AICPA CPA-Auditing CPA Exam Practice Test Instant Access

Question 1

Which of the following is not an example of the application of professional skepticism?

ADesigning additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion.

BObtaining corroboration of management's Explanation: s through consultation with a specialist.

CInquiring of prior year engagement personnel regarding their assessment of management's honesty and integrity.

DUsing third party confirmations to provide support for management's representations.

Answer : C

Choice 'c' is correct. The auditor should consider that fraud might occur regardless of any past experience with the entity. An assessment of management's honesty and integrity performed during the previous year would not necessarily be relevant to the current year's audit.

Choice 'a' is incorrect. An auditor might apply professional skepticism by performing additional audit procedures designed to improve the reliability of evidence.

Choice 'b' is incorrect. Corroborating management's Explanation: s is an example of the application of professional skepticism, since the auditor is obtaining additional support rather than simply accepting the Explanation: as given.

Choice 'd' is incorrect. Using third party confirmations to provide support for management's representations is an example of the application of professional skepticism, since the auditor is obtaining additional support rather than simply accepting the Explanation: as given.

Question 2

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?

AThe recipients are likely to sign the confirmations without devoting proper attention to them.

BSubsequent cash receipts are unusually difficult to verify.

CAnalytical procedures indicate that few exceptions are expected.

DThe combined assessed level of inherent risk and control risk is low.

Answer : A

Choice 'a' is correct. If the recipients of confirmations are likely to sign them without devoting proper attention to them, it is possible that a misstatement in the related receivable will not be discovered by the auditor (i.e., when the balance on the confirmation is incorrect and the recipient mistakenly signs it anyway). Use of the blank form of confirmation provides a greater degree of assurance in this situation because it forces the recipient to determine the receivable balance.

Choice 'b' is incorrect. Inability to verify subsequent cash receipts makes follow-up of unconfirmed accounts more difficult. Since blank forms may result in lower response rates (because they require additional effort), use of the blank form in this situation would be less likely.

Choice 'c' is incorrect. If few exceptions are expected, it would be acceptable to use positive confirmations. (Blank confirmations may provide a greater degree of assurance, which would be more important if many exceptions were expected.)

Choice 'd' is incorrect. In low risk situations, it would be acceptable to use positive confirmations. (Blank confirmations may provide a greater degree of assurance, which would be more important in high risk situations.)

Question 3

Samples to test internal control are intended to provide a basis for an auditor to conclude whether:

AThe control activities are operating effectively.

BThe financial statements are materially misstated.

CThe risk of incorrect acceptance is too high.

DMateriality for planning purposes is at a sufficiently low level.
Explanation
Choice 'a' is correct. Samples to test internal control are intended to provide a basis for an auditor to conclude whether the control activities are operating effectively.
Choice 'b' is incorrect. Tests of controls may provide evidence regarding the likelihood of misstatement, but they do not provide a basis for concluding whether the financial statements are materially misstated.
Choice 'c' is incorrect. The risk of incorrect acceptance is an aspect of sampling risk related to substantive tests, not tests of controls.
Choice 'd' is incorrect. Samples to test controls do not provide evidence regarding materiality levels for planning purposes.

Answer : A

Question 4

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

AFictitious transactions may be recorded that cause an understatement of revenues and overstatement of receivables.

BClaims received from customers for goods returned may be intentionally recorded in other customers' accounts.

CAuthorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

DThe failure to prepare shipping documents may cause an overstatement of inventory balances.

Answer : C

Choice 'c' is correct. The function of cash receipts is part of the treasurer's department and should be separate from the role of posting credits to the A/R ledger. Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by posting credits against the related A/R balance.

Choice 'a' is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated.

Choice 'b' is incorrect. Even the lack of effective internal controls would not allow this fraud to be perpetrated for long, since the customers that submitted the claim would complain that the credit was not properly applied as soon as they received their next statement or invoice.

Choice 'd' is incorrect. The failure to prepare shipping documents may cause inventory to be overstated, but it is unlikely to be perpetrated as a fraud since it does not allow theft of cash. In addition, the internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory.

Question 5

Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows:

Lore would use which of the following to determine the average days sales in inventory?

AOption A

BOption B

COption C

DOption D

Answer : B

Choice 'b' is correct. Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover.

Choice 'a' is incorrect. The denominator used to determine average days sales in inventory is inventory turnover. Inventory turnover is cost of goods sold divided by average inventory, not simply average inventory.

Choice 'c' is incorrect. The days sales in inventory calculation uses the cost of goods sold figure, not the sales figure.

Choice 'd' is incorrect. The days sales in inventory calculation uses 365 in the numerator, not sales divided by 365.

Question 6

Which of the following is an inherent limitation in internal control?

AIncompatible duties.

BLack of segregation of duties.

CFaulty human judgment.

DLack of an audit committee.
Explanation
Choice 'c' is correct. Inherent limitations in internal control are limitations that exist despite implementation of appropriate controls. For example, faulty human judgment may result in errors in the design or use of internal controls.
Choice 'a' is incorrect. Assigning incompatible duties to a particular individual indicates a missing control, rather than an inherent limitation in internal control.
Choice 'b' is incorrect. Lack of segregation of duties indicates a missing control, rather than an inherent limitation in internal control.
Choice 'd' is incorrect. Lack of an audit committee indicates a missing control, rather than an inherent limitation in internal control.

Answer : C

Question 7

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?

ATurnover of senior accounting personnel is low.

BInsiders recently purchased additional shares of the entity's stock.

CManagement places substantial emphasis on meeting earnings projections.

DThe rate of change in the entity's industry is slow.
Explanation
Choice 'c' is correct. Excessive pressure on management to meet financial targets is a fraud risk factor that would heighten an auditor's concern about the risk of intentional manipulation of financial statements.
Choice 'a' is incorrect. Low turnover would reduce the auditor's concern about intentional manipulation of the financial statements.
Choice 'b' is incorrect. Insider purchases of company stock would not be a factor that would cause any particular concerns about intentional manipulation of financial statements.
Choice 'd' is incorrect. A slow rate of change in the entity's industry would reduce the auditor's concern about the risk of intentional manipulation of the financial statements.

Answer : C

AICPA CPA-Auditing CPA Auditing and Attestation CPA Exam Practice Test