WILEY EXAM REVIEW Volume 2 ppt

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2011-2012
WILEY
EXAM
REVIEW
3
8
th Edition
Volume 2
Problems and Solutions
O. Ray Whittington, CPA, PhD
Patrick R. Delaney, CPA, PhD
JOHN WILEY & SONS, INC.
The following items, Copyright © by the American Institute of Certified Public Accountants, Inc., are reprinted with per-
mission:
1. Material from Uniform CPA Examination Questions and Answers, 1978 through 2001.
2. Information for Uniform CPA Examination Candidates, Board of Examiners, 2000.
3. Material from the Certified Internal Auditor Examination, Copyright
© 1994 through 1997 by the Institute of In-
ternal Auditors, Inc., are reprinted and/or adapted with permission.
4. Material from the Certified Management Accountant Examinations, Copyright
© 1993 through 1997 by the In-
stitute of Certified Management Accountants, are reprinted and/or adapted with permission.
From a declaration of principles jointly adopted by a Committee of the American Bar Association and a Committee of
Publishers.
This book is printed on acid-free paper.
∞
Copyright © 2011 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,
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ISBN: 978-0-470-92384-9 (Volume 2 paperback); 978-1-118-10714-0 (ebk); 978-1-118-10715-7 (ebk);
978-1-118-10716-4 (ebk)
ISBN: 978-0-470-93241-4 (Set)
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
PREFACE
Passing the CPA exam upon your first attempt is possible! The Wiley CPA Examination Review preparation ma-
terials provide you with the necessary materials (visit our Web site at www.wiley.com/cpa for more information). It’s up
to you to add the hard work and commitment. Together we can beat the first-time pass rate of less than 50%. All Wiley
CPA products are continuously updated to provide you with the most comprehensive and complete knowledge base.
Choose your products from the Wiley preparation materials and you can proceed confidently. You can select support
materials that are exam-based and user-friendly. You can select products that will help you pass!

The first purpose of Volume 2 is to provide CPA candidates with sample examination problems/questions organized
by topic (e.g., internal control, consolidations, etc.). This text includes over 2,600 multiple-choice questions. These
questions provide an effective means of studying the material tested on past exams; however, it is also necessary to work
with task-based simulations to develop the solutions approach (the ability to solve CPA questions and problems
efficiently).
The second objective of this volume is to explain the AICPA unofficial answers and author question answers to the
examination problems/questions included in this text. The AICPA published all CPA examinations and unofficial an-
swers through the November 1995 exam and selected questions and answers since then. No explanation is made, how-
ever, of the procedures that should have been applied to the examination problem to obtain the unofficial answers. Relat-
edly, the unofficial answers to multiple-choice questions provide no justification and/or explanation. This text provides
explanations of both how to work problems and the unofficial answers to multiple-choice questions.
This text is designed to be used in conjunction with Volume 1, Outlines and Study Guides, but may be used with or
without any other study source. Both volumes are organized into 47 manageable study units (modules) to assist candi-
dates in organizing their study programs. The multiple-choice questions in this volume are grouped into topical catego-
ries (submodules) that correspond to the sequencing of material as it appears in Volume 1.
New author-constructed questions have been added to this Thirty-Eighth Edition. As new questions and problems
are added, older ones are deleted. New problems have been added to address the new content of the exam that was
adopted January 1, 2011.
A Sample Examination for each of the four parts of the exam is included in the Appendix at the end of this volume.
The CPA exam is one of the toughest exams you will ever take. It will not be easy. But if you follow our guidelines
and focus on your goal, you will be thrilled with what you can accomplish.
Ray Whittington
April 2011
Don’t forget to visit our Web site at www.wiley.com/cpa
for supplements and updates.
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CONTENTS
1 HOW TO USE THIS BOOK 1
2 AUDITING AND ATTESTATION 7
M

odule
*
Abbreviations
N
umbers
Professional Res
p
onsibilities RESP 1 8
En
g
a
g
ement Plannin
g
, Obtainin
g
an Understandin
g
of the Client and Assessing Risks ENPL 2 24
Understandin
g
Internal Control and Assessin
g
Control Risk IC 3 67
Res
p
ondin
g
to Risk Assessment: Evidence
Accumulation and Evaluation EVID 4 113

Re
p
ortin
g
REPT 5 163
Accountin
g
and Review Services AARS 6 202
Audit Sam
p
lin
g
AUDS 7 214
Auditin
g
with Technolo
gy
ATEC 8 230
3 FINANCIAL ACCOUNTING AND REPORTING 239
Basic Theor
y
and Financial Re
p
ortin
g
TREP 9 241
A. Basic Concepts 241
B. Error Correction 268
C. Accounting Changes 280
D. Financial Statements 295

Inventor
y
INVY 10 333
Fixed Assets FA 11 361
Monetar
y
Current Assets and Current Liabilities CACL 12 392
Present Value PV 13 426
A. Fundamentals 426
B. Bonds 437
C. Debt Restructure 456
D. Pensions 460
E. Leases 473
Deferred Taxes DETX 14 494
Stockholders’ E
q
uit
y
STK 15 513
Investments IVES 16 546
Statement of Cash Flows SCF 17 573
Business Combinations and Consolidations BCC 18 592
Derivative Instruments and Hed
g
in
g
Activities DIHA 19 617
Miscellaneous MISC 20 634
A. Personal Financial Statements 634
B. Interim Reporting 638

C. Segment Reporting 642
D. Partnership Accounting 649
E. Foreign Currency Translation 661
Governmental (State and Local) Accountin
g
GOV 21 670
Not-for-Profit Accountin
g
NFP 22 695
4 REGULATION 711

*
As explained in Chapter 1, this volume is organized into 47 modules (manageable study units). Volume 1 is organized in a parallel
fashion.
5 PROFESSIONAL RESPONSIBILITIES AND BUSINESS LAW 713
M
odule
Abbreviations
N
umbers
Professional and Le
g
al Res
p
onsibilities PLR 23 714
Federal Securities Acts FEDE 24 730
Business Structure BSTR 25 742
Contracts CONT 26 761
Sales SALE 27 778
Commercial Pa

p
er CPAP 28 793
Secured Transactions SECU 29 810
Bankru
p
tc
y
BANK 30 818
Debtor-Creditor Relationshi
p
s DBCR 31 829
A
g
enc
y
AGEN 32 837
Re
g
ulation of Em
p
lo
y
ment and Environment EMEN 33 845
Pro
p
ert
y
PROP 34 856
6 FEDERAL TAXATION 861
Individual Taxation ITAX 35 862

Transactions in Pro
p
ert
y
TPRO 36 931
Partnershi
p
s Taxation PTAX 37 948
Cor
p
orate Taxation CTAX 38 974
Gift and Estate Taxation GETX 39 1031
7 BUSINESS ENVIRONMENT AND CONCEPTS 1055
Cor
p
orate Governance, Internal Control, and
Enterprise Risk Management CGIC 40 1056
Information Technolo
gy
IFTC 41 1066
Economics, Strate
gy
, and Globalization ECON 42 1093
Financial Risk Mana
g
ement and Ca
p
ital Bud
g
etin

g
RMCB 43 1114
Financial Mana
g
ement FINM 44 1132
Performance Measures PERM 45 1158
Cost Measurement COST 46 1171
Plannin
g
, Control, and Anal
y
sis PLAN 47 1186
APPENDIX A: SAMPLE EXAMINATIONS 1207
APPENDIX B: SAMPLE TESTLETS RELEASED FROM THE AICPA 1299
APPENDIX C: 2011 RELEASED AICPA QUESTIONS 1323
ABOUT THE AUTHORS
Ray Whittington, PhD, CPA, CMA, CIA, is the dean of the College of Commerce at DePaul University. Prior to
joining the faculty at DePaul, Professor Whittington was the Director of Accountancy at San Diego State University.
From 1989 through 1991, he was the Director of Auditing Research for the American Institute of Certified Public Ac-
countants (AICPA), and he previously was on the audit staff of KPMG. He previously served as a member of the Audit-
ing Standards Board of the AICPA and as a member of the Accounting and Review Services Committee and the Board of
Regents of the Institute of Internal Auditors. Professor Whittington has published numerous textbooks, articles, mono-
graphs, and continuing education courses.
Patrick R. Delaney, deceased, was the dedicated author and editor of the Wiley CPA Exam Review books for twenty
years. He was the Arthur Andersen LLP Alumni Professor of Accountancy and Department Chair at Northern Illinois
University. He received his PhD in Accountancy from the University of Illinois. He had public accounting experience
with Arthur Andersen LLP and was coauthor of GAAP: Interpretation and Application, also published by John Wiley &
Sons, Inc. He served as Vice President and a member of the Illinois CPA Society’s Board of Directors, and was Chair-
man of its Accounting Principles Committee; was a past president of the Rockford Chapter, Institute of Management Ac-
countants; and had served on numerous other professional committees. He was a member of the American Accounting

Association, American Institute of Certified Public Accountants, and Institute of Management Accountants. Professor
Delaney was published in The Accounting Review and was a recipient of the Illinois CPA Society’s Outstanding Educator
Award, NIU’s Excellence in Teaching Award, and Lewis University’s Distinguished Alumnus Award. He was involved
in NIU’s CPA Review Course as director and instructor.
ABOUT THE CONTRIBUTORS
Anita L. Feller, PhD, CPA, is a Lecturer in Accountancy at the University of Illinois at Urbana-Champaign. She is
the recipient of the Commerce Council Excellence in Teaching Award. Formerly a staff accountant in the tax department
at KPMG Peat Marwick, she teaches courses in financial accounting and applied professional research. Professor Feller
also teaches financial and managerial topics in the University of Illinois CPA Review Course. She is also the author of
Mastering Accounting Research for the CPA Exam and Wiley CPA Exam Review Impact Audios (both published by
Wiley).
Edward C. Foth, PhD, CPA, is the Administrator of the Master of Science in Taxation Program at DePaul Univer-
sity. He is a member of the American Accounting Association, the American Institute of Certified Public Accountants,
the Illinois CPA Society, and the American Taxation Association. He has been a recipient of the Ledger & Quill Faculty
Excellence Award, and is the author of CCH Incorporated’s Federal Tax Study Manual, Federal Taxation Refresher
Course, and is coauthor of their S Corporations Guide. He prepared Chapter 6.
Mark L. Frigo, PhD, CPA, CMA, is Director of The Center for Strategy, Execution and Valuation in Kellstadt
Graduate School of Business and Eichenbaum Foundation Distinguished Professor of Strategy and Leadership in the
School of Accountancy at DePaul University. Professor Frigo authored the Performance Measures module for the
Business Environment and Concepts section of this manual.
Kurt Pany, PhD, CPA, is a Professor of Accounting at Arizona State University. Prior to entering academe, he
worked as a staff auditor for Deloitte and Touche LLP. He is a former member of the AICPA’s Auditing Standards
Board and has taught in the Arizona State University CPA Review Course.
Patricia L. Smith, MBA, CPA, is an instructor in the School of Accountancy at DePaul University. She has a
background in auditing and financial accounting. She has audit experience with KPMG. She contributed to the auditing
modules.
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HOW TO USE THIS BOOK
This volume is a collection of CPA questions, task-based simulations and solutions. The text is designed
and organized to be used in conjunction with Volume 1, CPA Examination Review: Outlines and Study

Guides, but may be used with or without any other study source. Each module in this volume corresponds to a
module in Volume 1. In this volume, a module consists of
1. Multiple-choice questions
2. Task-based simulations
3. Written communication tasks
4. Unofficial answers for the multiple-choice questions with the author’s explanations
5. Answers for task-based simulations
The sources of the questions and task-based simulations material in each module are, of course, the four
sections of the CPA Exam. The modules are grouped together into chapters, which correspond with the four
sections of the exam. The following table shows how the modules are organized in Volume 2.
This manual has been updated for the major changes that occurred in the CPA exam effective January 1,
2011.
CPA EXAM SECTION AND CORRESPONDING MODULES
Auditin
g
and Attestation CH 2 Modules 1-6
Financial Accountin
g
and Re
p
ortin
g
CH 3 Modules 7-20
Re
g
ulation CH 5 & 6 Modules 21-37
Business Environment and Conce
p
ts CH 7 Modules 38-45
The material in Volume 2 allows candidates to work CPA exam questions, some of which have appeared

on previous examinations. This provides candidates with an effective method of studying the material tested
on the exam. However, candidates should also realize that the CPA has new material. Therefore, candidates
should use the study guides and outlines included in Volume 1 as a means of bridging this gap.
Also included at the end of this volume are sample exams for all four sections. They are included to en-
able candidates to gain experience in taking a “realistic” exam. While working through the modules, the can-
didate can become accustomed to concentrating on a fairly narrow range of topics. By taking the sample ex-
aminations near the end of their study program, candidates will be better prepared for taking the actual
examination.
Before you begin working the CPA questions in this volume, peruse the table of contents and scan through
the book, noting the manner in which the chapters and modules are organized. The schedule at the beginning
of each chapter provides an index to the questions appearing in each module. Some questions have been
modified to reflect recent changes in law or practice. For a complete analysis of recent examinations and the
AICPA Uniform CPA Examination Content Specification Outlines of future examinations, see the beginning
of each chapter starting with Chapter 5 in Volume 1, Outlines and Study Guides.
Multiple-Choice Questions
The multiple-choice questions and answer explanations can be used in many ways. First, they may be
used as a diagnostic evaluation of your knowledge. For example, before beginning to review audit sampling
you may wish to answer every fourth multiple-choice question to determine your ability to answer CPA ex-
amination questions on audit sampling. The apparent difficulty of the questions and the correctness of your
answers will allow you to determine the necessary breadth and depth of your review. Additionally, exposure
to examination questions prior to review and study of the material should provide motivation. You will de-
velop a feel for your level of proficiency and an understanding of the scope and difficulty of past examination
questions.
Second, the multiple-choice questions can be used as a poststudy or postreview evaluation. You should
attempt to understand all concepts mentioned (even in incorrect answers) as you answer the questions. Refer
to the explanation of the answer for discussion of the alternatives even though you selected the correct re-
2 CH 1 HOW TO USE THIS BOOK
sponse. Thus, you should read the explanation of the unofficial answer unless you completely understand the
question and all of the alternative answers.
Third, you may wish to use the multiple-choice questions as a primary study vehicle. This is probably the

quickest, but least thorough, approach. Make a sincere effort to understand the question and to select the cor-
rect reply before referring to the answer and explanation. In many cases the explanations will appear inade-
quate because of your unfamiliarity with the topic.
The multiple-choice questions in Volume 2 are grouped into study sets. The study sets include a smaller
amount of related material than the study modules, which provides greater flexibility in the individual candi-
date’s study strategy. The answer explanations for the multiple-choice questions in Volume 2 also include
headings which provide cross-references to the text material in Volume 1. For example, in Module 11, Fixed
Assets, the heading “F. Depreciation” appears above the answers to those questions dealing with depreciation.
The topical coverage of depreciation in Volume 1 can then be found by referring to the corresponding heading
within Module 11.
One of the benefits of working through multiple-choice questions is that it helps you to identify your weak
areas. Once you have graded your answers, your strong areas and weak areas should be clearly evident. Yet,
the important point here is that you should not stop at a simple percentage evaluation. The percentage only
provides general feedback about your knowledge of the material contained within that particular module. The
percentage does not give you any specific feedback regarding the concepts which were tested. In order to get
this feedback, you should look at the questions missed on an individual basis because this will help you gain a
better understanding of why you missed the question. This feedback process has been facilitated by the fact
that within each module where the multiple-choice answer key appears, two blank lines have been inserted
next to the multiple-choice answers. As you grade the multiple-choice questions, mark those questions which
you have missed. However, instead of just marking the questions right and wrong, you should now focus on
marking the questions in a manner which identifies why you missed the question. As an example, a candidate
could mark the questions in the following manner:
9 for math mistakes, x for conceptual mistakes, and ? for
areas which the candidate was unfamiliar with. The candidate should then correct these mistakes by rework-
ing through the marked questions. The objective of this marking technique is to help you identify your weak
areas and thus, the concepts which you should be focusing on. While it is still important for you to get be-
tween 75% and 80% correct when working multiple-choice questions, it is more important for you to under-
stand the concepts. This understanding applies to both the questions answered correctly and those answered
incorrectly. Remember, most of the questions on the CPA exam will be different from the questions in the
book; however, the concepts will be the same. Therefore, your preparation should focus on understanding

concepts, not just getting the correct answer.
The multiple-choice questions substantially outnumber the task-based simulations in this book. This is
similar to what can be expected on the CPA exam. The multiple-choice questions make up about between
60% and 85% (depending on the section) of the total examination.
One difficulty with so many multiple-choice questions is that you may overemphasize them. Candidates
generally prefer to work multiple-choice questions because they are shorter and less time consuming and solv-
able with less effort.
Another difficulty with the large number of multiple-choice questions is that you may tend to become
overly familiar with the questions. The result may be that you may begin reading the facts and assumptions of
previously studied questions into the questions on your examination. Guard against this potential problem by
reading each multiple-choice question with extra care.
Although not as critical as for task-based simulations, the solutions approach (a systematic problem-
solving methodology) is relevant to multiple-choice questions.
Multiple-Choice Screen Layout
The following is a computer screenshot that illustrates the manner in which multiple-choice questions will
be presented:
CH 1 HOW TO USE THIS BOOK 3
As indicated previously, multiple-choice questions will be presented in three individual testlets of 24 to 30
questions each. Characteristics of the computerized testlets of multiple-choice questions include the follow-
ing:
1. You may move freely within a particular testlet from one question to the next or back to previous
questions until you click the “Exit” button. Once you have indicated that you have finished the testlet
by clicking on the “Exit” button and reconfirmed, you can never return to that set of questions.
2. A button on the screen will allow you to “flag” a question for review if you wish to come back to it
later.
3. A four-function computer calculator with an electronic tape is available as a tool.
4. The time remaining for the entire exam section is shown on the screen.
5. The questions will be shown at the bottom of the screen. You may navigate between questions by
simply clicking on the question number.
6. The “Help” button will provide you with help in navigating and completing the testlet.

The screenshot above was obtained from the AICPA’s sample exam at www.cpa-exam.org. Candidates
are urged to complete the tutorial and other example questions on the AICPA’s Web site to obtain additional
experience with the computer-based testing.
Multiple-Choice Questions Solutions Approach
1. Work individual questions in order.
a. If a question appears lengthy or difficult, skip it until you can determine that extra time is avail-
able. Mark it for review to remind you to return to it later.
2. Read the stem of the question without looking at the answers.
a. The answers are sometimes misleading and may cause you to misread or misinterpret the question.
3. Read each question carefully to determine the topical area.
a. Study the requirements first so you know which data are important
b. Note keywords and important data
c. Identify pertinent information
d. Be especially careful to note when the requirement is an exception (e.g., “Which of the following
is not an effective disclaimer of the implied warranty of merchantability?”).
e. If a set of data is the basis for two or more questions, read the requirements of each of the ques-
tions before beginning to work the first question (sometimes it is more efficient to work the ques-
tions out of order)
4 CH 1 HOW TO USE THIS BOOK
f. Be alert to read questions as they are, not as you would like them to be. You may encounter a fa-
miliar looking item; don’t jump to the conclusion that you know what the answer is without read-
ing the question completely.
4. Anticipate the answer before looking at the alternative answers.
a. Recall the applicable principle (e.g., offer and acceptance, requisites of negotiability, etc.) and the
respective applications thereof.
b. If a question deals with a complex area, it may be very useful to set up a timeline or diagram using
abbreviations.
5. Read the answers and select the best alternative.
6. Click on the correct answer (or your educated guess).
7. After completing all of the questions including the ones marked for review click on the “Done”

button to close out the testlet. Remember once you have closed out the testlet you can never re-
turn to it.
Currently, all multiple-choice questions are scored based on the number correct, weighted by a difficulty
rating (i.e., there is no penalty for guessing). The rationale is that a “good guess” indicates knowledge. Thus,
you should answer all multiple-choice questions.
Task-Based Simulations
Simulations are case-based problems designed to
• Test integrated knowledge
• More closely replicate real-world problems
• Assess research and other skills
Any of the following types of responses might be required on task-based simulations:
• Drop-down selection
• Numeric and monetary inputs
• Formula answers
• Check box response
• Enter spreadsheet formulas
• Research results
To complete the simulations, candidates are provided with a number of tools, including
• A four-function computer calculator with an electronic tape
• Scratch spreadsheet
• The ability to split windows horizontally or vertically to show two tabs on the screen (e.g., you can
examine the situation tab in one window and a requirement tab in a second window)
• Access to professional literature databases to answer research requirements
• Copy and paste functions
In addition, the resource tab provides other resources that may be needed to complete the simulation. For
example, a resource tab might contain a present value table for use in answering a lease problem. A window
on the screen shows the time remaining for the entire exam, and the “Help” button provides instructions for
navigating the simulation and completing the requirements.
Task-Based Simulations Solutions Approach
The following solutions approach is suggested for answering simulations:

1. Review the entire background and problem. Get a feel for the topical area and related concepts that
are being tested. Even though the format of the question may vary, the exam continues to test your
understanding of applicable principles or concepts. Relax, take a deep breath, and determine your
strategy for conquering the simulation.
2. Identify the requirements of the simulation. This step will help you focus in more quickly on the
solution(s) without wasting time reading irrelevant material.
3. Study the items to be answered. As you do this and become familiar with the topical area being
tested, you should review the concepts of that area. This will help you organize your thoughts so that
you can relate logically the requirements of the simulation with the applicable concepts.
CH 1 HOW TO USE THIS BOOK 5
4. Use the scratch paper (which will be provided) and the spreadsheet and calculator tools to assist
you in answering the simulation.
You are urged to complete the tutorial and other sample tests that are on the AICPA’s Web site (www.cpa-
exam.org) to obtain additional experience with the interface and computer-based testing.
Task-Based Research Simulations
One research simulation will be included on the Auditing and Attestation, Financial Accounting and
Reporting, and Regulation sections of the exam. Research simulations require candidates to search the
professional literature and income tax code in electronic format and interpret the results. The table below
describes the research material that will be available for each section of the exam that includes research
simulations.
Section
P
otential research resources
Auditin
g
and Attestation • AICPA Statements on Auditin
g
Standards and
Interpretations (AU)
• PCAOB Auditing Standards and Interpretations

(PCAOB)
• AICPA Statements on Attestation Standards and
Interpretations (AT)
• AICPA Statements on Standards for Accounting and
Review Services and Interpretations (AR)
• AICPA Code of Professional Conduct (ET)
• AICPA Bylaws (BL)
• AICPA Statements on Standards for Valuation Services
(VS)
• AICPA Statement on Standards for Consulting Services
(CS)
• AICPA Statements on Standards for Quality Control
(QC)
• AICPA Peer Review Standards (PR)
• AICPA Statement on Standards for Tax Services (TS)
• AICPA Statement on Responsibilities in Personal
Financial Planning Practice (PFP)
• AICPA Statement on Standards for Continuing
Professional Education Programs (CPE)
Financial Accountin
g
and Re
p
ortin
g
• FASB Accountin
g
Standards Codification
Re
g

ulation • Internal Revenue Code
The research material may be searched using the table of contents or a keyword search. Therefore,
knowing important code sections, FASB codification sections, auditing standards section numbers, etc. may
speed up your search.
If possible, it is important to get experience using an electronic version of the research databases to
sharpen your skills. If that is not available, you should use the printed copy of the professional standards and
the IRS code and regulations to answer the simulations in the manual. Remember, the AICPA offers an
electronic version of professional standards to registered candidates. Refer to the AICPA Web site at
www.cpa-exam.org.
Written Communication Tasks
The Business Environment and Concepts section of the exam will require the completion of three written
communication questions. Communication questions will involve some real-world writing assignment that a
CPA might have to perform, such as a memorandum to a client explaining a management technique. The
subject of the communication will be a Business Environment and Concepts topic.
It is essential for the communication to be in your own words. In addition, the communication will not be
graded for technical accuracy. If it is on point, it will only be graded for usefulness to the intended user and
writing skills. The following screenshot illustrates a task requiring the composition of a memorandum to a
company president.
6 CH 1 HOW TO USE THIS BOOK
Diagnose Your Weaknesses prior to the Exam
This volume of questions, task-based simulations and solutions provides you with an opportunity to
diagnose and correct any exam-taking weaknesses prior to your taking the examination. Continuously analyze
the contributing factors to incomplete or incorrect solutions to CPA questions prepared during your study
program. General categories of candidates’ weaknesses include
1. Failure to understand the exam question requirements
2. Misunderstanding the supporting text of the question
3. Lack of knowledge of material tested, especially recently issued pronouncements
4. Failure to develop proficiency with practice tools such as electronic research databases and spread-
sheets
5. Inability to apply the solutions approach

6. Lack of an exam strategy (e.g., allocation of time)
7. Sloppiness and computational errors
8. Failure to proofread and edit
Time Management
Each section of the CPA exam will contain a number of multiple-choice testlets, and all of the sections ex-
cept Business Environment and Concepts will contain two simulations. As you complete each testlet keep
track of how you performed in relation to the AICPA suggested times. After you finish the multiple-choice
testlets, budget your time for the simulations based on your remaining time and the AICPA suggested times.
For example, if you have two hours remaining to complete two simulations that each have the same AICPA
suggested time, budget one hour for each simulation. Remember that you alone control watching your prog-
ress towards successfully completing this exam.
Additional Study Aids
A more complete discussion of the solutions approach, including illustrations thereof, appears in Chapter 3
of Volume 1, Outlines and Study Guides. Additionally, use of “note cards” as an integral part of your study
program is discussed and illustrated in Chapter 1 of Volume 1. Chapter 4 of Volume 1 includes a detailed
checklist to assist candidates with their last-minute preparation and to provide guidance concerning the actual
taking of the exam.
NOW IS THE TIME
TO MAKE A COMMITMENT
7
AUDITING AND ATTESTATION
The Auditing and Attestation Exam is scheduled for four and one-half hours. Based on information released by the
AICPA, candidates should expect three multiple-choice testlets of approximately thirty questions each, and two simulations.
The Uniform CPA Examination Content Specifications appear in Volume 1, Outlines and Study Guides.
Module 1/Professional Responsibilities (RESP)
39 Multiple-Choice 8 17
7 Task-Based Simulations 12 21
Module 2/Engagement Planning, Obtaining an Understanding of the Client and
Assessing Risks (ENPL)
113 Multiple-Choice 24 47

14 Task-Based Simulations 34 59
Module 3/Understanding Internal Control and Assessing Control Risk (IC)
166 Multiple-Choice 67 91
9 Task-Based Simulations 82 109
Module 4/Responding to Risk Assessment: Evidence Accumulation and Evaluation
(EVID)
169 Multiple-Choice 113 137
13 Task-Based Simulations 128 156
Module 5/Reporting (REPT)
164 Multiple-Choice 163 183
4 Task-Based Simulations 179 200
Module 6/Accounting and Review Services (AARS)
49 Multiple-Choice 202 208
1 Task-Based Simulations 207 213
Module 7/Audit Sampling (AUDS)
58 Multiple-Choice 214 222
3 Task-Based Simulations 220 229
Module 8/Auditing with Technology (ATEC)
32 Multiple-Choice 230 234
1 Task-Based Simulation 233 238
Auditing and Attestation Sample Examination
1207
Auditing and Attestation Regulation AICPA Sample Testlets
1299
Auditing and Attestation 2011 Released AICPA Questions
1323
MODULE 1 PROFESSIONAL RESPONSIBILITIES
8
PROFESSIONAL RESPONSIBILITIES
MULTIPLE-CHOICE QUESTIONS (1-39)

1. Which of the following best describes what is meant by
the term generally accepted auditing standards?
a. Rules acknowledged by the accounting profession
because of their universal application.
b. Pronouncements issued by the Auditing Standards
Board.
c. Measures of the quality of the auditor’s perfor-
mance.
d. Procedures to be used to gather evidence to support
financial statements.
2. For which of the following can a member of the AICPA
receive an automatic expulsion from the AICPA?
I. Member is convicted of a felony.
II. Member files his own fraudulent tax return.
III. Member files fraudulent tax return for a client knowing
that it is fraudulent.
a. I only.
b. I and II only.
c. I and III only.
d. I, II, and III.
3. Which of the following is an example of a safeguard
implemented by the client that might mitigate a threat to
independence?
a. Required continuing education for all attest
engagement team members.
b. An effective corporate governance structure.
c. Required second partner review of an attest
engagement.
d. Management selection of the CPA firm.
4. Which of the following is a “self review” threat to

member independence?
a. An engagement team member has a spouse that
serves as CFO of the attest client.
b. A second partner review is required on all attest
engagements.
c. An engagement team member prepares invoices
for the attest client.
d. An engagement team member has a direct financial
interest in the attest client.
5. According to the standards of the profession, which of
the following circumstances will prevent a CPA performing
audit engagements from being independent?
a. Obtaining a collateralized automobile loan from a
financial institution client.
b. Litigation with a client relating to billing for con-
sulting services for which the amount is immate-
rial.
c. Employment of the CPA’s spouse as a client’s di-
rector of internal audit.
d. Acting as an honorary trustee for a not-for-profit
organization client.
6. 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 representation
that the
a. Actual fee would be substantially higher.
b. Actual fee would be substantially lower than the
fees charged by other CPAs for comparable ser-
vices.

c. CPA would not be independent.
d. Fee was a competitive bid.
7. According to the ethical standards of the profession,
which of the following acts is generally prohibited?
a. Issuing a modified report explaining a failure to
follow a governmental regulatory agency’s stan-
dards when conducting an attest service for a cli-
ent.
b. Revealing confidential client information during a
quality review of a professional practice by a team
from the state CPA society.
c. Accepting a contingent fee for representing a client
in an examination of the client’s federal tax return
by an IRS agent.
d. Retaining client records after an engagement is ter-
minated prior to completion and the client has de-
manded their return.
8. According to the profession’s ethical standards, which
of the following events may justify a departure from a
Statement of the Governmental Accounting Standards
Board?
N
ew
legislation
E
volution of a new form
of business transaction
a. No Yes
b. Yes No
c. Yes Yes

d. No No
9. May a CPA hire for the CPA’s public accounting firm a
non-CPA systems analyst who specializes in developing
computer systems?
a. Yes, provided the CPA is qualified to perform each
of the specialist’s tasks.
b. Yes, provided the CPA is able to supervise the spe-
cialist and evaluate the specialist’s end product.
c. No, because non-CPA professionals are not per-
mitted to be associated with CPA firms in public
practice.
d. No, because developing computer systems is not
recognized as a service performed by public ac-
countants.
10. Stephanie Seals is a CPA who is working as a controller
for Brentwood Corporation. She is not in public practice.
Which statement is true?
a. She may use the CPA designation on her business
cards if she also puts her employment title on
them.
b. She may use the CPA designation on her business
cards as long as she does not mention Brentwood
Corporation or her title as controller.
c. She may use the CPA designation on company
transmittals but not on her business cards.
d. She may not use the CPA designation because she
is not in public practice.
11. According to the standards of the profession, which of
the following activities would most likely not impair a
CPA’s independence?

a. Providing advisory services for a client.
MODULE 1 PROFESSIONAL RESPONSIBILITIES
9
b. Contracting with a client to supervise the client’s
office personnel.
c. Signing a client’s checks in emergency situations.
d. Accepting a luxurious gift from a client.
12. Which of the following reports may be issued only by
an accountant who is independent of a client?
a. Standard report on an examination of a financial
forecast.
b. Report on consulting services.
c. Compilation report on historical financial state-
ments.
d. Compilation report on a financial projection.
13. According to the standards of the profession, which of
the following activities may be required in exercising due
care?
Consulting
with experts
Obtaining
specialty accreditation
a. Yes Yes
b. Yes No
c. No Yes
d. No No
14. Larry Sampson is a CPA and is serving as an expert
witness in a trial concerning a corporation’s financial state-
ments. Which of the following is(are) true?
I. Sampson’s status as an expert witness is based upon his

specialized knowledge, experience, and training.
II. Sampson is required by AICPA ruling to present his
position objectively.
III. Sampson may regard himself as acting as an advocate.
a. I only.
b. I and II only.
c. I and III only.
d. III only.
15. According to the ethical standards of the profession,
which of the following acts is generally prohibited?
a. Purchasing a product from a third party and resell-
ing it to a client.
b. Writing a financial management newsletter pro-
moted and sold by a publishing company.
c. Accepting a commission for recommending a
product to an audit client.
d. Accepting engagements obtained through the ef-
forts of third parties.
16. To exercise due professional care an auditor should
a. Critically review the judgment exercised by those
assisting in the audit.
b. Examine all available corroborating evidence sup-
porting managements assertions.
c. Design the audit to detect all instances of illegal
acts.
d. Attain the proper balance of professional experi-
ence and formal education.
17. Kar, CPA, is a staff auditor participating in the audit
engagement of Fort, Inc. Which of the following circum-
stances impairs Kar’s independence?

a. During the period of the professional engagement,
Fort gives Kar tickets to a football game worth
$75.
b. Kar owns stock in a corporation that Fort’s 401(k)
plan also invests in.
c. Kar’s friend, an employee of another local ac-
counting firm, prepares Fort’s tax returns.
d. Kar’s sibling is director of internal audit at Fort.
18. On June 1, 2008, a CPA obtained a $100,000 personal
loan from a financial institution client for whom the CPA
provided compilation services. The loan was fully secured
and considered material to the CPA’s net worth. The CPA
paid the loan in full on December 31, 2009. On April 3,
2009, the client asked the CPA to audit the client’s financial
statements for the year ended December 31, 2009. Is the
CPA considered independent with respect to the audit of the
client’s December 31, 2009 financial statements?
a. Yes, because the loan was fully secured.
b. Yes, because the CPA was not required to be inde-
pendent at the time the loan was granted.
c. No, because the CPA had a loan with the client
during the period of a professional engagement.
d. No, because the CPA had a loan with the client
during the period covered by the financial state-
ments.
19. Which of the following statements is(are) correct re-
garding a CPA employee of a CPA firm taking copies of
information contained in client files when the CPA leaves
the firm?
I. A CPA leaving a firm may take copies of information

contained in client files to assist another firm in serving
that client.
II. A CPA leaving a firm may take copies of information
contained in client files as a method of gaining technical
expertise.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
20. Which of the following statements is correct regarding
an accountant’s working papers?
a. The accountant owns the working papers and gen-
erally may disclose them as the accountant sees fit.
b. The client owns the working papers but the ac-
countant has custody of them until the accountant’s
bill is paid in full.
c. The accountant owns the working papers but gen-
erally may not disclose them without the client’s
consent or a court order.
d. The client owns the working papers but, in the ab-
sence of the accountant’s consent, may not dis-
close them without a court order.
21. Which of the following is an authoritative body
designated to promulgate attestation standards?
a. Auditing Standards Board.
b. Governmental Accounting Standards Board.
c. Financial Accounting Standards Board.
d. General Accounting Office.
22. According to the profession’s standards, which of the
following would be considered consulting services?

Advisory
services
I
mplementation
services
Product
services
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes Yes
MODULE 1 PROFESSIONAL RESPONSIBILITIES
10
23. According to the standards of the profession, which of
the following events would require a CPA performing a
consulting services engagement for a nonaudit client to
withdraw from the engagement?
I. The CPA has a conflict of interest that is disclosed to the
client and the client consents to the CPA continuing the
engagement.
II. The CPA fails to obtain a written understanding from the
client concerning the scope of the engagement.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
24. Which of the following services may a CPA perform in
carrying out a consulting service for a client?
I. Analysis of the client’s accounting system.
II. Review of the client’s prepared business plan.

III. Preparation of information for obtaining financing.
a. I and II only.
b. I and III only.
c. II and III only.
d. I, II, and III.
25. Under the Statements on Standards for Consulting Ser-
vices, which of the following statements best reflects a
CPA’s responsibility when undertaking a consulting services
engagement? The CPA must
a. Not seek to modify any agreement made with the
client.
b. Not perform any attest services for the client.
c. Inform the client of significant reservations con-
cerning the benefits of the engagement.
d. Obtain a written understanding with the client con-
cerning the time for completion of the engagement.
26. Which of the following services is a CPA generally
required to perform when conducting a personal financial
planning engagement?
a. Assisting the client to identify tasks that are essen-
tial in order to act on planning decisions.
b. Assisting the client to take action on planning deci-
sions.
c. Monitoring progress in achieving goals.
d. Updating recommendations and revising planning
decisions.
27. In relation to the AICPA Code of Professional Conduct,
the IFAC Code of Ethics for Professional Accountants
a. Has more outright prohibitions.
b. Has fewer outright prohibitions.

c. Has no outright prohibitions.
d. Applies only to professional accountants in
business.
28. Based on the IFAC Code of Ethics for Professional
Accountants, threats to independence arise from all of the
following except:
a. Self interest.
b. Advocacy.
c. The audit relationship.
d. Intimidation.
29. If an audit firm discovers threats to independence with
respect to an audit engagement, the IFAC Code of Ethics for
Professional Accountants indicates that the firm should
a. Immediately resign from the engagement.
b. Notify the appropriate regulatory body.
c. Document the issue.
d. Evaluate the significance of the threats and apply
appropriate safeguards to reduce them to an
acceptable level.
30. With respect to the acceptance of contingent fees for
professional services, the IFAC Code of Ethics for
Professional Accountants indicates that the accounting firm
a. Should not accept contingent fees.
b. Should establish appropriate safeguards around ac-
ceptance of a contingent fee.
c. Should accept contingent fees only for assurance
services other than audits of financial statements.
d. Should accept contingent fees if it is customary in
the country.
31. With regard to marketing professional services, the

IFAC Code of Ethics for Professional Accountants indicates
that
a. Direct marketing is prohibited.
b. Marketing is allowed if lawful.
c. Marketing should be honest and truthful.
d. Marketing of audit services is prohibited.
32. What body establishes international auditing standards?
a. The Public Company Accounting Oversight Board.
b. The International Federation of Accountants.
c. The World Bank.
d. The International Assurance Body.
33. Which of the following is not true about international
auditing standards?
a. International auditing standards do not require an
audit of internal control.
b. International auditing standards do not allow refer-
ence to division of responsibilities in the audit re-
port.
c. International auditing standards require obtaining
an attorney’s letter.
d. International auditing standards are based on a risk
assessment approach.
34. Which of the following is not true about international
auditing standards?
a. Audit report modification for consistency in the ap-
plication of accounting principles is required.
b. Confirmation of accounts receivable is not re-
quired.
c. The location in which the auditor practices must be
disclosed in the audit report.

d. International auditing standards do not require an
audit of internal control.
35. Independence standards of the GAO for audits in
accordance with generally accepted government auditing
standards describe three types of impairments of indepen-
dence. Which of the following is not one of these types of
impairments?
a. Personal.
b. Organizational.
c. External.
d. Unusual.
36. In accordance with the independence standards of the
GAO for performing audits in accordance with generally
accepted government auditing standards, which of the fol-
MODULE 1 PROFESSIONAL RESPONSIBILITIES
11
lowing is not an example of an external impairment of
independence?
a. Reducing the extent of audit work due to pressure
from management to reduce audit fees.
b. Selecting audit items based on the wishes of an
employee of the organization being audited.
c. Bias in the items the auditors decide to select for
testing.
d. Influence by management on the personnel
assigned to the audit.
37. Under the independence standards of the GAO for per-
forming audits in accordance with generally accepted gov-
ernment auditing standards, which of the following are
overreaching principles for determining whether a nonaudit

service impairs independence?
I. Auditors must not perform nonaudit services that in-
volve performing management functions or making
management decisions.
II. Auditors must not audit their own work or provide
nonaudit services in situations in which the nonaudit
services are significant or material to the subject
matter of the audit.
III. Auditors must not perform nonaudit services which
require independence.
a. I only.
b. I and II only.
c. I, II and III.
d. II and III only.
38. Which of the following bodies enforce the audit re-
quirements of the Employee Retirement Security Act of
1974 (ERISA) with respect to employee benefit plans?
a. The Department of Labor.
b. The Department of Pension Management.
c. The Securities and Exchange Commission.
d. The Public Company Accounting Oversight Board.
39. The requirement for independence by the auditor re-
garding audits of employee benefit plans apply to the plan as
well as
a. Investment companies doing business with the
plan.
b. Members of the plan.
c. The plan sponsor.
d. The actuary firm doing services for the plan.
MODULE 1 PROFESSIONAL RESPONSIBILITIES

12
SIMULATIONS
Task-Based Simulation 1
Independence
Issues
Authoritative
Literature Help
Assume that you are analyzing relationships for your firm to identify situations in which an auditor’s independence may be
impaired. For each of the following numbered situations, determine whether the auditor (a covered member in the situation) is
considered to be independent. If the auditor’s independence would not be impaired select No. If the auditor’s independence
would be impaired select Yes.
Yes
No
1. The auditor is a cosigner of a client’s checks.
{{
2. The auditor is a member of a country club which is a client.
{{
3. The auditor owns a large block of stock in a client but has placed it in a blind trust.
{{
4. The auditor placed her checking account in a bank which is her client. The account is fully
insured by a federal agency.
{{
5. The client has not paid the auditor for services for the past two years.
{{
6. The auditor is leasing part of his building to a client.
{{
7. The auditor joins, as an ordinary member, a trade association which is also a client.
{{
8. The auditor has an immaterial, indirect financial interest in the client.
{{

Task-Based Simulation 2
Independence and
Various Services
Authoritative
Literature Help
The director of the audit committee of Hanmei Corp., a nonissuer (nonpublic) company, has indicated that the company
may be interested in engaging your firm to perform various professional services. Consider each of the following potential
services by itself, and determine whether a CPA firm may provide such a service. If a CPA firm may provide the service, fill in
the circle under the first or second column of replies based upon whether independence is required. If the service may not be
provided, fill in the circle under “May Not Provide.” For each service you should have only one reply.
Service
May provide,
independence
is required
May provide,
independence is
not required
May
not provide
1. Provide an opinion on whether financial statements are pre-
pared following the cash basis of accounting.
{{{
2. Compile a forecast for the coming year.
{{{
3. Compile the financial statements for the past year and issue a
publicly available report.
{{{
4. Apply certain agreed-upon procedures to accounts receivable
for purposes of obtaining a loan, and express a summary of
findings relating to those procedures.

{{{
5. Review quarterly information and issue a report that includes
limited assurance.
{{{
6. Perform an audit of the financial statements on whether they
are prepared following generally accepted accounting princi-
ples.
{{{
7. Perform a review of a forecast the company has prepared for
the coming year.
{{{
MODULE 1 PROFESSIONAL RESPONSIBILITIES
13
Service
May provide,
independence
is required
May provide,
independence is
not required
May
not provide
8. Compile the financial statements for the past year, but not is-
sue a report since the financial statements are only for the
company’s use.
{{{
9. Calculate the client’s taxes and fill out the appropriate tax
forms.
{{{
10. Design a new payroll system for Hanmei and base billings on

Hanmei’s actual savings for the next three years.
{{{
Task-Based Simulation 3
Research
Authoritative
Literature Help
Covered Member
You work with a CPA firm as an assistant. The senior on the XYZ audit has asked you to determine whether you are
eligible to work on the XYZ audit since he knows that you own 100 shares of XYZ worth $700 in total. He has asked you to
research the following:
Title choices
A. AU
B. PCAOB
C. AT
D. AR
E. ET
F. BL
G. CS
H. QC
(A) (B) (C) (D) (E) (F) (G) (H)
1. He thinks that he recalls the issue relates to whether you are or are not a
“covered member.” He would like you to find the definition of a covered
member in the professional standards. Which title of the Professional Stan-
dards addresses this issue and will be helpful in responding to the senior?
{{{{{{{{
2. Enter the exact section and paragraphs with helpful information.
3. Regardless of what you find, he would like you to determine whether a covered member
may have such an immaterial financial investment in an audit client. What title, section,
and paragraph addresses this issue?
Task-Based Simulation 4

Providing Various
Services
Authoritative
Literature Help
The firm of Willingham and Whiting, CPAs, has had requests from a number of clients and prospective clients as to
providing various types of services. Please reply as to whether the appropriate independence rules (AICPA and/or PCAOB)
allow the following engagements with
A—Allowable, given these facts.
N—Not allowable, given these facts.
(If both AICPA and PCAOB rules apply and one of them does not allow the services answer N.)
MODULE 1 PROFESSIONAL RESPONSIBILITIES
14
Case Request
Public or
nonpublic
client
Allowable (A)
or not
allowable
(NA)?
1.
Provide internal audit outsourcing as well as perform the audit. Public
2.
Prepare the corporate tax return as well as perform the audit. Public
3.
Prepare the corporate tax return as well as perform the audit. Nonpublic
4.
Provide bookkeeping services as well as perform the audit; WW will not
determine journal entries, authorize transactions, prepare or modify source
documents.

Nonpublic
5.
Provide financial information systems design and implementation assistance;
WW provides no attest services for that company.
Public
6.
Serve on the board of directors of the company; WW provides no attest
services for that company.
Public
7.
Implement an off-the-shelf accounting package as well as perform the audit. Nonpublic
8.
Provide actuarial services related to certain liabilities as well as perform the
audit; the subjectively determined liabilities relate to a material portion of the
financial statements.
Nonpublic
9.
Provide actuarial services related to certain liabilities as well as perform the
audit; the subjectively determined liabilities relate to material portion of the
financial statements.
Public
10.
Corporate executives of an audit client want to have WW provide tax planning
for themselves (not the company).
Public
Task-Based Simulation 5
Research
Authoritative
Literature Help
Payroll System Engagement

Michael Edlinger is president of Edlinger Corporation, a nonpublic manufacturer of kitchen cabinets. He has been
approached by Marla Wong, a partner with Wong and Co., CPAs, who suggests that her firm can design a payroll system for
Edlinger that will either save his corporation money or be free. More specifically, Ms. Wong proposes to design a payroll
system for Edlinger on a contingent fee basis. She suggests that her firm’s fee will be 25 % of the savings in payroll for each of
the next four years. After four years Edlinger will be able to keep all future savings. Edlinger Corporation’s payroll system
costs currently are approximately $200,000 annually, and the corporation has not previously been a client of Wong. Edlinger
Corporation is audited by another CPA firm and Wong & Co. provides no other services to Edlinger Corporation. Select one of
the following topics to answer question 1.
Selections
A. AU
B. PCAOB
C. AT
D. AR
E. ET
F. BL
G. CS
H. QC
(A) (B) (C) (D) (E) (F) (G) (H)
1. Which topic of the Professional Standards addresses this issue and will be
helpful in determining whether Wong & Co. may perform this engagement
under these terms without violating professional requirements?
{{{{{{{{
2. Provide the appropriate paragraph citation that addresses this issue.
MODULE 1 PROFESSIONAL RESPONSIBILITIES
15
3. Interpret your findings in parts 1. and 2. and conclude on whether Wong & Co. may perform this service without violating
professional standards.
___Yes, this service may be performed without violating professional standards.
___No, this service may not be performed without violating professional standards.
Task-Based Simulation 6

Research
Authoritative
Literature Help
Professional Standards
You have worked with James & Co. CPAs for approximately 4 months. Jen Jefferson, who has just started with James &
Co., has asked you to explain the nature of various professional standards to her. More specifically, she would like to have a
better understanding of which standards to address, in which circumstances.
Select the appropriate title of standards for 1. through 10. below. Standards may be selected once, more than once, or not at
all.
Title of Standards
A. AICPA Bylaws (BL)
B. Code of Professional Conduct (ET)
C. PCAOB Auditing Standards
D. Standards for Performing and Reporting on Peer Reviews
(PR)
E. Statements on Auditing Standards (AU)
F. Statements on Quality Control Standards (SQCS)
G. Statements on Standards for Accounting and Review
Services (SSARS)
H. Statements on Standards for Attestation Engagements
(SSAE)
I. Statements on Standards for Consulting Services (CS)
J. Statements on Standards for Tax Services (TS)
Standards that provide guidance
(A) (B) (C) (D) (E) (F) (G) (H) (I) (J)
1. For performance of a review of a nonpublic company’s annual
financial statements.
{{{{{{{{{{
2. On whether a contingent fee may be billed to a client.
{{{{{{{{{{

3. Related to firm requirements of CPA firms that are enrolled in an
AICPA-approved practice-monitoring system.
{{{{{{{{{{
4. For an examination of a client’s financial forecast.
{{{{{{{{{{
5. Relating to overall requirements when providing services for an
advisory services engagement.
{{{{{{{
{{{
6. For the audit of a public company.
{{{{{{{{{{
7. For the performance of an interim review of the quarterly financial
statements of a nonpublic audit client.
{{{{{{{{{{
8. For reporting on client pro forma financial information.
{{{{{{{{{{
9. On whether an investment of a CPA impairs her independence with
respect to a client.
{{{{{{{{{{
10. On performing a compilation of a nonpublic company’s quarterly
statements.
{{{{{{{{{{