Aud - 2017 Aia Released Questions.pdf 5q594i

2017 AIA Newly Released Questions—Auditing

AUDITING 2017 AIA Newly Released MCQs

Page 1 of 50 ed to Andrea Rosillo (#818104)


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

1. A-06155 As a result of control testing, a A has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant? a.

The sample size would be irrelevant.

b.

The sample size would be higher.

c.

The sample size would be lower.

d.

The sample size would be unaffected.

Unit & Module to be Assigned To:

A-3, M-2

Representative Task:

AII-E3.1

Skill Level (Must be R&U or Application Only):

Application

Page Reference:

14

Correct Answer Choice:

C

ANSWER: Choice "c" is correct. A reduction in control risk would result in a lower substantive testing sample size. Choice "a" is incorrect. Control risk has a direct relationship with substantive testing sample size (i.e., a reduction in control risk results in a decrease in sample size). Choice "b" is incorrect. A reduction in control risk would result in a lower, not higher, substantive testing sample size. Choice "d" is incorrect. Sample size would be affected. Control risk has a direct relationship with substantive testing sample size (i.e., a reduction in control risk results in a decrease in sample size).



2. A-06191 An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. Given this result, which of the following expectations of recorded amounts would be unreasonable? a.

A decrease in costs of goods sold as a percentage of sales.

b.

A decrease in s payable.

c.

A decrease in retained earnings.

d.

A decrease in notes payable.


A-2, M-7


AIII-C1.3


Application

Page Reference:

48


C

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



3. A-06192 Which of the following procedures would an auditor most likely use to identify unusual year-end transactions? a.

Obtaining a client representation letter.

b.

Obtaining a legal inquiry letter.

c.

Performing analytical procedures.

d.

Testing arithmetic accuracy of the ing records.


A-3, M-6


AIII-C1.3


R&U

Page Reference:

46


C

ANSWER: Choice "c" is correct. An auditor most likely would perform analytical procedures to identify unusual yearend transactions. Analytical procedures consist of evaluations of financial information made by a study of meaningful relationships among data, which often help highlight unusual fluctuation. Choice "a" is incorrect. The client representation letter is unlikely to help the auditor identify unusual yearend transactions. This letter does not describe specific transactions. Choice "b" is incorrect. Obtaining a legal inquiry letter is helpful in identifying contingencies, but is unlikely to help identify unusual year-end transactions. Choice "d" is incorrect. Testing the arithmetic accuracy of ing records is likely to help discover mathematical errors, but is unlikely to help identify unusual year-end transactions.



4. A-06193 Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit? a.

Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.

b.

Management plans to expand into international operations during the next few years.

c.

Management believes the financial statements are accurately stated in accordance with generally accepted auditing standards (GAAS).

d.

Management believes the company is the premier company in its industry regarding service to customers.


A-4, M-9


AIII-F1.1


R&U

Page Reference:

64


A

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



5. A-06194 An auditor is reporting on comparative financial statements for three years. Which of the following statements is correct regarding written representations from management? a.

The representation letter needs to address the prior-year's financial statements not covered in the report.

b.

The representation letter needs to address only the most current year covered in the report.

c.

The representation letter needs to address only the two most recent years covered in the report.

d.

The representation letter needs to address all of the years being covered in the report.


A-4, M-9


AIII-F1.1


R&U

Page Reference:

63


D

ANSWER: Choice "d" is correct. Management representation letters need to address all of the years being covered in the report. Choices "a", "b", and "c" are incorrect, per the above explanation.



6. A-06195 Which of the following could indicate source document fraud? a.

The same customer purchase order number appears on different customer invoices.

b.

The same item code appears on different invoices.

c.

The same invoice number appears on different invoices.

d.

The same invoice date appears on different invoices.


A-3, M-1


AII-D1.1


Application

Page Reference:

8


C

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



7. A-06196 A client uses a service organization to process its payroll. Which of the following statements is correct regarding the auditor's use of the service auditor's report on internal controls placed in operation? a.

The client's auditor can use the service auditor's report to tly determine the materiality level.

b.

The client's auditor can use the service auditor's report without inquiring about the service auditor's reputation.

c.

The service auditor's report should be referred to in the report of the client's auditor.

d.

The client's auditor can use the service auditor's report as audit evidence for the client's internal controls.


A-5, M-5


AII-C3.2


R&U

Page Reference:

60


D

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



8. A-06197 During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do? a.

Report the matters to regulatory authorities.

b.

Consider the fraud a scope limitation and disclaim an opinion.

c.

Communicate the matter to those charged with governance.

d.

Immediately withdraw from the engagement.


A-3, M-1


AI-E3.1


R&U

Page Reference:

9


C

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



9. A-06198 Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count? a.

Validation of purchase transactions.

b.

Verification of existence of inventory.

c.

Authorization of the manufacturing orders.

d.

Posting and summarization of inventory transactions.


A-4, M-4


AIII-C6.1


Application

Page Reference:

21


B

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



10. A-06199 Which of the following procedures is performed first for unreturned positive confirmations of s receivable? a.

Comparing current sales with budgeted sales.

b.

Sending second requests for confirmation of s receivable.

c.

Performing subsequent procedures.

d.

Asking the client to obtain additional correspondence from the customers.


A-4, M-1


AIII-C6.2


R&U

Page Reference:

9


B

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



11. A-06200 Which of the following audit procedures most likely will involve sampling? a.

Risk assessment procedures performed to obtain an understanding of internal control.

b.

Tests of automated application controls when effective information technology general controls are present.

c.

Analyses of controls to determine the appropriate segregation of duties.

d.

Testing of process for approval of credit to customers for sales on .


A-3, M-8


AIII-B1.1


Application

Page Reference:

71


D

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



12. A-06201 Which of the following statements is correct about actions taken after the documentation completion date? a.

An auditor must not make any amendments to audit documentation before the end of the specified retention period.

b.

An auditor must not make any additions to audit documentation before the end of the specified retention period.

c.

An auditor must not make any changes to audit documentation before the end of the specified retention period.

d.

The auditor must not make any deletions to audit documentation before the end of the specified retention period.


A-2, M-2


AI-D1.2


R&U

Page Reference:

14


D

ANSWER: Choice "d" is correct. An auditor is not allowed to make any deletions to audit documentation before the end of the specified retention period. Choice "a" is incorrect. An auditor is allowed to amend documentation before the end of the specified retention period. Choice "b" is incorrect. An auditor is allowed to add documentation before the end of the specified retention period. Choice "c" is incorrect. An auditor may make some changes (i.e., add or modify) documentation before the end of the specified retention period.



13. A-06202 Which of the following services provides the least assurance regarding the fairness of financial statements? a.

Review.

b.

Audit.

c.

Compilation.

d.

Attestation.


A-6, M-3


AIV-C2.1


R&U

Page Reference:

15


C

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



14. A-06203 Under which of the following circumstances would an auditor be considered to be using the work of a specialist? a.

The auditor engages a lawyer to interpret the provisions of a complex contract.

b.

The auditor makes inquiries of the client's lawyer regarding pending litigation.

c.

A tax expert employed by the auditor's A firm reviews the client's tax accruals.

d.

The client engages an outside computer service organization to prepare its payroll.


A-2, M-5


AII-G1.2


Application

Page Reference:

36


A

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



15. A-06204 What is the definition of fraud in an audit of financial statements? a.

An intentional act that results in a material misstatement in financial statements that are the subject of an audit.

b.

The unintentional misapplication of ing principles relating to amounts, classification, manner of presentation, or disclosure.

c.

An intentional act that results in a material weakness in financial statements that are the subject of an audit.

d.

Management's inability to design and implement programs and controls to prevent, deter, and detect material misstatements.


A-3, M-1


AII-D1.1


R&U

Page Reference:

3


A

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



16. A-06205 A practitioner's report on agreed-upon procedures should contain which of the following statements? a.

The procedures performed were those agreed to by the specified parties identified in the report.

b.

Sufficiency of procedures is the responsibility of the practitioner.

c.

All classification codes appeared to comply with such performance documents.

d.

Nothing came to my attention as a result of applying the procedures.


A-5, M-4


AIV-B2.1


R&U

Page Reference:

40


A

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



17. A-06206 Which of the following groups is considered a subgroup ordinarily charged with assisting the board of directors in fulfilling its oversight responsibilities? a.

Audit committee.

b.

Secured creditors.

c.

Internal auditors.

d.

Senior management.


A-4, M-10


AI-E3.1


R&U

Page Reference:

69


A

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



18. A-06207 In which of the following situations will a practitioner disclaim an opinion on an examination of prospective financial statements? a.

The prospective financial statements depart from AIA presentation guidelines.

b.

The practitioner was not able to perform certain procedures deemed necessary.

c.

The prospective financial statements fail to disclose significant assumptions.

d.

The significant assumptions do not provide a reasonable basis for the statements.


A-5, M-4


AIV-B1.1


R&U

Page Reference:

45


B

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



19. A-06208 While conducting an audit of a new nonissuer client, an auditor discovers that ing policies applied in relation to the financial statement opening balances are inconsistent with ing policies applied during the period under audit. In this scenario, what should the auditor do? a.

Obtain sufficient appropriate evidence about whether changes in the ing policies have been appropriately ed for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

b.

Refrain from placing any reliance on information obtained from the review of the predecessor auditor's audit documentation of the prior period.

c.

Request that management inform the predecessor auditor that the prior-period audited financial statements require revision.

d.

Express a qualified or adverse opinion.


A-4, M-7


AIII-D1.1


Application

Page Reference:

43


A

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



20. A-06209 An auditor is assessing the appropriateness of management's rationale for selecting a model to measure the fair value of debt securities. If, during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, except whether the valuation model is: a.

Appropriate for the environment in which the entity operates.

b.

Consistently applied from prior periods.

c.

Evaluated and appropriately applied based on generally accepted ing principles.

d.

Appropriate for the debt security being valued.


A-4, M-5


AIII-D2.1


Application

Page Reference:

29


B

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



21. A-06210 Management's responses to inquiries can be corroborated by each of the following, except: a.

Visits to the entity's premises and plant facilities.

b.

Inspection of documents and internal control manuals.

c.

Preparation of the summary of unadjusted differences.

d.

Observation of entity activities and operations.


A-4, M-8


AIII-E1.1


Application

Page Reference:

56


C

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



22. A-06211 Which of the following statements concerning a compilation of specific elements, s, or items of a financial statement is correct? a.

The ant performing the compilation must be independent with regard to the client.

b.

The compilation cannot be relied upon to disclose errors, fraud, or illegal acts.

c.

The compilation involves compiling financial statements for different subsidiaries of the company.

d.

The compilation must be performed in conformance with an ing basis consistent with GAAP.


A-6, M-3


AIV-C2.1


R&U

Page Reference:

15


B

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



23. A-06212 An independent auditor is issuing an audit report for a governmental entity and plans to issue separate reports on internal control over financial reporting and compliance with laws and regulations. The auditor should do which of the following? a.

Report to the governing authority that separate reports will be issued.

b.

Issue the same opinion in each report.

c.

State in the audit report that separate reports will be issued.

d.

Obtain permission from the audit committee to issue separate reports.


A-5, M-7


AIV-E9.1


R&U

Page Reference:

77


C

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



24. A-06213 During a review of financial statements, an ant decides to emphasize a matter in the review report. Which of the following is an example of a matter that the ant would most likely want to emphasize? a.

Other entities in the same industry have recently changed from LIFO to FIFO.

b.

The IRS has notified the entity that it intends to audit income tax returns for prior years.

c.

The entity has had significant transactions with related parties.

d.

The entity has had significant tax expenses as a result of a new tax law.


A-6, M-5


AIV-C3.1


Application

Page Reference:

42


C

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



25. A-06214 Before issuing an unmodified report on a compliance audit, an auditor becomes aware of an instance of material noncompliance occurring after the period covered by the audit. The least appropriate response by the auditor would be to: a.

Discuss the matter with management and, if appropriate, those charged with governance.

b.

Issue a qualified compliance report describing the subsequent noncompliance.

c.

Determine whether the noncompliance relates to conditions that existed as of period end or arose subsequent to the reporting period.

d.

Modify the standard compliance report to include a paragraph describing the nature of the subsequent noncompliance.


A-5, M-6


AIV-D1.1


Application

Page Reference:

62


B

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



2017 AIA Auditing Newly Released MCQs—Difficult (Hard) Rating

26. A-06215 An auditor will most likely use computer-assisted audit techniques, rather than manual techniques, when it is necessary to: a.

Examine all data in an s payable file.

b.

Review approval of dividends.

c.

unrecorded legal liabilities.

d.

Assess compliance with policies and procedures related to information security.


A-2, M-9


AIII-C6.1


Application

Page Reference:

68


A

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



27. A-06216 Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements? a.

New convertible bonds are issued to expand the company's product line.

b.

A loss is reported on uncollectible s of an acknowledged distressed customer.

c.

A fixed asset used in operations is sold at a substantial profit.

d.

Negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter.


A-1, M-10


AIII-G1.1


Application

Page Reference:

71


A

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



28. A-06217 As part of a fraud audit, a A wishes to identify employees with invalid Social Security numbers in the client's payroll-transaction data. Which of the following audit tests of controls using computer-assisted audit techniques would best meet the objective? a.

Obtaining statistics on the population of the payroll file to identify unusual pay amounts to employees.

b.

Comparing Social Security numbers paid in the payroll transaction file to a file of governmentauthorized Social Security numbers.

c.

Randomly selecting 25 payments from the payroll report and comparing the results to employee Social Security cards in the human resources records.

d.

Comparing the payroll transaction file to the employee master file to extract payments to employees who are not in the employee master file.


A-2, M-9


AIII-C6.1


Application

Page Reference:

69


B

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



29. A-06218 What is the primary purpose of reviewing conflict-of-interest statements signed by of management? a.

To obtain an understanding of business processes.

b.

To identify transactions with related parties.

c.

To assess control risk.

d.

To consider limitations of internal control.


A-3, M-4


AII-H3.1


R&U

Page Reference:

35


B

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



30. A-06219 A A was engaged to audit the financial statements of a municipality that received federal financial assistance and that required a Single Audit for compliance with the of the financial assistance. Which of the following guidelines should the A consider? Generally Accepted Auditing Standards

Government Auditing Standards

a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No


A-5, M-8


AIV-E9.1


R&U

Page Reference:

83


A

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



31. A-06220 The client asked the auditor to audit financial statements covering the current year. The auditor did not observe the prior year's physical inventory count. Which of the following actions would the auditor most likely take? a.

Withdraw from the engagement and provide no assurance on the current year's financial statements.

b.

Rely on management's representation that the prior year's balances are correct.

c.

Audit the financial statements and express an opinion with a scope limitation.

d.

Audit the prior year inventory using alternative substantive procedures.


A-1, M-6


AIII-C6.2


Application

Page Reference:

36


D

ANSWER: Choice "d" is correct. If the auditor is unable to observe the prior year's physical inventory, then the auditor most likely will try to audit the prior year inventory using alternative substantive procedures. For example, the auditor may: •

Observe a current physical inventory count and reconcile it to the opening inventory quantities.

•

Perform audit procedures on the valuation of the opening inventory items.

•

Perform audit procedures on gross profit and cutoff.

Choice "a" is incorrect. An auditor is not required to withdraw from an engagement if the auditor is unable to observe the prior year's physical inventory count. The auditor may be able to obtain sufficient appropriate audit evidence by performing alternative audit procedures on the inventory balance. Choice "b" is incorrect. The auditor should the inventory balance by performing alternative procedures that provide sufficient appropriate audit evidence. Relying solely on management representations does not provide sufficient appropriate audit evidence about the beginning inventory balance. Choice "c" is incorrect. The inability to observe the inventory count is not a limitation on the scope of the audit if the auditor is able to obtain sufficient appropriate audit evidence by performing alternative procedures. However, if alternative procedures cannot be performed, then the auditor should express a qualified opinion or disclaimer of opinion.



32. A-06221 Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be: a.

Considered in the evaluation of audit findings in the current year.

b.

Disclosed by the client in the current-year financial statements.

c.

Retested during the current-year tests of controls.

d.

Removed from the prior-year summary because they were immaterial.


A-4, M-8


AIII-E1.2


R&U

Page Reference:

54


A

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



33. A-06222 Which of the following results of analytical procedures would most likely indicate possible unrecorded liabilities? a.

Current ratio of 2:1 as compared to 5:1 for the prior period.

b.

Ratio of s payable to total current liabilities of 4:1, compared to 6:1 for the prior period.

c.

s payable turnover of 5, compared to 10 for the prior period.

d.

s payable balance increase greater than 10 percent over the prior period.


A-3, M-7


AIII-C1.3


Application

Page Reference:

59


B

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



34. A-06223 A service organization provides processing services for a client's sales orders. Which of the following information is relevant when gathering data for the report on the service organization's internal controls? a.

The client's sales manager reviews s receivable balances.

b.

The client's data entry clerk used the sales manager's to make unauthorized changes to customer prices.

c.

Credit limits are established and updated by the client's credit department.

d.

The service organization's system calculates s receivable balances.


A-5, M-5


AIV-B3.1


Application

Page Reference:

54


D

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



35. A-06224 In a test of purchase orders, the auditor selected a random sample of 60 items out of a population of 1,200 purchase orders. The auditor discovered $4,000 in overstatement in the sample. The company's materiality is $65,000. The tolerable misstatement for purchases is $50,000. What should the auditor do next? a.

on the exceptions.

b.

Propose an adjustment to purchases.

c.

Consider expanding the size of the sample.

d.

Project the detected error to the entire population.


A-3, M-9


AIII-B1.1


Application

Page Reference:

88


D

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



36. A-06225 Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report? a.

The cost-to-benefit ratio of performing additional procedures to better determine the impact of the newly discovered facts.

b.

The potential impact on financial statements and associated audit reports for the previous five years.

c.

The client's willingness to pay additional fees for the additional procedures to be performed.

d.

The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.


A-1, M-10


AIII-G1.1


Application

Page Reference:

74


D

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



37. A-06226 During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery? a.

The auditor should fully investigate other transactions related to this manager to determine if fraud exists.

b.

The auditor should bring the transaction to the attention of an appropriate level of management.

c.

The auditor should report this finding to those charged with governance.

d.

The auditor's responsibility is satisfied by documenting that the single transaction is inconsequential.


A-3, M-1


AI-E3.1


Application

Page Reference:

9


B

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



38. A-06239 A practitioner has examined a client's compliance with debt covenants associated with a bank loan and is ready to issue a report. Which of the following standards apply to the report? a.

Internal control standards.

b.

Compliance attestation standards.

c.

Agreed-upon procedures standards.

d.

Auditing standards of field work.


A-5, M-6


AIV-D1.1


R&U

Page Reference:

65


B

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



39. A-06227 Which of the following objectives is achieved when an auditor decides to employ classical variable sampling? a.

To determine the reliability of voucher processing.

b.

To determine the completeness of billing transactions.

c.

To determine the inventory quantities on hand.

d.

To determine the efficiency of the payroll system.


A-3, M-9


AIII-B1.1


Application

Page Reference:

86


C

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



40. A-06228 The client's financial reporting includes supplementary financial information outside the basic financial statements but required by the Financial ing Standards Board (FASB). Which of the following statements is correct regarding the auditor's responsibility for this supplementary financial information? a.

The auditor should perform limited procedures.

b.

The auditor should apply tests of details of transactions.

c.

The auditor is not required to report omissions.

d.

The auditor should read the supplementary financial information.


A-1, M-11


AIV-E2.1


R&U

Page Reference:

83


A

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



41. A-06229 An auditor determines that a client who received a federal grant fraudulently reported information to the federal government. The client's management refuses to acknowledge the fraud. Which of the following parties should the auditor first? a.

The state ancy board.

b.

The state attorney general's office.

c.

The agency that provided the grant.

d.

The recipients of the client's services.


A-5, M-8


AI-F1.2


Application

Page Reference:

89


C

ANSWER: Choice "c" is correct. The auditor should first the specific agency that provided the grant to report the fraud. Choice "a" is incorrect. The auditor is not required to the state ancy board to report the fraud. Choice "b" is incorrect. The auditor is not required to the state attorney's general office to report the fraud. Choice "d" is incorrect. The auditor is not required to the recipients of the client's services to report the fraud.



42. A-06230 Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls? a.

Observation.

b.

Inspection.

c.

Inquiry.

d.

Reperformance.


A-5, M-1


AIII-C6.1


R&U

Page Reference:

8


C

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



43. A-06231 Which of the following statements is most accurate regarding audit documentation requirements? a.

The auditor should document findings that could result in a modification of the auditor's report.

b.

If different audit procedures were performed due to a lack of responsiveness by the client, the lack of responsiveness should not be included in the working papers.

c.

If an oral explanation serves as sufficient for the work the auditor performed, the explanation should be documented in the working papers.

d.

If the results of audit procedures indicate a need to revise the previous assessment of risk, the new assessment should be documented and the original assessment should be removed.


A-2, M-2


AI-D1.1


R&U

Page Reference:

16


A

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



44. A-06232 In an audit of financial statements for which an auditor's assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions? a.

Determine the effectiveness of general controls over classes of transactions characterized by high transaction volume.

b.

Perform substantive procedures for all relevant assertions related to each material class of transactions.

c.

Discuss strategies to eliminate such risks with top management or those with equivalent authority and responsibility.

d.

Consider whether risk assessment procedures are appropriate given preliminary levels of materiality and tolerable misstatement.


A-3, M-2


AII-E3.1


R&U

Page Reference:

14


B

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



45. A-06233 The auditor should consider certain factors in assessing the efficiency and effectiveness of analytical procedures as compared to tests of details. In determining whether and to what extent analytical procedures should be used, which of the following should the auditor consider? a.

Interrelationships of financial information.

b.

Nonfinancial information that may affect financial information.

c.

The nature of the assertion tested.

d.

Explanations provided by the client.


A-3, M-6


AIII-C1.1


R&U

Page Reference:

50


C

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



46. A-06234 A A had the management of Paper Plate Corp. prepare a letter requesting Paper Plate's external counsel to identify any pending and/or unasserted claims against Paper Plate. The A received a letter from the external counsel with the following response: "We are only aware of the following: Paper Plate was named as the defendant in a class action lawsuit for an alleged defective product manufactured two years ago. There is a remote possibility that Paper Plate will suffer any damages, because this firm has successfully defended similar cases in the past. However, similar cases that have been brought against competitors were settled between $1.5 and $2 million." Should the A accept the letter from the external counsel? a.

No, because the A allowed Paper Plate to prepare the letter.

b.

Yes, even though the A did not get a specific amount of loss.

c.

No, because the A did not consult a specialist in class action suits.

d.

Yes, if the A discusses the prior lawsuits with the competitors' lawyers.


A-4, M-7


AIII-D4.1


Application

Page Reference:

45


B

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



47. A-06235 Which of the following matters does an auditor usually communicate to management? a.

Arrangements involving a predecessor auditor.

b.

Indications of adverse key financial ratios.

c.

An agreement regarding preliminary materiality thresholds.

d.

Identification of recurring operating losses.


A-2, M-3


AI-E3.1


R&U

Page Reference:

20


A

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



48. A-06237 In which of the following engagements would a practitioner provide limited assurance about the possible significant effects on the historical financial statements if a change in capitalization had occurred at an earlier date? a.

A compilation of a financial projection.

b.

A review of pro forma financial information.

c.

An examination of management's discussion and analysis.

d.

An audit of condensed interim financial information.


A-5, M-4


AIV-B1.1


R&U

Page Reference:

48


B

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



49. A-06238 (Adapted) A report on an issuer's integrated audit must include each of the following statements, except: a.

The audit was conducted in accordance with AIA standards.

b.

The auditor believes the audit provides a reasonable basis for the issued opinion.

c.

Management is responsible for maintaining effective internal control.

d.

The audit includes obtaining an understanding of internal control over financial reporting.


A-5, M-2


AIV-A3.2


R&U

Page Reference:

22


A

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


2017 AIA Newly Released Simulations—Auditing

AUDITING 2017 AIA Newly Released Sims



Task 3057_01 Unit & Sim # / Task Position Sim Task Name: Skill Level: Representative Task: Web Repo ID:

A4_Sim 1 (116) / Task 6 Physical Inventory Results (AIA R-2017) Application AIII-D3.2 2109





Task 3057_01 (Selection List)



Task 3057_01 (Solution) Tip: Several selections can be quickly eliminated by knowing whether the transaction is a sale or purchase of inventory. Test count No. 1—Inspect ing purchase documents for proper shipping and receiving information to inclusion in inventory count In this test count, the auditor's test count quantity was less than the inventory quantity per client records. The client's explanation was that it included in its records inventory that was shipped FOB shipping point, which was received on September 2, Year 1. This explanation indicates that it is a purchase of inventory because the client received inventory. Items purchased with FOB shipping-point require the client to record the items as inventory as soon as the vendor ships the inventory. Therefore, the auditor should inspect ing documents to the client's explanation. Specifically, the auditor should proper shipping (that it is FOB shipping point) and receiving information ( number of items received) to the amount to be included in the inventory count. Test count No. 2—Inspect ing sale and shipment documentation for proper shipping for inclusion in inventory count In this test count, the auditor's test count quantity was less than the inventory quantity per client records. The client's explanation was that the inventory was sold to a customer FOB destination and was not received by the customer until September 2, Year 1. Inventory sold means that this is a sale of inventory. Items shipped FOB destination require the client to record the sale and relief of inventory when the item has reached its destination. In this case, the sale and relief of inventory will be recorded on September 2, Year 1 (after fiscal year-end). Therefore, the auditor should inspect ing documents to corroborate the client's explanation. Specifically, the auditor should inspect ing sale and shipment documentation for inclusion of these items in the inventory count. Test count No. 3—Inspect ing purchase documents for proper shipping and receiving information to inclusion in inventory count In this test count, the auditor's test count quantity was less than the inventory quantity per client records. The explanation provided was that payments were made in advance for items received September 2, Year 1. This transaction relates to a purchase transaction because the client is paying for items. The auditor needs to that the items should be included in the count (i.e. the items were shipped FOB shipping point and were shipped prior to or on August 30). The auditor should inspect ing purchase documents for proper shipping and receiving information to inclusion in the inventory count. Test count No. 4—Request that client make appropriate correction to record additional inventory In this test count, the auditor's test count quantity was more than the inventory quantity per client records. The explanation provided was that inventory was received on August 30, Year 1, but the vendor shipment receipt was not recorded. Inventory received prior to year-end needs to be included in the inventory count. Therefore, the auditor should request that the client make an adjusting journal entry to record the additional inventory.


2017 AIA Newly Released Simulations—Auditing Test count No. 5—Inspect ing sale and shipment documentation for proper shipping for inclusion in inventory count In this test count, the auditor's test count quantity was less than the inventory quantity per client records. The explanation provided was that inventory was separated for a September 1 sale (after fiscal year-end) and was held on dock for customer pickup. The items should be included in the count as of August 30 because this sale is after year-end. Therefore, the auditor should inspect ing sale and shipping documentation for proper shipping (which would say customer pickup) for inclusion in the inventory count. Test count No. 6—Review return shipment documentation to exclusion from inventory count In this test count, the auditor's test count was more than the inventory quantity per client records. The explanation provided was that additional items were identified as damaged and will be returned to the vendor. Therefore, the auditor should review the return shipment documentation to that this inventory should be excluded from the inventory count.



Task 531_01 Unit & Sim # / Task Position Sim Task Name: Skill Level: Representative Task: Web Repo ID:

A4_Sim 2 (105) / Task 7 Journal Entry Testing (AIA R-2017) Application AIII-C6.2 2112





Task 531_01 (Selection List)



Task 531_01 (Solution)

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



Task 4246_01 Research Unit & Sim # / Task Position Sim Task Name: Skill Level: Representative Task: Web Repo ID:

A5_Sim 1 (111) / Task 7 Research (AIA R-2017) Application AIV-B1.1 2100



Task 4246_01 Research (Solution)

AT-C 395.86 Keywords: Report Date MD&A For best results: • • •

Click on "advanced search" In "containing all these words" type Report Date MD&A Click on "search"


Aud - 2017 Aia Released Questions.pdf 5q594i

Overview 3e4r5l

More details w3441

Related Documents 3m3m1z

Aud - 2017 Aia Released Questions.pdf 5q594i

2015 Aia Released Questions Aud 1k1s3i

2013 Aia Released Aud Mcqs 1v2j6x

Aia Released Questions Aud 2015 Difficult 4v2q2o

Bec - 2017 Aia Released Questions.pdf 48d13

Audit 2015 Aia Released Question 1k50v

More Documents from "Ahmed" 174su

A Study And Survey Of Ofdm Versus Cofdm 4n6p4y

6l6m1j

6l6m1j

Ade-422-423-424-workshop-manual-abby.pdf 6o6s1p

Bw75h 4i6m42

Material Caterpillar D8r Bulldozer Transmission Power Train Hydraulic System Components Diagrams 1l3y28