CPA AUD Practice Exam 3 Welcome to your CPA AUD Practice Exam 3 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. The phrase "generally accepted accounting principles" is an accounting term that Includes broad guidelines of general application but not detailed practices and procedures. Encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. Provides a measure of conventions, rules, and procedures governed by the AICPA. Is included in the audit report to indicate that the audit has been conducted in accordance with generally accepted auditing standards (GAAS). None 2. Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting? Management displays a significant disregard for regulatory authorities. There is a lack of turnover of employees in the accounting department. Monthly bank reconciliations usually include several deposits in transit. Equipment is usually sold at a loss before being fully depreciated. None 3. If auditors of an issuer discover fraud that does not have a material impact on the financial statements, what is their responsibility with regard to communicating the discovery? Report the fraud to management or those charged with governance. Report the fraud to the Public Company Accounting Oversight Board (PCAOB). Report the fraud to management at least one level below those involved in the fraud. Not report the fraud to anyone because it is immaterial. None 4. Which of the following procedures would an auditor most likely perform in planning a financial statement audit? Inquire of the client's legal counsel concerning pending litigation. Compare the financial statements with anticipated results. Examine computer-generated exception reports to verify the effectiveness of internal control. Search for unauthorized transactions that may aid in detecting unrecorded liabilities. None 5. Which of the following procedures would an auditor most likely perform when planning an audit? Make a preliminary judgment about materiality. Confirm a sample of the entity's accounts payable with known creditors. Obtain written representations from management that there are no unrecorded transactions. Communicate management's initial selection of accounting policies to the audit committee. None 6. Which of the following statements is correct concerning materiality in a financial statement audit? Analytical procedures performed during an audit's review stage usually decrease materiality levels. If the materiality amount used in evaluating audit findings increases from the amount used in planning, the auditor should apply additional substantive tests. The auditor's materiality judgments generally involve quantitative, but not qualitative, considerations. Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements. None 7. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that Specific internal control activities are not operating as designed. The collective effect of the control environment may not achieve the control objectives. Tests of controls may fail to identify activities relevant to assertions. Material misstatements may exist in the financial statements. None 8. The profession's ethical standards most likely would be considered to have been violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representations that the Actual fee would be substantially higher. Actual fee would be substantially higher. CPA would not be independent. Fee was a competitive bid. None 9. Vinson, CPA is supervisor to Elkins, CPA. Under Vinson’s direction, Elkins signed a document containing materially false and misleading information. Who has committed an act discreditable to the profession? Vinson Elkins Both Vinson and Elkins Neither Vinson nor Elkins None 10. A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences, except As a principal financial officer, principal accounting officer, controller, public accountant, or auditor. Serving on at least one other issuer's audit committee or disclosure committee of the board of directors. Actively supervising a principal financial officer or principal accounting officer. Assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements. None 11. Bingham, a CPA, has been asked to join a local bank's board of directors. In which of the following scenarios would such a position be acceptable for Bingham? One of Bingham's clients has several business loans outstanding with the bank. Several of Bingham's clients have savings accounts at the bank. One of Bingham's clients, who is struggling financially, is in the loan application process at the bank. Several of Bingham's clients are in negotiations with this and other banks for operating loans. None 12. A cooling-off period of how many years is required before a member of an issuer's audit engagement team may begin working for the registrant in a key position? One year. Two years. Three years. Four years. None 13. According to the AICPA Code of Professional Conduct, which of the following records must a CPA return to the client when requested? Client-provided records, even if fees are due to the CPA for the engagement and are unpaid. Client-provided records requested for a second time because the client misplaced the first set of records. Supporting records prepared by the CPA consisting of adjusting, closing, combining, or consolidating entries prior to the completion of the engagement. The CPA's working papers consisting of analyses and schedules prepared by the client at the CPA's request. None 14. According to the AICPA Code of Professional Conduct, a CPA's independence from a nonissuer client would most likely be impaired if the CPA Accepted any gift from a client. Became a member of a trade association that is a client. Contracted with a client to supervise the client's office personnel. Attended meetings of the client's board of directors as a nonvoting advisor. None 15. Which of the following is a correct statement regarding integrated audits? Integrated audits are required for all companies in response to accounting scandals such as Enron. Integrated audits result in opinions on financial statements and internal controls over financial reporting. Integrated audits will integrate the client's internal audit test results with the external audit tests. Only integrated audits involve an evaluation of internal controls. None 16. Which of the following best describes why an auditor is always required to document the auditor's understanding of internal controls? To support the auditor's opinion. To avoid performing substantive procedures. To lower control risk. To support risk assessment conclusions None 17. Which of the following factors would most likely influence the form and extent of the auditor's documentation of an entity's internal control environment? Complexity and size of the entity. Amount of audit work performed at an interim date. Amount of audit work performed by the internal auditor. Results of verifying material account balances. None 18. Which of the following is not an inherent risk of investments in equity securities? Reliance on outside parties. Market conditions. Ease of theft. Legal risk. None 19. "A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Employee Responsibility Clerk 1 Reviews vendor invoices for proper signature approval Clerk 2 Uploads vendor invoices into the accounting system and verifies payment terms Clerk 3 Posts entered vendor invoices to the accounts payable ledger for payment and mails checks Treasurer Reviews the vendor invoices and signs each check. Which of the following would indicate a weakness in the company's internal control?" Clerk 1 opens all of the incoming mail. Clerk 2 reconciles the accounts payable ledger with the general ledger monthly. Clerk 3 mails the checks and remittances after they have been signed. The treasurer uses a stamp for signing checks. None 20. In addition to providing assurance that transactions are authorized, recorded, and reconciled, the internal control structure for a production cycle would assure that Production orders are prenumbered and signed by a supervisor. Custody of work in process and of finished goods is properly maintained. Independent internal verification of activity reports is established. Transfers to finished goods are documented by a completed production report. None 21. An auditor most likely would assess control risk (ie, risk of material misstatement) at a high level if the payroll department supervisor is responsible for Examining authorization forms for new employees. Comparing payroll registers with original batch transmittal data. Authorizing payroll rate changes for all employees. Hiring all subordinate payroll department employees. None 22. In a properly designed internal control structure, the same employee most likely would match vendors' invoices with receiving reports and Post the detailed accounts payable records. Recalculate the calculations on vendors' invoices. Reconcile the accounts payable ledger. Cancel vendors' invoices after payment. None 23. When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the Unpaid voucher. Debit memo. Vendor invoice. Credit memo. None 24. Each of the following is a violation of segregation of duties in internal control, except: The purchasing manager reconciles the receiving log with the purchases journal. The purchasing manager receives goods from vendors and signs off on deliveries. The purchasing manager matches invoices to purchase orders and receiving reports. The purchasing manager negotiates pricing and payment terms with vendors. None 25. "A company employs three clerks and one purchasing manager. Their responsibilities are as follows: Employee Responsibility Purchasing Manager Approves purchase requests before they are processed and negotiates terms with vendors. Clerk 1, Purchasing Places orders with vendors. Clerk 2, Accounts Payable Prepares payment vouchers after verifying accuracy of vendor invoices and comparing supporting documents. Clerk 3, Receiving Receives delivery of goods from vendors Which of the following would indicate a weakness in the company's internal control?" Clerk 3 conducts manual counts of goods received, unaware of the quantities actually ordered. The Purchasing Manager frequently attends vendor events with all expenses-paid by the company. Clerk 2 has access to unused purchase orders. Clerk 1 reports to the Purchasing Manager, who has significant influence over Clerk 1’s pay and career progression. None 26. Proper segregation of duties reduces the opportunities for persons to be in positions to both Journalize entries and prepare financial statements. Record cash receipts and cash disbursements. Establish internal controls and authorize transactions. Perpetrate and conceal errors and irregularities. None 27. Which of the following is not a component of internal control? Control environment. Control activities. Inherent risk. Monitoring. None 28. Which of the following sets of duties may be performed by a single individual in a company with the most effective segregation of duties in place? Approving payment vouchers and having access to blank purchase orders. Approving purchase orders and preparing receiving reports. Distributing payments and canceling supporting documents. Distributing payments and preparing bank reconciliations. None 29. Which of the following factors represents an inherent limitation of internal control? Absence of segregation of duties. Failure to perform required tasks. Mistakes resulting from human error. Inadequate provisions to safeguard assets None 30. Which of the following is true regarding significant deficiencies and material weaknesses? Auditors must search for them. Auditors must communicate them to the audit committee. They must be included in the financial statements. They must be disclosed in footnotes. None 31. When planning an engagement to examine the effectiveness of the entity's internal control in an integrated audit of a nonissuer, a practitioner would least likely consider which of the following factors? Preliminary judgments about the effectiveness of internal control. The extent of recent changes in the entity and its operations. The type of available evidential matter pertaining to the effectiveness of the entity's internal control. The evaluation of the operating effectiveness of the controls. None 32. Which of the following statements is correct for both an audit of an entity's financial statements and an integrated audit of a nonissuer? The auditor must test the design and operating effectiveness of key controls. The auditor must issue an opinion on the entity's internal controls over financial reporting. The auditor must obtain an understanding of the design of an entity's control structure. The auditor will issue an adverse opinion when a material weakness is discovered. None 33. Which of the following statements would be included in a separate report of an entity's internal control over financial reporting for an integrated audit of a nonissuer? Enter Choice here (if any) Only those controls the auditor intends to rely on were reviewed, tested, and evaluated. The study and evaluation of the internal controls was conducted in accordance with generally accepted accounting principles. The establishment and maintenance of the internal controls is the responsibility of management. Distribution of the report is restricted for use only by management and the board of directors. None 34. An engagement to examine internal control will generally Require procedures that duplicate those already applied in assessing Risk of Material Misstatement during a financial statement audit. Increase the reliability of the financial statements that have already been audited. Be more extensive in scope than the assessment of Risk of Material Misstatement made during a financial statement audit. Be more limited in scope than the assessment of Risk of Material Misstatement made during a financial statement audit. None 35. For issuers, the opinion on the internal control over financial reporting contains a statement indicating the date as of which the auditor's opinion is based. That date is The date of the auditor's report. The date the financial statements were issued. The date specified in the body of the CEO's signed statement on internal control. The date of the financial statements. None 36. Which of the following statements is correct concerning internal control matters identified in a nonissuer financial statement audit? An auditor is required to search for internal control matters that require communication to client management. All identified internal control matters are considered material weaknesses and must be communicated to the client's management. All internal control matters must be communicated orally to those charged with governance. An auditor may report, in writing, that no material weaknesses were noted during an audit None 37. When internal control is effective, which of the following audit procedures is most likely to be conducted only after year end? Evaluating management's adjusting journal entries. Confirming accounts receivable. Testing property, plant, and equipment disposals. Analyzing stockholders' equity transactions. None 38. Which of the following audit procedures probably would provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventories? Trace test counts noted during the entity’s physical count to the entity’s summarization of quantities. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. Inspect the open purchase order file for significant commitments that should be considered for disclosure None 39. Whose signatures should be included in the management representation letter to the auditor? President and chief financial officer. Chairman of the audit committee and chief operating officer. Corporate secretary and treasurer. Chief information officer and chief operating officer. None 40. To be considered sufficient audit documentation, the audit working papers should include A statement indicating auditor compliance with the Code of Professional Conduct. Copies of current licenses or certifications held by the auditor. Definitions of tick marks (eg, symbols) used. Evidence that the client has received copies of the working papers. None 41. What is the maximum number of days in which a nonissuer's auditor should complete the assembly of the final audit file following the report release date? 30 days. 45 days. 60 days. 75 days. None 42. Which of the following factors would an independent auditor most likely consider in assessing the objectivity of an internal auditor? The internal auditor has obtained the Certified Internal Auditor designation. The audit committee reviews employment decisions related to the director of internal auditing. The internal auditor was previously an employee of the auditor's public accounting firm. The internal auditor attends a number of comprehensive continuing professional education courses each year. None 43. If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles? Payroll. Revenue. Purchasing. Inventory. None 44. A primary objective of analytical procedures used in the final review stage of an audit is to Identify account balances that represent specific risks relevant to the audit. Gather evidence from tests of details to corroborate financial statement assertions. Detect fraud that may cause the financial statements to be misstated. Assist the auditor in evaluating the overall financial statement presentation. None 45. “We have disclosed to you all known instances of non-compliance with laws and regulations whose effects should be considered when preparing financial statements”. The foregoing passage is most likely from a Report on internal control. Special report. Management representation letter. Letter for underwriters. None 46. """In connection with an audit of our financial statements, management has prepared, and furnished to our auditors a description and evaluation of certain contingencies."" The foregoing passage most likely is from a(an)" Audit inquiry letter to legal counsel. Management representation letter. Audit committee's communication to the auditor. Financial statement footnote disclosure. None 47. An overall response to address a high assessed risk of material misstatement at the financial statement level of a nonissuer may include Increasing reliance on results of internal control testing. Emphasizing the need for more accounting staff. Incorporating additional predictability into the selection of procedures. Providing more supervision of the audit team. None 48. What type of procedure might an auditor perform when trying to gather evidence supporting management's assertion regarding understandability? Review financial statement disclosures. Review internal control policies for clarity. Interview the client's accounting department employees. Confirm documented internal control with client personnel. None 49. In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion? The auditor did not observe the entity’s physical inventory and is unable to become satisfied about its balance by other auditing procedures. Conditions that cause the auditor to have substantial doubt about the entity’s ability to continue as a going concern are inadequately disclosed. There has been a change in accounting principles that has a material effect on the comparability of the entity’s financial statements. The auditor is unable to apply necessary procedures concerning an investor’s share of an investee’s earnings recognized on the equity method. None 50. In performing procedures to test the balance sheet values of marketable debt trading securities, an auditor records the details of each security on a worksheet. What other information is usually included on this worksheet? A recalculation of the value of the securities. An analysis of realized gains and losses from the sale of securities during the year. An evaluation of the client's internal control concerning physical access to the securities. A description of the client's procedures that prevent the negotiation of securities by just one person. None 51. As part of the process of observing a client's physical inventories, an auditor should be alert to The inclusion of any obsolete or damaged goods. Any change in the method of pricing from prior years. The existence of outstanding purchase commitments. The verification of inventory values assigned to goods in process. None 52. An auditor's principal objective in analyzing repairs and maintenance expense accounts is to Determine that all obsolete plant and equipment assets were written off before the year end. Verify that all recorded plant and equipment assets actually exist. Discover expenditures that were expensed but should have been capitalized. Identify plant and equipment assets that cannot be repaired and should be written off. None 53. During the confirmation of accounts receivable, a confirmation is emailed to the client, who forwards it to the auditor. Which of the following actions should the auditor take? Not accept the confirmation and select another customer's balance to confirm. Not accept the confirmation and treat it as an exception. Accept the confirmation and file it in the working papers. Accept the confirmation but verify the source and content through a telephone call to the respondent. None 54. The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to Observe physical counts of the inventory items. Trace the total on the inventory listing to the general ledger inventory account. Obtain a confirmation from the client indicating inventory ownership. Analytically compare the current-year inventory balance to the prior-year balance None 55. On receiving a client's bank cutoff statement, an auditor most likely would trace Prior-year checks listed in the cutoff statement to the year-end outstanding check list. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation. Checks dated after year end listed in the cutoff statement to the year-end outstanding check list. Deposits recorded in the cash receipts journal after year end to the cutoff statement. None 56. A client has disposed of several pieces of manufacturing equipment at a significant gain. This raises question as to which assertion in regard to property, plant, and equipment? Existence Rights and obligations Valuation and allocation Completeness None 57. Which of the following audit procedures most likely will involve sampling? Risk assessment procedures performed to obtain an understanding of internal control. Tests of automated application controls when effective information technology general controls are present. Analyses of controls to determine the appropriate segregation of duties. Testing of process for approval of credit to customers for sales on account. None 58. If an auditor of a nonissuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management's review and approval of time sheets, then the auditor would most appropriately Increase the tolerable rate of deviation. Extrapolate the impact of the exceptions on other key controls requiring management review. Propose an audit adjustment. Increase the assessed risks of material misstatement. None 59. An auditor is performing tests of controls using sampling procedures. Testing of the entire population would have revealed that the deviation rate exceeds the tolerable rate. However, the deviation rate in the auditor's sample is less than the tolerable rate. If the auditor plans the audit based on the sample results, the auditor will most likely Assess control risk too low and increase substantive testing. Assess control risk too low and decrease substantive testing. Assess control risk too high and increase substantive testing. Assess control risk too high and decrease substantive testing. None 60. Which of the following statements is correct about the sample size in statistical sampling when testing internal controls? The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size. As the likely rate of deviation decreases, the auditor should increase the planned sample size. The allowable risk of assessing control risk too low has no effect on the planned sample size. Of all the factors to be considered, the population size has the greatest effect on the sample size. None 61. An auditor is performing attribute testing on a sample of 50 documents that results in three deviations. If the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 1%, the auditor will most likely Increase the level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate. Accept the sample results and reduce control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. Accept the sample results and reduce control risk because the sample deviation plus the allowance for sampling risk is less than or equal to the tolerable rate. Increase the level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. None 62. When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements. Consider the adequacy of disclosure about the client's possible inability to continue as a going concern. Report to the client's audit committee that management's accounting estimates may need to be adjusted. Reissue the prior year's auditor's report and add an explanatory paragraph that specifically refers to "substantial doubt" and "going concern." None 63. If an auditor includes an emphasis-of-matter paragraph in an audit report for a nonissuer, then the auditor should Indicate that the auditor's opinion is modified with respect to the matter. Notify the appropriate regulatory authority if the auditor's opinion was modified on the basis of the matter. Modify the basis for opinion section to direct the reader to the emphasis-of-matter paragraph. Indicate where disclosures describing the matter occur in the financial statements. None 64. "The following sentence was included in an auditor's report to indicate an inconsistency: ""As discussed in note T to the financial statements, the company changed its method of accounting for inventory in Year 1."" Assuming the auditor concurred with the change and the change had a material effect on the financial statements, what type of report was issued?" Unmodified opinion with emphasis-of-matter paragraph. Standard unmodified report. Qualified or adverse opinion. Disclaimer of opinion. None 65. When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year's financial statements if the Prior year's financial statements are restated to conform with the applicable reporting framework. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued report. Prior year's opinion was unmodified and the opinion on the current year's financial statements is modified due to a lack of consistency. Prior year's financial statements are restated following a change in reporting entity in the current year. None 66. Which of the following is required in a financial statement preparation engagement performed in accordance with SSARS? A cover page to the financial statements with a signed statement declaring the accounting framework used in the financial statements. Elimination of any known material misstatements, or withdrawal from the engagement if management refuses to eliminate the material misstatements. Discussing with management significant judgements affecting the financial statements which the accountant assisted in making, such that the client can take responsibility for the judgments. A side-by-side comparison to GAAP if the financial statements are prepared in accordance with a non-GAAP accounting framework. None 67. When performing a review of interim financial information, an accountant would typically do each of the following, except Consider the results from the latest audit. Test controls related to the preparation of annual financial information. Perform analytical procedures. Make inquiries of management None 68. When providing limited assurance that the financial statements of a nonpublic entity require no material modifications to be in accordance with generally accepted accounting principles, the accountant should Understand the accounting principles of the industry in which the entity operates. Evaluate the client's internal control structure for effectiveness. Assess the risk that a material misstatement could occur in a financial statement. Send a letter of inquiry to the client's attorney. None 69. When planning a review of an audit client's interim financial statements, which of the following procedures should the accountant perform to update the accountant's understanding of the entity and its environment? Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year end. Inquire of the entity's outside legal counsel about the status of any previous pending litigation and any new litigation involving the entity. Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation. Consider the results of audit procedures performed with respect to the current year's financial statements. None 70. Which of the following statements best serves as management's assertion of consistency in an MD&A presentation? Information included in the presentation is properly classified and described. Nonfinancial data have been accurately derived from related records. Reported transactions took place during a given period. Descriptions of all transactions are included to explain entity's financial condition. None 71. Which of the following is a requirement for accepting an attestation engagement to report on the controls at a service organization? The description of the controls is completed prior to the signing of the engagement letter. The service auditor has the competence and capability to perform the engagement. The suitability of the evaluation criteria is reviewed by a third party. Management agrees that the service auditor will be responsible for documenting the controls. None 72. In which of the following situations will a practitioner disclaim an opinion on an examination of prospective financial statements? The prospective financial statements depart from AICPA presentation guidelines. The practitioner was not able to perform certain procedures deemed necessary. The prospective financial statements fail to disclose significant assumptions. The significant assumptions do not provide a reasonable basis for the statements. None 1 out of 72 Time is Up! Time's upTime is Up!
