CPA AUD Practice Exam 2 Welcome to your CPA AUD Practice Exam 2 This test is designed to prepare you mentally for the actual CPA AUD Exam with the same number of (72 questions) and the same time allowed (90 minutes) as the actual exam. The CPA AUD Exam is breakdown into four (4) Parts. Here are the Four (4) Domains of the CPA AUD Exam with the weightage and number of questions in this practice exam: 1. Ethics, Professional Responsibilities, and General Principles [14 Questions] - 15-25% 2. Assessing Risk and Developing a Planned Response [22 Questions] - 25-35% 3. Performing Further Procedures and Obtaining Evidence [25 Questions] - 30-40% 4. Forming Conclusions and Reporting [11 Questions] - 10-20% Please click NEXT to start your Free CPA AUD Practice Exam right away. Best of Luck! 1. Which of the following communications between the auditor with final responsibility for an engagement and the audit engagement team regarding the susceptibility of a client's financial statements to material misstatements due to error or fraud is required by auditing standards? Explaining all procedures to be performed on the engagement to detect significant errors or fraudulent activity. Discussing the need to maintain a questioning mind and to exercise professional skepticism throughout the audit. Explaining the firm's strategy for managing and controlling legal liability due to fraud. Discussing the firm's policy for allocating budgeted audit hours to detect fraud. None 2. Each of the following questions to a predecessor auditor can help a successor auditor determine whether to accept an initial audit engagement, except: Were there any disagreements with management related to accounting policies? How would you describe the integrity of management? How would you assess inherent risk and control risk of the entity? What is your understanding about the reasons for a change in auditor? None 3. Which of the following factors does not influence a CPA firm's quality control policies and procedures? The size of the firm. The nature of the firm's practice. Cost-benefit considerations. The Sarbanes-Oxley Act. None 4. Which of the following is correct regarding the Auditing Standards Board's Statements on Quality Control Standards? The standards include the policies and procedures to be followed by CPA firms. The standards are implemented at the CPA firm level. The standards are implemented at the engagement level. The standards are applicable only at the engagement partner level. None 5. Which of the following statements correctly defines the term reasonable assurance? A substantial level of assurance to allow an auditor to detect a material misstatement. A significant level of assurance to allow an auditor to detect a material misstatement. An absolute level of assurance to allow an auditor to detect a material misstatement. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement. None 6. Which of the following statements most likely would be included in an engagement letter from an auditor to a client? The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement. The CPA firm is responsible for ensuring that the client complies with applicable laws. The CPA firm will involve information technology specialists in the performance of the audit. The CPA firm will adjust the financial statements to correct misstatements before issuing a report. None 7. An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it Changes the company's operating results from a net loss to a net income. Arises from a transaction cycle with controls that were determined to be operating effectively. Is the first time a misstatement has arisen from the relevant transaction cycle. Decreases management's incentive compensation for the period. None 8. A CPA in charge of the external audit of a nonissuer received an unexpected inheritance that includes 100 shares of the audit client's common stock. Which of the following actions should the CPA take to avoid violating independence rules? Decline to accept the inheritance. Petition the AICPA for an independence exception from unforeseen circumstances. Resign from the audit firm. Sell or donate the stock within 30 days after receipt of ownership rights. None 9. Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance? A distinguishing mark of a profession is its acceptance of responsibility to the public. A requirement for a profession is to establish ethical standards that stress primary responsibility to clients and colleagues. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. None 10. According to the ethical standards of the profession, which of the following acts is generally prohibited? Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client. Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society. Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent. Retaining client records after an engagement is terminated prior to completion and the client has demanded their return. None 11. According to the SEC, members of an issuer's audit committee may not Establish procedures for employees to anonymously report fraud. Be responsible for the compensation of any registered public accounting firm employed by the entity to provide an audit report. Accept any consulting, advisory, or other compensation fee from the entity for services other than as a member of the board. Engage independent counsel as deemed necessary to carry out their duties. None 12. A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities are not material to the CPA's wealth but are material to the child's personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA's independence with the client? No, because the CPA would not have a direct financial interest in the client. Yes, because the stock would be a direct financial interest and materiality is a factor. Yes, because the stock would be an indirect financial interest and materiality is not a factor. Yes, because the stock would be a direct financial interest and materiality is not a factor. None 13. According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee? Performing an audit of a financial statement. Performing a review of a financial statement. Performing an examination of prospective financial information. Seeking a private letter ruling. None 14. According to the AICPA Code of Professional Conduct, which of the following positions would be considered a key position with an audit client? A marketing position related to the client's primary products. A policy-making position in the client's finance division. A staff position in the client's research and development division. A senior position in the client's human resources division. None 15. Which of the following is most likely not a reason to perform tests of controls? Risk of material misstatement is assessed at a lower level. Performing tests of controls will be more efficient than performing substantive testing. The auditor believes weaknesses exist in the internal control design. The auditor believes the internal controls can be relied on. None 16. When planning an audit, an auditor is required to assess which of the following with respect to internal controls? Whether they are well designed. Whether they operate effectively. Whether they are applied consistently. Whether they cover every assertion for each account. None 17. Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls? The amount of time budgeted to complete the engagement. The size and complexity of the client. The nature of specific relevant controls. The auditor's prior experience with client operations. None 18. What is a service auditor's responsibility, if any, with regard to other information presented in a document containing management's description of its system and the service auditor's report? The auditor has no responsibility with regard to the other information presented. To read the other information in order to identify material inconsistencies or misstatements. To ensure that the format of the other information is consistent with industry practice. To obtain supporting documentation for the other information. None 19. Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity? Inquiry of client personnel. Inspection of documents and reports. Observation of client personnel. Preparation of system flowcharts None 20. Which of the following statements is correct concerning significant deficiencies in an audit? An auditor is required to search for significant deficiencies during an audit. An auditor should consider all significant deficiencies to be material weaknesses. An auditor may communicate significant deficiencies during an audit or after the audit's completion. An auditor may report that no significant deficiencies were noted during an audit. None 21. On the basis of audit evidence, an auditor decides to increase the assessed level of control risk. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would likely Decrease detection risk. Decrease materiality levels. Decrease substantive testing. Increase inherent risk. None 22. Which of the following is a step in an auditor's decision to assess control risk below the maximum level? Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. Perform tests of details of transactions and account balances to identify potential errors and irregularities. Identify specific internal control policies and procedures that are likely to detect or prevent material misstatements. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing. None 23. Each of the following is a function of an entity's control risk, except The process for approving transactions. The process of implementing new business processes. The entity's regulatory environment. Management's risk assessment for financial reporting. None 24. Which of the following is a computer program that appears to be legitimate but performs some illicit activity when it is run? Hoax virus. Web crawler. Trojan horse. Killer application. None 25. To obtain an understanding a nonissuer's internal control structure during a GAAS financial audit, an auditor is not required to Consider factors that affect the risk of material misstatement. Ascertain whether internal control structure policies and procedures have been placed in operation. Identify the types of misstatements that can occur. Obtain knowledge about the internal control structure's operating effectiveness. None 26. An audit client has implemented an electronic data interchange (EDI) system for interacting with customers and suppliers. Which of the following is the expected result for the audit client? Increased accounts receivable turnover ratio. Longer operating cycle. Increased data security. Reduced need for data translation software. None 27. Which of the following factors affecting the risk associated with a control is not a consideration when designing the current-year audit procedures in an audit of internal control over financial reporting for an issuer? Whether there have been changes in the operation of a key control since the previous audit. The results of the previous years' testing of the control. The nature, timing, and extent of procedures performed in previous audits. Whether the control has been documented in flowchart or narrative form. None 28. Which of the following sets of controls over information technology is the auditor of an issuer most likely to examine first in audit planning? Input controls. Processing controls. Output controls. Change management controls. None 29. Which of the following steps might an auditor take as part of the risk assessment procedure to obtain an understanding of the entity's environment and internal controls? Obtain a management representation letter. Perform analytical procedures. Obtain attorney letters from external attorneys. Confirm accounts receivable balances. None 30. Which of the following topics would not be included in a report on internal control matters noted in a nonissuer financial statement audit? No material weaknesses in internal control were identified in the audit. There were no significant deficiencies in internal control design or operation. The information included in this report is restricted to specific users. The audit was not designed to discover all internal control deficiencies. None 31. A nonissuer's previously communicated internal control deficiency has not been corrected. Ordinarily, this deficiency would not be communicated again if The auditor's assessment of control risk remains the same. The cost of correction outweighs the benefit. Management accepts the risk posed by the deficiency. It is no longer a significant deficiency. None 32. Which of the following is true regarding a nonissuer engagement that results in an opinion on internal control over financial reporting? The engagement objective is to search for and identify internal control weaknesses and deficiencies. The engagement must always be part of an integrated audit. The engagement that results in an opinion indicating a material weakness always indicates a material financial misstatement. The engagement results in a single opinion None 33. Which of the following statements is correct concerning internal control deficiencies that are noted in an audit and are required to be communicated to the appropriate level of the client's governance? All internal control deficiencies must be reported to management and those charged with governance, regardless of the type of audit engagement. Only material weaknesses and significant deficiencies identified in connection with financial audits must be reported to management and those charged with governance. Audit engagements for issuers or nonissuers must include an opinion on the effectiveness of internal controls. Only audits of issuers require written communications to management regarding internal control deficiencies None 34. When comparing a nonissuer financial statement audit with an integrated audit, which of the following statements would be correct? Both audits have a similar purpose. Both audits have a similar scope. Both audits follow similar procedures. Both audits result in a single opinion. None 35. In an integrated audit of a nonissuer, an auditor finds a combination of control deficiencies that have a reasonable possibility of causing a material misstatement on the financial statements. The auditor should take which of the following actions? Issue an adverse opinion on the material weakness. Issue an unmodified opinion with an explanatory paragraph. Issue an unmodified opinion because no misstatement was detected. Issue an except for qualified opinion on the material weakness. None 36. Which of the following most likely indicates a material weakness in internal control? Fraud by senior management, whether material or immaterial. Deficiency in a control's design that makes it reasonably possible an immaterial misstatement will occur. Poor execution of a well-designed control that makes it remotely possible a material misstatement will occur. A flaw in the execution of a well-designed control that, if not corrected, makes it probable an immaterial misstatement will occur. None 37. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? Determine whether inventory ordered before the year end was included in the physical count. Inquire about payroll checks that were recorded before year end but cashed after year end. Investigate changes in capital stock recorded after year end. Review tax returns prepared by management after year end. None 38. A CPA firm has decided to rely on the audit work performed by another audit firm. Which of the following procedures should the CPA firm perform when taking responsibility for the other firm's audit work? Review the other firm's documentation of identified risks of material misstatement. Reference the reliance on the other firm's work in a footnote disclosure to the financial statements. Reference the reliance on the other firm's work in the opinion section of the audit report. Obtain and attach a copy of the other firm's representation letter and audit report to the opinion that the CPA firm issues. None 39. Sufficient audit documentation should enable an experienced auditor, without direct knowledge about the client, to understand the conclusions reached by the audit engagement team. Which of the following statements describes sufficient audit documentation? Reflects the work performed, who performed the work, and who reviewed the work. Includes every matter considered during the audit. Indicates the client reviewed the work performed and agreed with conclusions. Notes that audit conclusions avoided the use of professional judgment. None 40. An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to Identify unusually large purchases that should be investigated further. Verify that cash disbursements were for goods actually received. Determine that purchases were properly recorded. Test whether payments were for goods actually ordered. None 41. Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer? "Sufficient evidential matter has been made available to the auditor to permit the issuance of an unqualified opinion." "There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed." "We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities." "No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements." None 42. Of which of the following matters is a management representation letter required to contain specific representations? Length of a material contract with a new customer. Information concerning fraud by the CFO. Reason for a significant increase in revenue over the prior year. The competency and objectivity of the internal audit department. None 43. Which of the following statements is most accurate regarding sufficient and appropriate documentation? Accounting estimates are not considered sufficient and appropriate documentation. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years. None 44. An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that Fictitious credit sales have been recorded during the year. Employees have stolen inventory just before the year end. The client recently tightened its credit-granting policies. An employee has been lapping receivables in both years. None 45. Which of the following would more likely be included in the current file rather than the permanent file? Audit program. Control flowcharts. Long-term debt account information. Board of director meeting minutes None 46. Which of the following procedures would an auditor most likely follow to assess the client’s rights and obligations regarding its inventory? Review supplier catalogs to estimate the replacement cost of the inventory on hand Inspect the inventory on hand Examine vendor invoices for the inventory Read the financial statements and trace purchases into the purchases journal None 47. Which of the following most likely would be detected by an auditor’s review of a client’s sales cut-off? Shipments lacking sales invoices and shipping documents. Excessive write-offs of an accounts receivable. Unrecorded sales at year-end. Lapping of year-end accounts receivable. None 48. When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation? Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test. Reevaluate the risk of fraud, and design alternate tests for the related transactions. Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices. Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors. None 49. "Choose the correct statement(s) regarding the auditing of debt obligations. A typical audit plan for debt obligations will rely heavily on sampling. An auditor will focus on the management assertion of existence in order to determine that debt obligations are not understated. Common analytical procedures performed while auditing debt obligations include analyzing ratios between related accounts such as interest expense and notes payable." II and III only III only I and II only I, II, and III None 50. An auditor scans a client's investment records for the period just before and just after the year end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertions of Rights and obligations, and existence or occurrence. Valuation or allocation, and rights and obligations. Existence or occurrence, and presentation and disclosure. Presentation and disclosure, and valuation or allocation None 51. Which of the following analytical procedures would an auditor most likely perform to assess the risk that employees are erroneously or fraudulently paid after termination? Sending confirmations to the banks of terminated employees. Inspecting personnel documents for a sample of terminated employees. Comparing employee termination logs to the payroll disbursements journal. Calculating the number of terminated employees in both the current and prior year. None 52. An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to Verify that payroll taxes are deducted from employees' gross pay. Determine whether internal control activities are operating effectively. Uncover fictitious employees who are receiving payroll checks. Identify potential liabilities for unpaid payroll taxes. None 53. Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? "I believe that the plaintiff will have problems establishing any liability." "I believe that this action has only a remote chance in establishing any liability." "I believe that the plaintiff's case against the company is without merit." "I believe that this action will be dismissed by the courts." None 54. Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit? When the client maintains periodic inventory records. When the auditor finds minimal variations in client records and test counts in prior periods. When total inventory has not varied more than 5% in the last five years. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts. None 55. An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized? Cash. Depreciation expense. Property tax expense. Repairs and maintenance. None 56. Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? Inspecting title documents to verify whether any assets are pledged as collateral. Calculating current ratio. Reconciling the cash balance per books with the bank confirmation. Comparing the entity's depreciation polices with other entities in the industry None 57. In a probability-proportional-to-size (PPS) sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $12,000 had an audited amount of $11,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be $833 $960 $1,000 $2,000 None 58. As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate. The most likely explanation for this situation is that The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate. The deviation rates of both the auditor's sample and the population exceed the tolerable rate. The deviation rates of both the auditor's sample and the population are less than the tolerable rate. None 59. For which of the following audit tests would an auditor most likely use attribute sampling? Inspecting purchase orders for proper approval by supervisors. Making an independent estimate of recorded payroll expense. Determining that all payables are recorded at year end. Selecting accounts receivable for confirmation of account balances. None 60. An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement. There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements. The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement. The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements. None 61. The risk of incorrect acceptance and the likelihood of assessing risk of material misstatement too low relate to the Allowable risk of tolerable misstatement. Preliminary estimates of materiality levels. Efficiency of the audit. Effectiveness of the audit. None 62. On August 13, a CPA completed field work on an engagement to audit financial statements for the year ended June 30. On August 27, an event came to the CPA's attention that should be disclosed in the notes to the financial statements. The event was properly disclosed by the entity, but the CPA decided not to dual date the auditor's report and dated the report August 27. Under these circumstances, the CPA was taking responsibility for All subsequent events that occurred through August 27. Only the specific subsequent event disclosed by the entity. All subsequent events that occurred through August 13 and the specific subsequent event disclosed by the entity. Only the subsequent events that occurred through August 13. None 63. For which of the following events would an auditor issue a report that omits any reference to consistency? A change in the method of accounting for inventories. A change from an accounting principle that is not generally accepted to one that is generally accepted. A change in the useful life used to calculate the provision for depreciation expense. Management's lack of reasonable justification for a change in accounting principle. None 64. A CPA is engaged to audit a nonissuer's current year financial statements for use in a comparative presentation with those of the prior year. The prior year's financial statements were reviewed by another CPA but the review report is not being reissued. Under these circumstances, the CPA should issue a (an) Unmodified opinion with an emphasis-of-matter paragraph. Unmodified opinion with an other-matter paragraph. Disclaimer of opinion. Qualified opinion None 65. In which of the following sections of an auditor's report for a nonissuer does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit? Auditor's responsibility section. Opinion section. Basis for opinion section. Management's responsibility section. None 66. The accountant must do which of the following during reviews and audits, but not during a compilation: Assist the entity in presenting accounting information. Obtain a management representation letter. Gain an understanding of the entity's internal control. Make a preliminary assessment of control risk. None 67. North Co., a privately held entity, asked its tax accountant, King, a CPA in public practice, to prepare North's interim financial statements, which are to be presented with North's quarterly tax return. King should not submit these financial statements to North unless, at a minimum, King complies with the provisions of Statements on Standards for Accounting and Review Services. Statements on Standards for Unaudited Financial Services. Statements on Standards for Consulting Services. Statements on Standards for Attestation Engagements. None 68. When an accountant is not independent with respect to an entity, which of the following types of compilation reports may be issued? The standard compilation report may be issued, regardless of independence. A compilation report with negative assurance may be issued. A compilation report with special wording that notes the accountant's lack of independence may be issued. A compilation report may be issued if the engagement is upgraded to a review None 69. What information should a practitioner include in the standard report on an examination of prospective financial statements? The prospective results might not be achieved. The projection should be read only in conjunction with the audited historical financial statements. There are no known material modifications that should be made as a result of applying the procedure. The practitioner assumes the responsibility to update the report for events and circumstances occurring after the date of the report. None 70. Which of the following items should be included in prospective financial statements issued in an attestation engagement performed in accordance with Statements on Standards for Attestation Engagements? All significant assertions used to prepare the financial statements. All significant assumptions used to prepare the financial statements. Pro forma financial statements for the past two years. Historical financial statements for the past three years. None 71. While planning an engagement to issue a report on the application of the requirements of an applicable financial reporting framework to a specific transaction of a nonissuer, a reporting accountant should obtain an understanding of the Financial expertise of the users of the reporting accountant's report. Risk appetites of parties to the specific transaction. Form and substance of the specific transaction. Internal control activities related to the specific transaction. None 72. An auditor who identifies a potential fraud that is significant within the context of the audit under generally accepted government auditing standards would most appropriately respond first in which of the following manners? Recommend a separate engagement to determine whether fraud has occurred. Extend audit procedures as necessary to determine whether fraud has occurred. Refer investigation of the potential fraud to the party with oversight responsibility. Communicate the potential fraud directly to management. None 1 out of 72 Time is Up! Time's upTime is Up!
