Free Practice Questions for AICPA CPA-Auditing Exam

Question 1

Which of the following professional services would be considered an attest engagement?

AA management consulting engagement to provide EDP advice to a client.

BAn engagement to report on management's discussion and analysis (MD&A).

CAn income tax engagement to prepare federal and state tax returns.

DThe compilation of financial statements from a client's accounting records.

Correct Answer: B. An engagement to report on management's discussion and analysis (MD&A).

Explanation:

Choice 'b' is correct. An engagement to report on management's discussion and analysis (MD&A) would be considered an attest engagement, because the accountant is issuing an examination, review, or agreed-upon procedures report on another party's assertion.

Choice 'a' is incorrect. A management consulting engagement to provide EDP advice to a client is not considered to be an attest engagement, because the accountant is not issuing an examination, review, or agreed-upon procedures report on another party's assertion.

Choice 'c' is incorrect. An income tax engagement to prepare federal and state tax returns is not considered to be an attest engagement.

Choice 'd' is incorrect. The compilation of financial statements from a client's accounting records (a compilation engagement) is not considered to be an attest engagement. (Note that although a compilation of prospective financial statements is covered under Statements on Standards for Attestation Engagements, the question does not indicate that prospective financial statements are involved).

Question 2

Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an:

AUnqualified opinion.

BOpinion qualified because of a lack of consistency.

COpinion qualified because of a departure from GAAP.

DAdverse opinion.

Correct Answer: A. Unqualified opinion.

Explanation:

Choice 'a' is correct. GAAP allows a company to use different methods for costing different inventories as long as the methods are disclosed. Thus, the audit report would be unqualified; there is no departure from GAAP.

Choice 'b' is incorrect. The consistency standard refers to changes in application of accounting practices between periods, affecting the comparability of financial statements. There is no indication Digit made any change in methods.

Choice 'c' is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in a qualification of the auditor's report.

Choice 'd' is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in an adverse report.

Question 3

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the:

ALevel of detection risk.

BExtent of tests of details.

CLevel of inherent risk.

DExtent of tests of controls.
Explanation
Choice 'b' is correct. An increase in the assessed level of control risk means that the assessed risk of material misstatement has also increased, and this requires a corresponding decrease in detection risk to maintain the same (presumably low) level of overall audit risk. Increasing the extent of tests of details will result in a reduction in detection risk.
Choice 'a' is incorrect. Increasing detection risk would result in a corresponding increase in overall audit risk, which is the opposite of the desired response.
Choice 'c' is incorrect. The auditor cannot change the level of inherent risk, which is based on the nature of the related assertion.
Choice 'd' is incorrect. If the auditor has already determined that certain control activities are ineffective, increasing the extent of those tests is not likely to be helpful. The auditor needs to find a way to compensate for the increased level of risk in order to keep overall audit risk to a low level.

Correct Answer: B. Extent of tests of details.

Question 4

Gearty & Duffy, certified public accountants, have been engaged to perform a single audit of Sleepy Knoll Township, a local government receiving substantial federal financial assistance for community development and housing assistance. A single audit represents:

AAn audit of annual activity of only federal financial assistance programs over the course of the town's fiscal year.

BAn inception to date audit of only federal financial assistance programs over the course of the grant year specified by the grant award.

CAn audit of the township's financial statements and of compliance with federal regulations relating to federal financial assistance as prescribed by the Single Audit Act and OMB Circular A-133.

DAn audit of the township's financial statements and the fair presentation of the revenues derived from federal financial assistance.

Correct Answer: C. An audit of the township's financial statements and of compliance with federal regulations relating to federal financial assistance as prescribed by the Single Audit Act and OMB Circular A-133.

Explanation:

Choice 'c' is correct. A single audit represents a combined audit of both an entity's financial statements and federal financial assistance programs. The single audit provides audited organizations with the opportunity to capitalize on the efficiency of satisfying their audit requirements with a single audit.

Auditors are governed by the Single Audit Act and OMB Circular A-133.

Choice 'a' is incorrect. A single audit is not simply an audit of federal financial assistance.

Choice 'b' is incorrect. A single audit is not simply an audit of federal financial assistance.

Choice 'd' is incorrect. A single audit is not limited to expression of an opinion on the fair presentation of financial statements. It also is designed to report on compliance with laws, rules, and regulations.

Question 5

Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has:

AIdentified and disclosed all laws and regulations that have a direct and material effect on its financial statements.

BImplemented internal controls designed to detect all illegal acts.

CExpressed both positive and negative assurance to the auditor that the entity complied with all laws and regulations.

DEmployed internal auditors who can report their findings, opinions, and conclusions objectively without fear of political repercussion.

Correct Answer: A. Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements.

Explanation:

Choice 'a' is correct. The auditor should obtain written representation that management has disclosed all laws and regulations that have a direct and material effect on its financial statements.

Choice 'b' is incorrect. Management need not acknowledge that it has implemented internal control activities to detect all illegal acts.

Choice 'c' is incorrect. Management should state that it is responsible for compliance with all laws and regulations.

Choice 'd' is incorrect. Management need not employ internal auditors.

Question 6

Which of the following services performed by another entity would not be considered to be part of the client's information system?

AProcessing of the client's accounting transactions by an electronic data processing service center.

BPreparation of the client's financial statements by an outside accounting organization.

CInitiation of the client's weekly payroll transactions by a payroll processing organization.

DSale (specifically authorized by the client) of investment securities by an external broker.
Explanation
Choice 'd' is correct. Services performed by another organization are not considered to be part of the client's information system if the services provided are limited to executing transactions that are specifically authorized by the client.
Choice 'a' is incorrect. A service organization's services are part of an entity's information system if they affect any of the following: How the entity's transactions are initiated; the accounting records, supporting information, and specific accounts in the financial statements involved in the processing and reporting of the entity's transactions; the accounting processing involved from the initiation of transactions to their inclusion in the financial statements, including electronic means used to transmit, process, maintain, and access information; and the financial reporting process used to prepare the entity's financial statements, including significant accounting estimates and disclosures.
Choice 'b' is incorrect. As described more fully above, a service organization's services are part of an entity's information system if they affect the initiation, processing, or reporting of the entity's transactions.
Choice 'c' is incorrect. As described more fully above, a service organization's services are part of an entity's information system if they affect the initiation, processing, or reporting of the entity's transactions.

Correct Answer: D. Sale (specifically authorized by the client) of investment securities by an external broker. Explanation Choice 'd' is correct. Services performed by another organization are not considered to be part of the client's information system if the services provided are limited to executing transactions that are specifically authorized by the client. Choice 'a' is incorrect. A service organization's services are part of an entity's information system if they affect any of the following: How the entity's transactions are initiated; the accounting records, supporting information, and specific accounts in the financial statements involved in the processing and reporting of the entity's transactions; the accounting processing involved from the initiation of transactions to their inclusion in the financial statements, including electronic means used to transmit, process, maintain, and access information; and the financial reporting process used to prepare the entity's financial statements, including significant accounting estimates and disclosures. Choice 'b' is incorrect. As described more fully above, a service organization's services are part of an entity's information system if they affect the initiation, processing, or reporting of the entity's transactions. Choice 'c' is incorrect. As described more fully above, a service organization's services are part of an entity's information system if they affect the initiation, processing, or reporting of the entity's transactions.

Question 7

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

AInability to generate cash flows from operations while reporting substantial earnings growth.

BManagement's lack of interest in increasing the entity's stock trend.

CLarge amounts of liquid assets that are easily convertible into cash.

DInability to borrow necessary capital without granting debt covenants.
Explanation
Choice 'a' is correct. An auditor's concern about the risk of fraudulent financial reporting would be heightened if the entity were unable to generate cash flows from operations, but still reported substantial earnings growth, since these two occurrences are somewhat inconsistent.
Choice 'b' is incorrect. Management's excessive interest in increasing the stock price and earnings trend is a fraud risk factor; lack of such interest would not cause concern.
Choice 'c' is incorrect. Large amounts of liquid assets that are easily convertible into cash would heighten an auditor's concern about misappropriation of assets, not about fraudulent financial reporting.
Choice 'd' is incorrect. The need to grant debt covenants when borrowing capital is an ordinary occurrence that would not heighten the auditor's concern.

Correct Answer: A. Inability to generate cash flows from operations while reporting substantial earnings growth.

Question 8

An examination of a financial forecast is a professional service that involves:

ACompiling or assembling a financial forecast that is based on management's assumptions.

BLimiting the distribution of the accountant's report to management and the board of directors.

CAssuming responsibility to update management on key events for one year after the report's date.

DEvaluating the preparation of a financial forecast and the support underlying management's assumptions.

Correct Answer: D. Evaluating the preparation of a financial forecast and the support underlying management's assumptions.

Explanation:

Choice 'd' is correct. An examination of a financial forecast is a professional service that involves:

1) evaluating the preparation of the prospective financial statements,

2) evaluating the support underlying the assumptions,

3) evaluating the presentation of the prospective financial statements in conformity with AICPA guidelines, and

4) issuing an examination report.

Choice 'a' is incorrect. Compiling or assembling a financial forecast based on management's assumptions is part of a compilation engagement, not an examination engagement.

Choice 'b' is incorrect. A financial forecast may be issued for general use.

Choice 'c' is incorrect. The accountant's standard report specifically states that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.

Question 9

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

ACan more easily convert the sample into a dual-purpose test useful for substantive testing.

BEliminate the need to use judgment in determining appropriate sample sizes.

CAfford greater assurance than a nonstatistical sample of equal size.

DProvide an objective basis for quantitatively evaluating sample risk.

Correct Answer: D. Provide an objective basis for quantitatively evaluating sample risk.

Explanation:

Choice 'd' is correct. By using statistical sampling, the auditor can quantify sampling risk to assist in limiting it to a level considered acceptable.

Choice 'a' is incorrect. Statistical sampling does not provide any advantage with respect to converting the test into a dual-purpose test.

Choice 'b' is incorrect. Statistical sampling still requires judgment to determine sample sizes. The tolerable rate of deviation, the likely rate of deviation, and the allowable risk of assessing control risk too low are all determined by the auditor's professional judgment.

Choice 'c' is incorrect. Statistical sampling does not afford greater assurance than a nonstatistical sample of the same size. It only provides the auditor with a better measure of the sufficiency of the evidence found, and helps to evaluate the results found.

Question 10

When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that:

AStates that the income tax basis of accounting is a comprehensive basis of accounting other than generally accepted accounting principles.

BJustifies the use of the income tax basis of accounting.

CEmphasizes that the financial statements are not intended to have been audited in accordance with generally accepted auditing standards.

DRefers to the authoritative pronouncements that explain the income tax basis of accounting being used.

Correct Answer: A. States that the income tax basis of accounting is a comprehensive basis of accounting other than generally accepted accounting principles.

Explanation:

Choice 'a' is correct. When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that states that the income tax basis of accounting is a comprehensive basis of accounting other than GAAP (included in the third paragraph of the special report).

Choice 'b' is incorrect. The special report does not justify the use of the income tax basis of accounting.

Choice 'c' is incorrect. The financial statements are audited in accordance with GAAS (as stated in the first sentence in the second paragraph of the report).

Choice 'd' is incorrect. The report does not refer to the authoritative pronouncements that explain the income tax basis of accounting being used.

Question 11

An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. The prior-period financial statements are restated in the current period to conform with generally accepted accounting principles.

The auditor's updated report on the prior-period financial statements should:

AExpress an unqualified opinion concerning the restated financial statements.

BBe accompanied by the original auditor's report on the prior period.

CBear the same date as the original auditor's report on the prior period.

DQualify the opinion concerning the restated financial statements because of a change in accounting principle.

Correct Answer: A. Express an unqualified opinion concerning the restated financial statements.

Explanation:

Choice 'a' is correct. When prior-period financial statements are restated in the current period to conform with GAAP, the auditor's updated report on the prior-period financial statements should express an unqualified opinion concerning the restated financial statements.

Choice 'b' is incorrect. The original auditor's report on the prior period should not be presented.

Choice 'c' is incorrect. The original report date is used only if the original report is reissued unchanged.

Choice 'd' is incorrect. A change in accounting principle that is properly accounted for does not result in a qualified opinion.

Events Occurring After Year-end

Question 12

Which of the following control activities is not usually performed in the vouchers payable department?

ADetermining the mathematical accuracy of the vendor's invoice.

BHaving an authorized person approve the voucher.

CControlling the mailing of the check and remittance advice.

DMatching the receiving report with the purchase order.

Correct Answer: C. Controlling the mailing of the check and remittance advice.

Explanation:

Choice 'c' is correct. Internal control is enhanced if check mailing is performed by the treasury (cash disbursements) department.

Choice 'a' is incorrect. Mathematical accuracy of the vendor's invoice is usually verified in the vouchers payable department.

Choice 'b' is incorrect. Voucher approval by an authorized person is usually performed in the vouchers payable department.

Choice 'd' is incorrect. Matching the receiving report with the purchase order is usually performed in the vouchers payable department.

Question 13

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

AA substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.

BA substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

CA small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.

DA small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

Correct Answer: D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

Explanation:

Choice 'd' is correct. The use of negative confirmations most likely would be justified when there are a small number of accounts that may be in dispute and the accounts receivable balance arises from sales to many customers with small balances (e.g., utility consumer customers).

Choice 'a' is incorrect. Positive (not negative) confirmations should be used when a substantial number of accounts are expected to be in dispute, or if the accounts receivable balance is comprised of accounts from a few major customers.

Choice 'b' is incorrect. Positive (not negative) confirmations should be used when a substantial number of accounts are expected to be in dispute.

Choice 'c' is incorrect. Positive (not negative) confirmations should be used when the accounts receivable balance is comprised of accounts from a few major customers.

Question 14

On February 9, Brown, CPA, expressed an unqualified opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first:

ARequest Web's permission to perform substantive procedures that would provide a satisfactory basis for the opinion.

BInquire of Web whether there are persons currently relying, or likely to rely, on the financial statements.

CTake no additional action because subsequent events have no effect on the financial statements that were reported on.

DAssess the importance of the omitted procedures to Brown's present ability to support the opinion.

Correct Answer: D. Assess the importance of the omitted procedures to Brown's present ability to support the opinion.

Explanation:

Choice 'd' is correct. If an omitted audit procedure is discovered, the auditor should assess the importance of the omitted procedure to the auditor's ability to support the opinion. It might be the case that other audit procedures tended to compensate for the omitted procedure, in which case no further action would be necessary.

Choice 'a' is incorrect. The auditor would only request permission to perform substantive procedures if no other procedures compensated for the missing one, and if there were persons relying (or likely to rely) on the financial statements.

Choice 'b' is incorrect. The auditor would need to determine whether there were persons relying (or likely to rely) on the financial statements, but this would not be done unless it had already been determined that no other audit procedures compensated for the missing one.

Choice 'c' is incorrect. If the omitted audit procedure impairs the auditor's ability to support the opinion, no other procedures compensated for the missing one, and there were persons relying (or likely to rely) on the financial statements, the auditor would need to apply substantive procedures. Taking no action would not be an acceptable response.

Reporting on Other Information

Question 15

An auditor obtains knowledge about a new client's business and its industry to:

AMake constructive suggestions concerning improvements to the client's internal control.

BDevelop an attitude of professional skepticism concerning management's financial statement assertions.

CEvaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.

DUnderstand the events and transactions that may have an effect on the client's financial statements.
Explanation
Choice 'd' is correct. The auditor should obtain knowledge of the client's business and its industry in order to determine the effect of transactions, events, and practices on the client's financial statements.
Choice 'a' is incorrect. Constructive suggestions concerning improvements in the new client's internal control are generally made after the study and evaluation of the client's internal control, performed subsequent to planning. Knowledge about the new client's business and its industry is generally obtained during planning.
Choice 'b' is incorrect. The auditor should have an attitude of professional skepticism in conducting the engagement, but this attitude is not necessarily related to the auditor's knowledge of the new client's business and its industry.
Choice 'c' is incorrect. The auditor should evaluate whether the aggregation of known misstatements materially affects the financial statements, but this is done near the audit's conclusion. Knowledge about the new client's business and its industry is generally obtained during planning.

Correct Answer: D. Understand the events and transactions that may have an effect on the client's financial statements. Explanation Choice 'd' is correct. The auditor should obtain knowledge of the client's business and its industry in order to determine the effect of transactions, events, and practices on the client's financial statements. Choice 'a' is incorrect. Constructive suggestions concerning improvements in the new client's internal control are generally made after the study and evaluation of the client's internal control, performed subsequent to planning. Knowledge about the new client's business and its industry is generally obtained during planning. Choice 'b' is incorrect. The auditor should have an attitude of professional skepticism in conducting the engagement, but this attitude is not necessarily related to the auditor's knowledge of the new client's business and its industry. Choice 'c' is incorrect. The auditor should evaluate whether the aggregation of known misstatements materially affects the financial statements, but this is done near the audit's conclusion. Knowledge about the new client's business and its industry is generally obtained during planning.