specified
retention period.
Choice "c" is incorrect. An auditor may make some changes (i.e., add or modify) documentation before
the end of the specified retention period.
Page 13 of 50

13. CPA-06202
Which of the following services provides the least assurance regarding the fairness of financial
statements?
a. Review.
b. Audit.
c. Compilation.
d. Attestation.

Representative Task: AIV-C2.1
Page Reference: 15
ANSWER:
Choice "c" is correct. A compilation provides the least amount of assurance because it provides no
assurance.
Choice "a" is incorrect. A review provides limited assurance, which is higher than no assurance.
Choice "b" is incorrect. An audit provides reasonable assurance, which is higher than limited assurance
and no assurance.
Choice "d" is incorrect. Attestation services include examinations (reasonable assurance), reviews
(limited assurance) and agreed-upon procedures (no assurance). Although attestation services do include
agreed-upon procedures, which provide no assurance, attestation services also include examinations and
reviews, which provide a higher level of assurance than a compilation. Therefore, the best response is
"compilation," because it always provides no assurance.
Page 14 of 50

14. CPA-06203
Under which of the following circumstances would an auditor be considered to be using the work of a
specialist?
a. The auditor engages a lawyer to interpret the provisions of a complex contract.
b. The auditor makes inquiries of the client's lawyer regarding pending litigation.
c. A tax expert employed by the auditor's CPA firm reviews the client's tax accruals.
d. The client engages an outside computer service organization to prepare its payroll.

Representative Task: AII-G1.2
Page Reference: 36
ANSWER:
Choice "a" is correct. An auditor engaging a lawyer to interpret the provisions of a complex contract would
be considered to be using the work of a specialist. GAAS defines a specialist as a person or firm with
special skills in a field other than accounting or auditing (e.g., actuaries, appraisers, attorneys, or
engineers).
Choice "b" is incorrect. Making inquiries of the client's lawyer is a standard audit procedure, and is not
considered using the work of a specialist.
Choice "c" is incorrect. A tax expert employed by the auditor does not meet the definition of a specialist
because the tax expert's skills are in accounting.
Choice "d" is incorrect. An outside computer service organization engaged by the client to prepare its
payroll would not be considered to be using the work of a specialist in an audit. The client is engaging the
payroll services, not the auditor.
Page 15 of 50

15. CPA-06204
What is the definition of fraud in an audit of financial statements?
a. An intentional act that results in a material misstatement in financial statements that are the subject
of an audit.
b. The unintentional misapplication of accounting principles relating to amounts, classification, manner
of presentation, or disclosure.
c. An intentional act that results in a material weakness in financial statements that are the subject of
an audit.
d. Management's inability to design and implement programs and controls to prevent, deter, and
detect material misstatements.

Representative Task: AII-D1.1
Page Reference: 3
ANSWER:
Choice "a" is correct. The definition of fraud is an intentional act that results in a material misstatement in
financial statements that are the subject of an audit.
Choice "b" is incorrect. The definition of error is an unintentional misapplication of accounting principles
relating to amounts, classification, manner of presentation, or disclosure.
Choice "c" is incorrect. Fraud is an intentional act that results in a material misstatement (not material
weakness) in financial statements that are the subject of an audit.
Choice "d" is incorrect. Management's inability to design and implement programs and controls to
prevent, deter, and detect material misstatements is not the definition of fraud. However, this situation
most likely would increase the auditor's assessment of risk of material misstatement.
Page 16 of 50

16. CPA-06205
A practitioner's report on agreed-upon procedures should contain which of the following statements?
a. The procedures performed were those agreed to by the specified parties identified in the report.
b. Sufficiency of procedures is the responsibility of the practitioner.
c. All classification codes appeared to comply with such performance documents.
d. Nothing came to my attention as a result of applying the procedures.

Representative Task: AIV-B2.1
Page Reference: 40
ANSWER:
Choice "a" is correct. A practitioner's report on agreed-upon procedures should contain the statement that
the procedures performed were those agreed to by the specified parties identified in the report.
Choice "b" is incorrect. A practitioner's report on agreed-upon procedures should contain the statement
that the sufficiency of procedures is the responsibility of the specified parties, not the practitioner. The
practitioner disclaims responsibility for the sufficiency of the procedures.
Choice "c" is incorrect. A practitioner's report on agreed-upon procedures should not include the
statement that all classification codes appeared to comply with such performance documents. The agreed
upon procedures engagement may relate to a subject matter unrelated to classification of codes, and an
agreed-upon procedures report does not include any form of assurance.
Choice "d" is incorrect. A practitioner's report on agreed-upon procedures contains a disclaimer of opinion
on the subject matter. Limited assurance is not provided in an agreed-upon procedures engagement.
Page 17 of 50

17. CPA-06206
Which of the following groups is considered a subgroup ordinarily charged with assisting the board of
directors in fulfilling its oversight responsibilities?
a. Audit committee.
b. Secured creditors.
c. Internal auditors.
d. Senior management.

Page Reference: 69
ANSWER:
Choice "a" is correct. The audit committee is considered a subgroup ordinarily charged with assisting the
board of directors in fulfilling its oversight responsibilities.
Choice "b" is incorrect. Secured creditors are lenders to the entity that hold a legally enforceable claim on
the entity's assets. Secured creditors are not responsible for assisting the board of directors in their
oversight duties, nor are they a subgroup of the board of directors.
Choice "c" is incorrect. Internal auditors are not a subgroup of the board of directors. The internal audit
function may report to the audit committee or the board of the directors, but they are not a subgroup of
the board of directors.
Choice "d" is incorrect. Senior management assists the board of directors with the day to day activities of
the business. Senior management reports to the board of directors but is not considered a subgroup of
the board of directors.
Page 18 of 50

18. CPA-06207
In which of the following situations will a practitioner disclaim an opinion on an examination of prospective
financial statements?
a. The prospective financial statements depart from AICPA presentation guidelines.
b. The practitioner was not able to perform certain procedures deemed necessary.
c. The prospective financial statements fail to disclose significant assumptions.
d. The significant assumptions do not provide a reasonable basis for the statements.

Page Reference: 45
ANSWER:
Choice "b" is correct. A practitioner would disclaim an opinion when facing a scope limitation, such as the
inability to perform certain procedures deemed necessary.
Choice "a" is incorrect. A practitioner would issue a qualified or adverse opinion if the prospective
financial statements departed from AICPA guidelines.
Choice "c" is incorrect. A practitioner would issue an adverse opinion if the prospective financial
statements failed to disclose significant assumptions.
Choice "d" is incorrect. A practitioner would issue an adverse opinion if the significant assumptions did not
provide a reasonable basis for the statements.
Page 19 of 50

19. CPA-06208
While conducting an audit of a new nonissuer client, an auditor discovers that accounting policies applied
in relation to the financial statement opening balances are inconsistent with accounting policies applied
during the period under audit. In this scenario, what should the auditor do?
a. Obtain sufficient appropriate evidence about whether changes in the accounting policies have been
appropriately accounted for and adequately presented and disclosed in accordance with the
applicable financial reporting framework.
b. Refrain from placing any reliance on information obtained from the review of the predecessor
auditor's audit documentation of the prior period.
c. Request that management inform the predecessor auditor that the prior-period audited financial
statements require revision.
d. Express a qualified or adverse opinion.

Representative Task: AIII-D1.1
Page Reference: 43
ANSWER:
Choice "a" is correct. If accounting policies change, then the auditor should obtain sufficient appropriate
evidence about whether changes in the accounting policies have been appropriately accounted for and
adequately presented and disclosed in accordance with the applicable financial reporting framework.
Choice "b" is incorrect. An auditor can still rely on information obtained from the review of the predecessor
auditor's audit documentation. A change in accounting policy has no effect on the quality of the
predecessor auditor's work.
Choice "c" is incorrect. The successor auditor does not need to request that management inform the
predecessor auditor that the prior-period audited financial statements require revision. Accounting policies
may change year to year. The successor auditor should ensure that the accounting policies are
appropriately accounted for and adequately presented and disclosed in accordance with the applicable
financial reporting framework.
Choice "d" is incorrect. A change in accounting policy does not necessarily mean that the company is not
following GAAP. The auditor may still be able to express an unqualified opinion.
Page 20 of 50

20. CPA-06209
An auditor is assessing the appropriateness of management's rationale for selecting a model to measure
the fair value of debt securities. If, during the current year, an active trading market for the debt security
was introduced, the auditor should validate each of the following criteria, except whether the valuation
model is:
a. Appropriate for the environment in which the entity operates.
b. Consistently applied from prior periods.
c. Evaluated and appropriately applied based on generally accepted accounting principles.
d. Appropriate for the debt security being valued.

Page Reference: 29
ANSWER:
Choice "b" is correct. Because an active trading market was introduced this year, it is likely that the
method utilized would be inconsistent with the prior year. Specifically, the auditor would most likely expect
the client to use a valuation model in the current year that uses observable quoted prices in the active
market (Level 1), rather than the use of inputs other than quoted market prices (Level 2) or unobservable
inputs (Level 3), one of which was most likely used in the prior year.
Choice "a" is incorrect. The auditor would evaluate whether the valuation model is appropriate for the
environment in which the entity operates.
Choice "c" is incorrect. The auditor would evaluate whether the valuation model is appropriately applied
based on generally accepted accounting principles.
Choice "d" is incorrect. The auditor would evaluate whether the valuation model is appropriate for the debt
security being valued.
Page 21 of 50

21. CPA-06210
Management's responses to inquiries can be corroborated by each of the following, except:
a. Visits to the entity's premises and plant facilities.
b. Inspection of documents and internal control manuals.
c. Preparation of the summary of unadjusted differences.
d. Observation of entity activities and operations.

Representative Task: AIII-E1.1
Page Reference: 56
ANSWER:
Choice "c" is correct. The auditor prepares the summary of unadjusted differences. Management's
responses to inquiries cannot be verified by the auditor by merely taking their statements and filling out a
summary sheet of misstatements. Misstatements recorded on the summary should be supported by
additional evidence (e.g., inspection of documents, observations). Inquiry alone is not sufficient.
Choice "a" is incorrect. Management's responses to inquiries can be corroborated by visiting the entity's
premises and plant facilities.
Choice "b" is incorrect. Management's responses to inquiries can be corroborated by inspecting
documents and internal control manuals.
Choice "d" is incorrect. Management's responses to inquiries can be corroborated by observing the entity
activities and operations.
Page 22 of 50

22. CPA-06211
Which of the following statements concerning a compilation of specific elements, accounts, or items of a
financial statement is correct?
a. The accountant performing the compilation must be independent with regard to the client.
b. The compilation cannot be relied upon to disclose errors, fraud, or illegal acts.
c. The compilation involves compiling financial statements for different subsidiaries of the company.
d. The compilation must be performed in conformance with an accounting basis consistent with
GAAP.

Page Reference: 15
ANSWER:
Choice "b" is correct. A compilation cannot be relied upon to disclose errors, fraud, or illegal acts.
Because a compilation is not an assurance engagement, a compilation engagement does not require the
accountant to verify the accuracy or completeness of the information provided by management or
otherwise gather evidence to express an opinion or conclusion on the financial statements.
Choice "a" is incorrect. An accountant who is not independent with respect to an entity may compile
financial statements for the entity and issue a compilation report. The accountant would simply need to
disclose the lack of independence in the compilation report.
Choice "c" is incorrect. A compilation of a specific element, accounts, or items of a financial statement
means the accountant is compiling information for a certain aspect of the financial statements (e.g.,
accounts receivable). It does not mean that the compilation involves compiling financial statements for
different subsidiaries within the company.
Choice "d" is incorrect. A compilation may be performed in conformance with an accounting basis other
than GAAP (e.g., cash basis, IFRS).
Page 23 of 50

23. CPA-06212
An independent auditor is issuing an audit report for a governmental entity and plans to issue separate
reports on internal control over financial reporting and compliance with laws and regulations. The auditor
should do which of the following?
a. Report to the governing authority that separate reports will be issued.
b. Issue the same opinion in each report.
c. State in the audit report that separate reports will be issued.
d. Obtain permission from the audit committee to issue separate reports.

Representative Task: AIV-E9.1
Page Reference: 77
ANSWER:
Choice "c" is correct. If an auditor decides to issue separate reports rather than a combined report on
internal control over financial reporting and compliance with laws and regulations, then the auditor should
state in the audit report that separate reports will be issued. This would appear as a paragraph entitled
"Other Reporting Required by Government Auditing Standards" in the auditor's report.
Choice "a" is incorrect. An auditor does not need to notify the governing authority when the auditor
decides to issue separate reports rather than a combined report on internal control over financial
reporting and compliance with laws and regulations
Choice "b" is incorrect. The reports on internal control over financial reporting and compliance with laws
and regulations may, but are not required by GAGAS to, contain an opinion. If they do contain an opinion,
that opinion may be different from the financial statement opinion.
Choice "d" is incorrect. The auditor does not need permission from the audit committee to issue separate
reports on internal control over financial reporting and compliance with laws and regulations.
Page 24 of 50

24. CPA-06213
During a review of financial statements, an accountant decides to emphasize a matter in the review
report. Which of the following is an example of a matter that the accountant would most likely want to
emphasize?
a. Other entities in the same industry have recently changed from LIFO to FIFO.
b. The IRS has notified the entity that it intends to audit income tax returns for prior years.
c. The entity has had significant transactions with related parties.
d. The entity has had significant tax expenses as a result of a new tax law.

Page Reference: 42
ANSWER:
Choice "c" is correct. An example of a matter an accountant would want to emphasize is that the entity
has significant transactions with related parties.
Choice "a" is incorrect. The review report should focus on the accountant's client and would not mention
other entities' accounting principles.
Choice "b" is incorrect. An accountant generally does not discuss upcoming IRS audits for an entity in a
review report.
Choice "d" is incorrect. An accountant is unlikely to emphasize in the review report that the entity had
significant tax expenses as a result of a new tax law.
Page 25 of 50

25. CPA-06214
Before issuing an unmodified report on a compliance audit, an auditor becomes aware of an instance of
material noncompliance occurring after the period covered by the audit. The least appropriate response
by the auditor would be to:
a. Discuss the matter with management and, if appropriate, those charged with governance.
b. Issue a qualified compliance report describing the subsequent noncompliance.
c. Determine whether the noncompliance relates to conditions that existed as of period end or arose
subsequent to the reporting period.
d. Modify the standard compliance report to include a paragraph describing the nature of the
subsequent noncompliance.

Representative Task: AIV-D1.1
Page Reference: 62
ANSWER:
Choice "b" is correct. The least appropriate response if an auditor discovers an instance of material
noncompliance that occurred after the period covered by the audit is to issue a qualified compliance
report describing the subsequent noncompliance. The opinion issued (i.e., unmodified) should relate to
compliance during the period covered by the auditor's report. However, if the auditor determines that it is
of such nature and significance that its disclosure is needed to prevent report users from being misled,
the auditor may add an other-matter paragraph in the report to describe the nature of the noncompliance.
Choice "a" is incorrect. An appropriate response is to discuss the matter with management and, if
appropriate, those charged with governance.
Choice "c" is incorrect. An appropriate response is to determine whether the noncompliance relates to
conditions that existed as of period end or arose subsequent to the reporting period.
Choice "d" is incorrect. An appropriate response is to modify the standard compliance report to include an
other-matter paragraph describing the nature of the subsequent noncompliance.
Page 26 of 50

2017 AICPA Auditing Newly Released MCQs—Difficult (Hard) Rating
26. CPA-06215
An auditor will most likely use computer-assisted audit techniques, rather than manual techniques, when
it is necessary to:
a. Examine all data in an accounts payable file.
b. Review approval of dividends.
c. Verify unrecorded legal liabilities.
d. Assess compliance with policies and procedures related to information security.

Page Reference: 68
ANSWER:
Choice "a" is correct. An auditor will most likely use computer-assisted audit techniques, rather than
manual techniques, when it is necessary to examine all data in an accounts payable file. Computer-
assisted audit techniques (CAATs) are computer programs that allow auditors to test computer files and
databases during an audit. CAATs are best to use when there is need to examine a lot of data (in this
case, "all") in the computer files (accounts payable file).
Choice "b" is incorrect. A manual technique, rather than use of CAATs, is best to use when reviewing
approval of dividends. This is often performed by reviewing the board of director meeting minutes for
proper approval of the dividends.
Choice "c" is incorrect. A manual technique, rather than use of CAATs, is best to use when verifying
unrecorded legal liabilities. This is often performed by reviewing the response from the lawyer to the letter
of inquiry.
Choice "d" is incorrect. A manual technique, rather than use of CAATs, is best to use when assessing
compliance with policies and procedures related to information security. For example, a policy for
information security may be that all patient health care files need to be in a locked cabinet.
Page 27 of 50

27. CPA-06216
Which of the following events that occurred after a client's calendar-year end, but before the audit report
date, would require disclosure in the notes to the financial statements, but no adjustment in the financial
statements?
a. New convertible bonds are issued to expand the company's product line.
b. A loss is reported on uncollectible accounts of an acknowledged distressed customer.
c. A fixed asset used in operations is sold at a substantial profit.
d. Negotiations have resulted in compensation adjustments for union employees retroactive to the
fourth quarter.

Representative Task: AIII-G1.1
Page Reference: 71
ANSWER:
Choice "a" is correct. This transaction does not relate to the year under audit, so no adjustment is needed
to the financial statements, but it is considered a significant event that should be disclosed. This
information would most likely appear in the subsequent events footnote.
Choice "b" is incorrect. A loss reported on uncollectible accounts is considered a recognized subsequent
event that would require adjustment to the financial statement amounts. This event provides us with
additional information that should be used to adjust the estimate for allowance for doubtful accounts. This
event probably would not be disclosed in the financial statements.
Choice "c" is incorrect. The sale of a fixed asset is a nonrecognized subsequent event that would not
require disclosure or adjustment in the financial statements.
Choice "d" is incorrect. Negotiations that require compensation adjustments retroactive to the year under
audit would be considered a recognized subsequent event that would require adjustment to the financial
statement amounts. This information should be used to adjust accounts related to compensation for union
employees.
Page 28 of 50

28. CPA-06217
As part of a fraud audit, a CPA wishes to identify employees with invalid Social Security numbers in the
client's payroll-transaction data. Which of the following audit tests of controls using computer-assisted
audit techniques would best meet the objective?
a. Obtaining statistics on the population of the payroll file to identify unusual pay amounts to
employees.
b. Comparing Social Security numbers paid in the payroll transaction file to a file of government-
authorized Social Security numbers.
c. Randomly selecting 25 payments from the payroll report and comparing the results to employee
Social Security cards in the human resources records.
d. Comparing the payroll transaction file to the employee master file to extract payments to employees
who are not in the employee master file.

Page Reference: 69
ANSWER:
Choice "b" is correct. Comparing Social Security numbers in the payroll transaction file to a file of
government-authorized Social Security numbers would help identify invalid Social Security numbers.
Choice "a" is incorrect. This audit technique would not help the auditor identify invalid Social Security
numbers. However, this procedure may help the auditor identify unusual pay amounts.
Choice "c" is incorrect. Randomly selecting 25 payments from the payroll report and comparing the
results to employee Social Security cards in the human resources records appears to be a manual rather
than computer-assisted audit technique (especially because the sample size is relatively low). In addition,
comparing Social Security numbers in the payroll transaction file to a file of government-authorized Social
Security numbers would be the best way to identify invalid Social Security numbers.
Choice "d" is incorrect. Comparing the payroll transaction file to the employee master file would not
provide information about invalid Social Security numbers. However, this procedure may help the auditor
test the completeness of the master file.
Page 29 of 50

29. CPA-06218
What is the primary purpose of reviewing conflict-of-interest statements signed by members of
management?
a. To obtain an understanding of business processes.
b. To identify transactions with related parties.
c. To assess control risk.
d. To consider limitations of internal control.

Representative Task: AII-H3.1
Page Reference: 35
ANSWER:
Choice "b" is correct. The primary purpose of reviewing conflict-of-interest statements signed by members
of management is to help identify transactions with related parties. Conflict-of-interest statements require
management to disclose any relationships with related organizations that do business with the entity. (For
example, the conflict-of-interest statement may have the manager disclose whether he or she has
ownership in a business that does business with the entity.)
Choice "a" is incorrect. A conflict-of-interest statement is unlikely to help the auditor obtain an
understanding of the business process. Other procedures are more likely to aid the auditor in
understanding the business process, such as reviewing the entity's policies and procedures or performing
walk-throughs.
Choice "c" is incorrect. The primary purpose of reviewing conflict-of-interest statements signed by
members of management is to help identify transactions with related parties. Review of these documents
may also help the auditor assess control risk related to the entity's identification and disclosure of related
party relationships, but this is not the primary objective of reviewing those documents.
Choice "d" is incorrect. Reviewing conflict-of-interest statements most likely would not assist the auditor in
considering limitations of internal control.
Page 30 of 50

30. CPA-06219
A CPA was engaged to audit the financial statements of a municipality that received federal financial
assistance and that required a Single Audit for compliance with the terms of the financial assistance.
Which of the following guidelines should the CPA consider?
Generally Accepted Government
Auditing Standards Auditing Standards
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Page Reference: 83
ANSWER:
Choice "a" is correct. An auditor should consider both generally accepted auditing standards and
government auditing standards when auditing the financial statements of a municipality that received
federal financial assistance and that required a Single Audit for compliance with the terms of the financial
assistance. Government auditing standards include generally accepted auditing standards.
Choices "b", "c", and "d" are incorrect, per the above explanation.
Page 31 of 50

31. CPA-06220
The client asked the auditor to audit financial statements covering the current year. The auditor did not
observe the prior year's physical inventory count. Which of the following actions would the auditor most
likely take?
a. Withdraw from the engagement and provide no assurance on the current year's financial
statements.
b. Rely on management's representation that the prior year's balances are correct.
c. Audit the financial statements and express an opinion with a scope limitation.
d. Audit the prior year inventory using alternative substantive procedures.

Page Reference: 36
ANSWER:
Choice "d" is correct. If the auditor is unable to observe the prior year's physical inventory, then the
auditor most likely will try to audit the prior year inventory using alternative substantive procedures. For
example, the auditor may:
• Observe a current physical inventory count and reconcile it to the opening inventory quantities.
• Perform audit procedures on the valuation of the opening inventory items.
• Perform audit procedures on gross profit and cutoff.
Choice "a" is incorrect. An auditor is not required to withdraw from an engagement if the auditor is unable
to observe the prior year's physical inventory count. The auditor may be able to obtain sufficient
appropriate audit evidence by performing alternative audit procedures on the inventory balance.
Choice "b" is incorrect. The auditor should verify the inventory balance by performing alternative
procedures that provide sufficient appropriate audit evidence. Relying solely on management
representations does not provide sufficient appropriate audit evidence about the beginning inventory
balance.
Choice "c" is incorrect. The inability to observe the inventory count is not a limitation on the scope of the
audit if the auditor is able to obtain sufficient appropriate audit evidence by performing alternative
procedures. However, if alternative procedures cannot be performed, then the auditor should express a
qualified opinion or disclaimer of opinion.
Page 32 of 50

32. CPA-06221
Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such
misstatements should be:
a. Considered in the evaluation of audit findings in the current year.
b. Disclosed by the client in the current-year financial statements.
c. Retested during the current-year tests of controls.
d. Removed from the prior-year summary because they were immaterial.

Representative Task: AIII-E1.2
Page Reference: 54
ANSWER:
Choice "a" is correct. Immaterial misstatements from prior years should be considered in the evaluation of
audit findings in the current year. For example, auditors focus on correcting misstatements existing in the
balance sheet, regardless of the year(s) that misstatements originated. In other words, an immaterial error
from prior years needs to be considered because at some point it may, in aggregate, become material.
Choice "b" is incorrect. Immaterial misstatements from prior years do not need to be disclosed by the
client in the current-year financial statements.
Choice "c" is incorrect. Immaterial misstatements from prior years do not need to be retested during the
current-year test of controls.
Choice "d" is incorrect. Immaterial misstatements from prior years should remain in the prior-year
summary.
Page 33 of 50

33. CPA-06222
Which of the following results of analytical procedures would most likely indicate possible unrecorded
liabilities?
a. Current ratio of 2:1 as compared to 5:1 for the prior period.
b. Ratio of accounts payable to total current liabilities of 4:1, compared to 6:1 for the prior period.
c. Accounts payable turnover of 5, compared to 10 for the prior period.
d. Accounts payable balance increase greater than 10 percent over the prior period.

Page Reference: 59
ANSWER:
Choice "b" is correct. A decrease in the ratio of accounts payable to total current liabilities most likely
indicates possible unrecorded liabilities. In the prior year, there were six accounts payable for every
current liability. In the current year, there are four accounts payable for every current liability. The
decrease in accounts payable per current liability may indicate possible unrecorded payables.
Choice "a" is incorrect. The current ratio (current assets ÷ current liabilities) decreased from the prior
year. In the prior year, there were five current assets for every current liability. In the current year, there
are two current assets for every current liability. In other words, there is a greater proportion of current
liabilities for every current asset. This is unlikely to indicate possible unrecorded liabilities.
Choice "c" is incorrect. Accounts payable turnover (purchases ÷ average accounts payable) decreased
from the prior year. This means that there is a greater proportion of average accounts payable for every
purchase. This is unlikely to indicate possible unrecorded liabilities.
Choice "d" is incorrect. An increase in accounts payable (a liability account) from the prior year most likely
would not indicate possible unrecorded liabilities.
Page 34 of 50

34. CPA-06223
A service organization provides processing services for a client's sales orders. Which of the following
information is relevant when gathering data for the report on the service organization's internal controls?
a. The client's sales manager reviews accounts receivable balances.
b. The client's data entry clerk used the sales manager's password to make unauthorized changes to
customer prices.
c. Credit limits are established and updated by the client's credit department.
d. The service organization's system calculates accounts receivable balances.

Page Reference: 54
ANSWER:
Choice "d" is correct. This question focuses on information relevant to the service organization's report on
internal controls. Information regarding the service organization's system for calculating accounts
receivable balances is relevant for gathering data on the service organization's internal controls.
Choice "a" is incorrect. Information related to the client's sales manager review of accounts receivable
would not provide information about the service organization's internal controls.
Choice "b" is incorrect. Information related to the client's data clerk making unauthorized changes to
customer prices would not provide information about the service organization's internal controls.
Choice "c" is incorrect. Information related to the client's credit department and their development of credit
limits would not provide information about the service organization's internal controls.
Page 35 of 50

35. CPA-06224
In a test of purchase orders, the auditor selected a random sample of 60 items out of a population of
1,200 purchase orders. The auditor discovered $4,000 in overstatement in the sample. The company's
materiality is $65,000. The tolerable misstatement for purchases is $50,000. What should the auditor do
next?
a. Pass on the exceptions.
b. Propose an adjustment to purchases.
c. Consider expanding the size of the sample.
d. Project the detected error to the entire population.

Page Reference: 88
ANSWER:
Choice "d" is correct. After identification of misstatements in the sample, the next step is to project the
detected error to the entire population.
Choice "a" is incorrect. The auditor should not pass on these misstatements. These misstatements should
be projected and considered when the auditor forms their conclusion about purchases.
Choice "b" is incorrect. The auditor may propose an adjustment to management; however, this would
occur after projecting the misstatements to the population.
Choice "c" is incorrect. The next step the auditor should perform is projecting the error. Generally, the
auditor considers expanding the sample size based on factors other than the actual misstatement in the
sample.
Page 36 of 50

36. CPA-06225
Which of the following factors should an auditor consider most important upon subsequent discovery of
facts that existed at the date of the audit report and would have affected the report?
a. The cost-to-benefit ratio of performing additional procedures to better determine the impact of the
newly discovered facts.
b. The potential impact on financial statements and associated audit reports for the previous five
years.
c. The client's willingness to pay additional fees for the additional procedures to be performed.
d. The client's willingness to issue revised financial statements or other disclosures to persons known
to be relying on the financial statement.

Representative Task: AIII-G1.1
Page Reference: 74
ANSWER:
Choice "d" is correct. An auditor would consider the client's willingness to issue revised financial
statements or other disclosures to persons known to be relying on the financial statement the most
important factor upon subsequent discovery of facts that existed at the date of the audit report that would
have affected the report.
Choice "a" is incorrect. An auditor is required to determine the impact of the newly discovered facts
regardless of the cost-to-benefit ratio.
Choice "b" is incorrect. An auditor should determine the potential impact on financial statements and
associated audit reports for prior years (not limited to just five years).
Choice "c" is incorrect. The auditor's primary concern should not be on whether the auditor is going to be
paid by the client for the additional procedures. Instead, the auditor's primary concern should be ensuring
that revised financial statements or other disclosures are issued.
Page 37 of 50

37. CPA-06226
During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The
auditor determines that this transaction is inconsequential and several similar transactions would not be
material to the financial statements in the aggregate. Which of the following statements best describes
the auditor's required response to the discovery?
a. The auditor should fully investigate other transactions related to this manager to determine if fraud
exists.
b. The auditor should bring the transaction to the attention of an appropriate level of management.
c. The auditor should report this finding to those charged with governance.
d. The auditor's responsibility is satisfied by documenting that the single transaction is
inconsequential.

Page Reference: 9
ANSWER:
Choice "b" is correct. When the auditor has obtained evidence that fraud exists, it is important that the
matter be brought to the attention of the appropriate level of management as soon as practicable. This is
true even if the matter is considered inconsequential.
Choice "a" is incorrect. The auditor may decide to investigate other transactions related to this manager,
but that is up to the auditor's judgment. For example, an auditor may decide not to investigate other
transactions because the aggregate total of the transactions may be immaterial to the financial
statements.
Choice "c" is incorrect. The auditor is not required to report inconsequential fraud by a low-level manager
to those charged with governance. Those charged with governance should be notified of fraud if it
involves senior management, employees who have significant roles in internal control, or others when the
fraud results in a material misstatement in the financial statements.
Choice "d" is incorrect. The auditor has a duty to report fraud, even inconsequential, to the appropriate
level of management.
Page 38 of 50

38. CPA-06239
A practitioner has examined a client's compliance with debt covenants associated with a bank loan and is
ready to issue a report. Which of the following standards apply to the report?
a. Internal control standards.
b. Compliance attestation standards.
c. Agreed-upon procedures standards.
d. Auditing standards of field work.

Representative Task: AIV-D1.1
Page Reference: 65
ANSWER:
Choice "b" is correct. Compliance attestation standards apply for an examination of a client's compliance
with specified requirements, such as debt covenants associated with a bank loan. In addition,
examination engagements fall under attestation standards.
Choice "a" is incorrect. This engagement does not involve evaluating the effectiveness of the entity's
internal control. In addition, there are no standards referred to as "internal control standards."
Choice "c" is incorrect. Agreed-upon procedures apply when the practitioner is engaged to perform
agreed-upon procedures, not an examination.
Choice "d" is incorrect. Auditing standards apply to audits, not examinations.
Page 39 of 50

39. CPA-06227
Which of the following objectives is achieved when an auditor decides to employ classical variable
sampling?
a. To determine the reliability of voucher processing.
b. To determine the completeness of billing transactions.
c. To determine the inventory quantities on hand.
d. To determine the efficiency of the payroll system.

Page Reference: 86
ANSWER:
Choice "c" is correct. Determining the inventory quantities on hand is achieved when an auditor decides
to employ classical variable sampling. This sampling method helps the auditor determine the
reasonableness of the inventory account and is often performed during the inventory count.
Choice "a" is incorrect. Attribute sampling, rather than variable sampling, is used to determine the
reliability of voucher processing. Processing of transactions relates to tests of controls rather than
substantive testing.
Choice "b" is incorrect. Attribute sampling, rather than variable sampling, is used to determine the
completeness of billing transactions.
Choice "d" is incorrect. Determining the efficiency of the payroll system would not be achieved by
employing classical variable sampling. Attribute sampling should be used for this objective.
Page 40 of 50

40. CPA-06228
The client's financial reporting includes supplementary financial information outside the basic financial
statements but required by the Financial Accounting Standards Board (FASB). Which of the following
statements is correct regarding the auditor's responsibility for this supplementary financial information?
a. The auditor should perform limited procedures.
b. The auditor should apply tests of details of transactions.
c. The auditor is not required to report omissions.
d. The auditor should read the supplementary financial information.

Page Reference: 83
ANSWER:
Choice "a" is correct. An auditor should perform limited procedures on required supplementary
information.
Choice "b" is incorrect. An auditor is not required to apply tests of details of transactions on required
supplementary information. The auditor should perform limited procedures on required supplementary
information.
Choice "c" is incorrect. An auditor is required to report omissions of required supplementary information in
an other-matter paragraph or explanatory paragraph for a nonissuer or issuer, respectively.
Choice "d" is incorrect. Unlike other information, the auditor has to perform procedures beyond just
reading for required supplementary information. An auditor is required to perform limited procedures on
required supplementary information.
Page 41 of 50

41. CPA-06229
An auditor determines that a client who received a federal grant fraudulently reported information to the
federal government. The client's management refuses to acknowledge the fraud. Which of the following
parties should the auditor contact first?
a. The state accountancy board.
b. The state attorney general's office.
c. The agency that provided the grant.
d. The recipients of the client's services.

Representative Task: AI-F1.2
Page Reference: 89
ANSWER:
Choice "c" is correct. The auditor should first contact the specific agency that provided the grant to report
the fraud.
Choice "a" is incorrect. The auditor is not required to contact the state accountancy board to report the
fraud.
Choice "b" is incorrect. The auditor is not required to contact the state attorney's general office to report
the fraud.
Choice "d" is incorrect. The auditor is not required to contact the recipients of the client's services to
report the fraud.
Page 42 of 50

42. CPA-06230
Which of the following audit procedures, if used, should be combined with other audit procedures when
testing the operating effectiveness of controls?
a. Observation.
b. Inspection.
c. Inquiry.
d. Reperformance.

Page Reference: 8
ANSWER:
Choice "c" is correct. Inquiry should be corroborated with other audit procedures when testing the
operating effectiveness of controls. Inquiry alone is not sufficient to support a conclusion on the operating
effectiveness of controls.
Choice "a" is incorrect. Observation does not need to be combined with other audit procedures when
testing operating effectiveness of controls.
Choice "b" is incorrect. Inspection does not need to be combined with other audit procedures when
Choice "d" is incorrect. Reperformance does not need to be combined with other audit procedures when
Page 43 of 50

43. CPA-06231
Which of the following statements is most accurate regarding audit documentation requirements?
a. The auditor should document findings that could result in a modification of the auditor's report.
b. If different audit procedures were performed due to a lack of responsiveness by the client, the lack
of responsiveness should not be included in the working papers.
c. If an oral explanation serves as sufficient support for the work the auditor performed, the
explanation should be documented in the working papers.
d. If the results of audit procedures indicate a need to revise the previous assessment of risk, the new
assessment should be documented and the original assessment should be removed.

Representative Task: AI-D1.1
Page Reference: 16
ANSWER:
Choice "a" is correct. The auditor should document findings that could result in a modification of the
auditor's report.
Choice "b" is incorrect. If alternative audit procedures were performed due to a lack of responsiveness by
the client, the lack of responsiveness should be documented in the working papers.
Choice "c" is incorrect. On their own, oral explanations do not represent adequate support for the work
the auditor performed or conclusions the auditor reached, but may be used to explain or clarify
information contained in the audit documentation.
Choice "d" is incorrect. If the results of audit procedures indicate a need to revise the previous
assessment of risk, the new assessment and original assessment should be documented. The auditor
should also address responses to the new risk.
Page 44 of 50

44. CPA-06232
In an audit of financial statements for which an auditor's assessment of risk is judgmental and may not be
sufficiently precise to identify all risks of material misstatement, the auditor should take which of the
following actions?
a. Determine the effectiveness of general controls over classes of transactions characterized by high
transaction volume.
b. Perform substantive procedures for all relevant assertions related to each material class of
transactions.
c. Discuss strategies to eliminate such risks with top management or those with equivalent authority
and responsibility.
d. Consider whether risk assessment procedures are appropriate given preliminary levels of
materiality and tolerable misstatement.

Representative Task: AII-E3.1
Page Reference: 14
ANSWER:
Choice "b" is correct. In an audit of financial statements, substantive procedures will always be necessary
for all relevant assertions related to material transaction classes.
Choice "a" is incorrect. An auditor is not required to determine the effectiveness of controls in a financial
statement audit.
Choice "c" is incorrect. The auditors are responsible for their own assessment of risk and response to
risks. They should not discuss strategies to eliminate risks with top management.
Choice "d" is incorrect. Considering the appropriateness of risk assessment procedures does not
adequately respond to the fact that the auditor's assessment of risk is always subjective rather than
objective. The appropriate response is to perform substantive procedures for all relevant assertions
related to each material class of transactions.
Page 45 of 50

45. CPA-06233
The auditor should consider certain factors in assessing the efficiency and effectiveness of analytical
procedures as compared to tests of details. In determining whether and to what extent analytical
procedures should be used, which of the following should the auditor consider?
a. Interrelationships of financial information.
b. Nonfinancial information that may affect financial information.
c. The nature of the assertion tested.
d. Explanations provided by the client.

Page Reference: 50
ANSWER:
Choice "c" is correct. When evaluating whether and to what extent analytical procedures should be used,
the auditor should consider the nature of the assertion tested. The other factors the auditor considers are
the plausibility and predictability of the data relationship, availability and reliability of data used to develop
the expectation, and the precision of the expectation.
Choice "a" is incorrect. Interrelationships of financial information is not a direct factor that the auditor
considers when assessing the efficiency and effectiveness of analytical procedures. However, the auditor
may consider this when forming an expectation.
Choice "b" is incorrect. The consideration of nonfinancial information and its effect on the financial
information is not a direct factor that the auditor considers when assessing the efficiency and
effectiveness of analytical procedures. However, the auditor may consider this when forming an
expectation.
Choice "d" is incorrect. Explanations provided by management is not a direct factor when assessing the
efficiency and effectiveness of analytical procedures. However, the auditor may consider their
explanations when evaluating the results of analytical procedures.
Page 46 of 50

46. CPA-06234
A CPA had the management of Paper Plate Corp. prepare a letter requesting Paper Plate's external
counsel to identify any pending and/or unasserted claims against Paper Plate. The CPA received a letter
from the external counsel with the following response:
"We are only aware of the following: Paper Plate was named as the defendant in a class action
lawsuit for an alleged defective product manufactured two years ago. There is a remote possibility
that Paper Plate will suffer any damages, because this firm has successfully defended similar cases
in the past. However, similar cases that have been brought against competitors were settled between
$1.5 and $2 million."
Should the CPA accept the letter from the external counsel?
a. No, because the CPA allowed Paper Plate to prepare the letter.
b. Yes, even though the CPA did not get a specific amount of loss.
c. No, because the CPA did not consult a specialist in class action suits.
d. Yes, if the CPA discusses the prior lawsuits with the competitors' lawyers.

Page Reference: 45
ANSWER:
Choice "b" is correct. The auditor may accept the letter from external counsel even though the CPA did
not get a specific amount of loss.
Choice "a" is incorrect. Paper Plate is allowed to draft the letter to external legal counsel. Management of
Paper Plate will sign this letter because management needs to authorize the confidential legal information
to be released to the auditor. The auditor will then review the letter and mail it to the external counsel.
External counsel then responds directly to the auditor.
Choice "c" is incorrect. A CPA is not required to use a specialist in an audit.
Choice "d" is incorrect. A CPA is not required to discuss prior lawsuits with the competitors' lawyers.
Page 47 of 50

47. CPA-06235
Which of the following matters does an auditor usually communicate to management?
a. Arrangements involving a predecessor auditor.
b. Indications of adverse key financial ratios.
c. An agreement regarding preliminary materiality thresholds.
d. Identification of recurring operating losses.

Page Reference: 20
ANSWER:
Choice "a" is correct. The auditor usually communicates with management about arrangements involving
a predecessor auditor.
Choice "b" is incorrect. The auditor generally does not communicate indications of adverse key financial
ratios to management.
Choice "c" is incorrect. The auditor usually does not communicate materiality thresholds to management.
Choice "d" is incorrect. The auditor typically does not communicate with management about recurring
operating losses.
Page 48 of 50

48. CPA-06237
In which of the following engagements would a practitioner provide limited assurance about the possible
significant effects on the historical financial statements if a change in capitalization had occurred at an
earlier date?
a. A compilation of a financial projection.
b. A review of pro forma financial information.
c. An examination of management's discussion and analysis.
d. An audit of condensed interim financial information.

Page Reference: 48
ANSWER:
Choice "b" is correct. A review of pro forma financial information provides limited assurance about the
effect of a future or hypothetical event (in this case, a change in capitalization) by showing how it might
have affected the historical financial statements if it had occurred at an earlier date.
Tip: This question can be quickly answered by knowing that reviews provide limited assurance.
Choice "a" is incorrect. A compilation provides no assurance. In addition, this engagement does not
describe reporting on a financial projection. A financial projection presents an entity's expected financial
results based on one or more hypothetical assumption based on conditions the entity expects would exist
and the course of action it expects would be taken given the assumptions.
Choice "c" is incorrect. An examination provides reasonable assurance. In addition, this engagement
does not describe reporting on management discussion and analysis. Management discussion and
analysis is a written explanation provided by management about the past and future performance of the
entity.
Choice "d" is incorrect. An audit provides reasonable assurance. In addition, this engagement does not
describe reporting on condensed interim financial information. Condensed financial statements present
financial results in considerably less detail than complete financial statements.
Page 49 of 50

49. CPA-06238 (Adapted)

A report on an issuer's integrated audit must include each of the following statements, except:
a. The audit was conducted in accordance with AICPA standards.
b. The auditor believes the audit provides a reasonable basis for the issued opinion.
c. Management is responsible for maintaining effective internal control.
d. The audit includes obtaining an understanding of internal control over financial reporting.

Representative Task: AIV-A3.2
Page Reference: 22
ANSWER:
Choice "a" is correct. A report on an issuer's integrated audit must include the statement that the audit
was conducted in accordance of the standards of the Public Company Accounting Oversight Board (not
AICPA standards).
Choice "b" is incorrect. A report on an issuer's integrated audit must include the statement that the auditor
believes the audit provides a reasonable basis for the issued opinion.
Choice "c" is incorrect. A report on an issuer's integrated audit must include the statement that
management is responsible for maintaining effective internal control.
Choice "d" is incorrect. A report on an issuer's integrated audit must include the statement that the audit
includes obtaining an understanding of internal control over financial reporting.
Page 50 of 50

2017 AICPA Newly Released Simulations—Auditing
AUDITING
2017 AICPA Newly
Released Sims
Page 1 of 12

Task 3057_01
Unit & Sim # / Task Position A4_Sim 1 (116) / Task 6

Sim Task Name: Physical Inventory Results (AICPA R-2017)
Skill Level: Application
Web Repo ID: 2109
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Task 3057_01 (Selection List)
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Task 3057_01 (Solution)
Tip: Several selections can be quickly eliminated by knowing whether the transaction is a sale or purchase of
inventory.
Test count No. 1—Inspect supporting purchase documents for proper shipping terms and receiving
information to verify inclusion in inventory count
In this test count, the auditor's test count quantity was less than the inventory quantity per client records. The
client's explanation was that it included in its records inventory that was shipped FOB shipping point, which
was received on September 2, Year 1. This explanation indicates that it is a purchase of inventory because the
client received inventory. Items purchased with FOB shipping-point terms require the client to record the items
as inventory as soon as the vendor ships the inventory. Therefore, the auditor should inspect supporting
documents to support the client's explanation. Specifically, the auditor should verify proper shipping terms (that
it is FOB shipping point) and receiving information (verify number of items received) to verify the amount to be
included in the inventory count.
Test count No. 2—Inspect supporting sale and shipment documentation for proper shipping terms for
inclusion in inventory count
client's explanation was that the inventory was sold to a customer FOB destination and was not received by
the customer until September 2, Year 1. Inventory sold means that this is a sale of inventory. Items shipped
FOB destination require the client to record the sale and relief of inventory when the item has reached its
destination. In this case, the sale and relief of inventory will be recorded on September 2, Year 1 (after fiscal
year-end). Therefore, the auditor should inspect supporting documents to corroborate the client's explanation.
Specifically, the auditor should inspect supporting sale and shipment documentation for inclusion of these
items in the inventory count.
Test count No. 3—Inspect supporting purchase documents for proper shipping terms and receiving
information to verify inclusion in inventory count
explanation provided was that payments were made in advance for items received September 2, Year 1. This
transaction relates to a purchase transaction because the client is paying for items. The auditor needs to verify
that the items should be included in the count (i.e. verify the items were shipped FOB shipping point and were
shipped prior to or on August 30). The auditor should inspect supporting purchase documents for proper
shipping terms and receiving information to verify inclusion in the inventory count.
Test count No. 4—Request that client make appropriate correction to record additional inventory
In this test count, the auditor's test count quantity was more than the inventory quantity per client records. The
explanation provided was that inventory was received on August 30, Year 1, but the vendor shipment receipt
was not recorded. Inventory received prior to year-end needs to be included in the inventory count. Therefore,
the auditor should request that the client make an adjusting journal entry to record the additional inventory.
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Test count No. 5—Inspect supporting sale and shipment documentation for proper shipping terms for
inclusion in inventory count
explanation provided was that inventory was separated for a September 1 sale (after fiscal year-end) and was
held on dock for customer pickup. The items should be included in the count as of August 30 because this sale
is after year-end. Therefore, the auditor should inspect supporting sale and shipping documentation for proper
shipping terms (which would say customer pickup) for inclusion in the inventory count.
Test count No. 6—Review return shipment documentation to verify exclusion from inventory count
In this test count, the auditor's test count was more than the inventory quantity per client records. The
explanation provided was that additional items were identified as damaged and will be returned to the vendor.
Therefore, the auditor should review the return shipment documentation to verify that this inventory should be
excluded from the inventory count.
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Task 531_01

Sim Task Name: Journal Entry Testing (AICPA R-2017)
Web Repo ID: 2112
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Task 531_01 (Selection List)
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Task 531_01 (Solution)
Journal entry No. 1—Obtain management's bonus plan and eligible employee list and recalculate
expense
The auditor is trying to corroborate the journal entry and related explanation. This journal entry relates to
compensation for Year 2 (DR Salaries and wages expense) that will be paid in the subsequent year (CR
Accrued liabilities). To verify the accounts and the related amounts, the auditor should obtain management's
bonus plan and eligible employee list and recalculate salaries and wages expense to verify that it is at the
appropriate amount.
Journal entry No. 2—Confirm with the controller any changes in estimates
This journal entry is to adjust a machine's depreciation expense. Depreciation expense is affected by changes
in estimates (i.e., useful life). Changes in estimates are accounted for in the current year and prospectively.
Therefore, the accounts utilized (accumulated depreciation and depreciation expense) appear appropriate. To
obtain support for this adjustment, the auditor should confirm with the controller any changes in estimate (and
recalculate the expense).
Journal entry No. 3—Review board minutes for change in classification of long-lived assets
In this journal entry, there is a change in classification of an investment from held-to-maturity (non-current
asset classification) to trading security (current asset classification). Investment classification is based on the
intent of the client (i.e., holding the security to sell in the near future = trading; holding the investment until it
matures = held-to-maturity). To obtain support for the change in classification of this long-lived asset, the
auditor should review board minutes to verify the intent of this investment.
Journal entry No. 4—Propose adjusting entry to debit prior-year retained earnings
This journal entry relates to an adjusting journal entry that was proposed by the auditors related to the Year 1
financial statements. Because this is a correction of Year 1 financial statements and not Year 2, the journal
entry should be a debit to retained earnings. Correction of errors related to Year 1 financial statements should
not affect the Year 2 income statement.
Journal entry No. 5—Obtain financial statement of subsidiary
This journal entry is recording subsidiary income for Year 2. Based on the journal entry, the investment is
accounted for under the equity method. Under the equity method, when the investee reports income, the
investor (the client) records a DR Investment in stock (referred to in our FAR book as investment in investee)
and CR Investment income (referred to in our FAR book as equity in earnings/investee income). The amount
recorded is based on the percentage ownership of the company. For example, if the investee reports $100 on
its income statement and the client owns 25 percent of the entity, then the auditor would expect an amount of
$25 to be recorded. The auditor should obtain the financial statements of the subsidiary and then recalculate
this amount.
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Task 4246_01 Research

Sim Task Name: Research (AICPA R-2017)
Web Repo ID: 2100
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Task 4246_01 Research (Solution)
AT-C 395.86
Keywords: Report Date MD&A
For best results:
• Click on "advanced search"

• In "containing all these words" type Report Date MD&A
• Click on "search"
Page 12 of 12

AUD - 2017 AICPA Released Questions PDF

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2017 AICPA Newly Released Questions—Auditing

Registered to Andrea Rosillo (#818104)

2017 AICPA Auditing Newly Released MCQs—Medium (Moderate) Rating

Unit & Module to be Assigned To: A-3, M-2

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Unit & Module to be Assigned To: A-2, M-9

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