Term
| c. It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board |
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Definition
Which of the following is not correct relating to the Sarbanes-Oxley Act?
a. It toughens penalties for corporate fraud.
b. It restricts the types of consulting CPAs may perform for audit clients.
c. It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board.
d. It eliminates a significant portion of the accounting profession's system of self-regulation. |
|
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Term
| b. Different interests may exist between the company preparing the statements and the persons using the statements |
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Definition
2. Which of the following best describes the reason why independent auditors report on financial statements?
a. A management fraud may exist and it is more likely to be detected by independent auditors.
b. Different interests may exist between the company preparing the statements and the persons using the statements.
c. A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work.
d. Poorly designed internal control may be in existence. |
|
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Term
| a. Future improvements to accomplish the goals of management |
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Definition
3. Operational auditing is primarily oriented toward:
a. Future improvements to accomplish the goals of management.
b. The accuracy of data reflected in management's financial records.
c. The verification that a company's financial statements are fairly presented.
d. Past protection provided by existing internal control. |
|
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Term
| a. Agreed-upon procedures report |
|
Definition
4. A summary of findings rather than assurance is most likely to be included in a(n):
a. Agreed-upon procedures report.
b. Compilation report.
c. Examination report.
d. Review report. |
|
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Term
| A. Auditing Standards Board |
|
Definition
The Statements on Auditing Standards have been issued by the:
A. Auditing Standards Board.
B. Financial Accounting Standards Board.
C. Securities and Exchange Commission.
D. Federal Bureau of Investigation. |
|
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Term
|
Definition
The risk associated with a company's survival and profitability is referred to as:
A. Business Risk.
B. Information Risk.
C. Detection Risk.
D. Control Risk. |
|
|
Term
| C. Statements on Auditing Standards (SASs) |
|
Definition
The serially-numbered pronouncements issued by the Auditing Standards Board over a period of years are known as:
A. Auditing Statements of Position (ASPs).
B. Accounting Series Releases (ASRs).
C. Statements on Auditing Standards (SASs).
D. Statements on Auditing Principles (SAPs). |
|
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Term
| B. Conducts operational audits and reports the results to Congress |
|
Definition
The Government Accountability Office (GAO):
A. Is primarily concerned with rapid processing of all accounts payable incurred by the federal government.
B. Conducts operational audits and reports the results to Congress.
C. Is a multinational organization of professional accountants.
D. Is primarily concerned with budgets and forecasts approved by the SEC. |
|
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Term
| C. Members, regardless of whether they are in public practice, are required to meet such requirements |
|
Definition
Which statement is correct with respect to continuing professional education (CPE) requirements of members of the AICPA?
A. Only members employed by the AICPA are required to take such courses.
B. Only members in public practice are required to take such courses.
C. Members, regardless of whether they are in public practice, are required to meet such requirements.
D. There is no requirement for members to participate in CPE |
|
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Term
| A. State Boards of Accountancy |
|
Definition
The right to practice as a CPA is given by which of the following organizations?
A. State Boards of Accountancy.
B. The AICPA.
C. The SEC.
D. The General Accounting Office. |
|
|
Term
|
Definition
Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit. |
|
|
Term
| A. Professional standards for CPAs |
|
Definition
Historically, which of the following has the AICPA been most concerned with providing?
A. Professional standards for CPAs.
B. Professional guidance for regulating financial markets.
C. Standards guiding the conduct of internal auditors.
D. Staff support to Congress. |
|
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Term
| D. Securities and Exchange Commission |
|
Definition
The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the:
A. Auditing Standards Board.
B. Financial Accounting Standards Board.
C. Government Accounting Standards Boards.
D. Securities and Exchange Commission. |
|
|
Term
| B. Understanding as to the reasons for the change of auditors |
|
Definition
1. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:
A. Opinion of any subsequent events occurring since the predecessor's audit report was issued
B. Understanding as to the reasons for the change of auditors
C. Awareness of the consistency in the application of GAAP between periods
D. Evaluation of all matters of continuing accounting significance |
|
|
Term
| D. Disagreements with management as to auditing procedures |
|
Definition
2. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:
A. Specialized accounting principles of the client's industry
B. The competency of the client's internal audit staff
C. The uncertainty inherent in applying sampling procedures
D. Disagreements with management as to auditing procedures |
|
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Term
| D. The prospective client's consent to make inquiries of the predecessor auditor, if any |
|
Definition
3. Before accepting an engagement to audit a new client, a CPA is required to obtain:
A. An understanding of the prospective client's industry and business
B. A management representation letter
C. A preliminary understanding of the prospective client's control environment
D. The prospective client's consent to make inquiries of the predecessor auditor, if any |
|
|
Term
| D. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement |
|
Definition
4. Which of the following statements would least likely appear in an auditor's engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses.
B. During the course of our audit we may observe opportunities for economy in, or improved controls over, your operations.
C. Our engagement is subject to the risk that material errors or irregularities, including fraud and defalcations, if they exist, will not be detected.
D. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement. |
|
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Term
| B. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies that come to the auditor's attention |
|
Definition
5. An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:
A. Management's responsibility for errors and the illegal activities of employees that may cause material misstatement
B. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies that come to the auditor's attention
C. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud
D. The auditor's responsibility for determining preliminary judgments about materiality and audit risk factors |
|
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Term
| A. Management's responsibility for the entity's compliance with laws and regulations |
|
Definition
6. Which of the following matters generally is included in an auditor's engagement letter?
A. Management's responsibility for the entity's compliance with laws and regulations
B. The factors to be considered in settling preliminary judgments about materiality
C. Management's vicarious liability for illegal acts committed by its employees
D. The auditor's responsibility to search for significant internal control deficiencies |
|
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Term
| A. Management's acknowledgment of its responsibility for maintaining effective internal control |
|
Definition
7. An auditor's engagement letter should include:
A. Management's acknowledgment of its responsibility for maintaining effective internal control
B. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting
C. A reminder that management is responsible for illegal acts committed by employees
D. A request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and assessments |
|
|
Term
|
Definition
8. A document in an auditor's working papers includes the following statement: "Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud that comes to our attention, unless it is inconsequential." This passage is most likely from a(an)?
A. Comfort letter
B. Engagement letter
C. Letter of audit inquiry
D. Representation Letter |
|
|
Term
| A. Management's responsibility to provide certain written representations to the auditor |
|
Definition
9. An auditor's engagement letter most likely would include a statement regarding:
A. Management's responsibility to provide certain written representations to the auditor
B. Conditions under which the auditor may modify the preliminary judgment about materiality
C. Internal control activities that would reduce the auditor's assessment of control risk
D. Materiality matters that could modify the auditor's preliminary assessment of fraud risk |
|
|
Term
| D. Potential risks of material misstatement |
|
Definition
10. In developing a preliminary audit strategy, an auditor should consider
A. Whether the allowance for sampling risk exceeds the achieved upper precision limit
B. Findings from substantive tests performed at interim dates
C. Whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements
D. Potential risks of material misstatement |
|
|
Term
| D. Financial statement assertions |
|
Definition
11. In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the
A. Timing of audit procedures
B. Cost-benefit of gathering evidence
C. Selected audit techniques
D. Financial statement assertions |
|
|
Term
| D. Determining the extent of involvement of the client's internal auditors |
|
Definition
12. Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
A. Obtaining a written representation letter from the client's management
B. Examining documents to detect illegal acts having a material effect on the financial statements
C. Considering whether the client's accounting estimates are reasonable in the circumstances
D. Determining the extent of involvement of the client's internal auditors |
|
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Term
| D. The audit evidence gathered supports the auditor's conclusions |
|
Definition
13. Audit programs should be designed so that
A. Most of the required procedures can be performed as interim work.
B. Inherent risk is assessed at a sufficiently low level.
C. The auditor can make constructive suggestions to management.
D. The audit evidence gathered supports the auditor's conclusions. |
|
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Term
| D. Timing of inventory observation procedures to be performed |
|
Definition
14. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the
A. Evidence to be gathered to provide a sufficient basis for the auditor's opinion
B. Procedures to be undertaken to discover litigation, claims, and assessments
C. Pending legal matters to be included in the inquiry of the client's attorney
D. Timing of inventory observation procedures to be performed |
|
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Term
| C. Document the disagreement and ask to be disassociated from the resolution of the matter |
|
Definition
15. A difference of opinion regarding the results of a sample cannot be resolved between the assistant who performed the auditing procedures and the in-charge auditor. The assistant should
A. Accept the judgment of the more experienced in-charge auditor
B. Refuse to perform any further work on the engagement
C. Document the disagreement and ask to be disassociated from the resolution of the matter
D. Notify the client that a serious audit problem exists |
|
|
Term
| B. Results are consistent with the conclusions to be presented in the auditor's report |
|
Definition
16. The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the
A. Auditor's system of quality control has been maintained at a high level.
B. Results are consistent with the conclusions to be presented in the auditor's report.
C. Audit procedures performed are approved in the professional standards.
D. Audit has been performed by persons having adequate technical training and proficiency as auditors. |
|
|
Term
| C. Professional skepticism |
|
Definition
17. Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of
A. Objective judgment
B. Independent integrity
C. Professional skepticism
D. Impartial conservatism |
|
|
Term
| 1. Give guidance to the staff regarding both technical and personnel aspects of the audit |
|
Definition
18. The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to
1. Give guidance to the staff regarding both technical and personnel aspects of the audit
2. Provide an opportunity to document staff disagreements regarding technical issues
3. Establish the need for using the work of specialists and internal auditors
4. Discuss staff suggestions concerning the establishment and maintenance of time budgets |
|
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Term
|
Definition
19. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate
A. $10,000
B. $15,000
C. $20,000
D. $30,000 |
|
|
Term
| C. Exist independently of the financial statement audit |
|
Definition
20. Inherent risk and control risk differ from detection risk in that they
A. Arise from the misapplication of auditing procedures
B. May be assessed in either quantitative or nonquantitative terms
C. Exist independently of the financial statement audit
D. Can be changed at the auditor's discretion |
|
|
Term
| A. Assurance provided by substantive tests |
|
Definition
21. The acceptable level of detection risk is inversely related to the
A. Assurance provided by substantive tests
B. Risk of misapplying auditing procedures
C. Preliminary judgment about materiality levels
D. Risk of failing to discover material misstatements |
|
|
Term
| c) Control risk; Detection risk; Inherent risk |
|
Definition
Which of the following audit risk components may be assessed in non-quantitative terms?
a) Control risk; Detection risk
b) Control risk; Inherent risk
c) Control risk; Detection risk; Inherent risk
d) Detection risk; Inherent risk |
|
|
Term
| C. The entity's financial statements of the prior year |
|
Definition
23. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?
A. The results of the initial assessment of control risk
B. The anticipated sample size for planned substantive tests
C. The entity's financial statements of the prior year
D. The assertions that are embodied in the financial statements |
|
|
Term
| A. Influence the design of internal control |
|
Definition
24. In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods
A. Influence the design of internal control
B. Affect the auditor's preliminary judgment about materiality levels
C. Assist in evaluating the planned audit objectives
D. Determine the auditor's acceptable level of audit risk |
|
|
Term
| B. Comparing the financial statements to anticipated results |
|
Definition
25. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
A. Inquiring of the client's legal counsel concerning pending litigation
B. Comparing the financial statements to anticipated results
C. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities
D. Examining computer generated exception reports to verify the effectiveness of internal controls |
|
|
Term
| A. Knowledge necessary to assess the risk of material misstatement and design further audit procedures |
|
Definition
26. The primary objective of procedure performed to obtain an understanding of the entity and its environment, including its internal control, is to provide an auditor with
A. Knowledge necessary to assess the risk of material misstatement and design further audit procedures
B. An evaluation of the consistency of application of management's policies
C. A basis for modifying tests of controls
D. Audit evidence to use in assessing inherent risk |
|
|
Term
|
Definition
27. When obtaining an understanding of the entity and its environment, including its internal control, the auditor is required to document:
I. The discussion concerning the susceptibility of the financial statements to material misstatement
II. The risk assessment procedures performed
A. I only
B. II only
C. Both I & II
D. Neither I nor II |
|
|
Term
| A. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion |
|
Definition
28. Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?
A. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.
B. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.
C. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.
D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole. |
|
|
Term
| D. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements |
|
Definition
29. Which of the following statements reflects an auditor's responsibility for detecting errors and fraud?
A. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud involving employee collusion or management override.
B. An auditor should plan the audit to detect errors and fraud that are caused by departures from GAAP.
C. An auditor is not responsible for detecting errors and fraud unless the application of GAAS would result in such detection.
D. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. |
|
|
Term
| A. The entity's industry is experiencing declining customer demand |
|
Definition
30. Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?
A. The entity's industry is experiencing declining customer demand.
B. Employees who handle cash receipts are not bonded.
C. Bank reconciliations usually include in-transit deposits.
D. Equipment is often sold at a loss before being fully depreciated |
|
|
Term
| A. Inability to generate cash flows from operations while reporting substantial earnings growth |
|
Definition
31. Which of the following factors would most likely heighten the auditor's concern about the risk of fraudulent financial reporting?
A. Inability to generate cash flows from operations while reporting substantial earnings growth
B. Management's lack of interest in increasing the entity's stock trend
C. Large amounts of liquid assets that are easily convertible into cash
D. In ability to borrow necessary capital without granting debt covenants |
|
|
Term
| D. Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud |
|
Definition
32. Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements?
A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements
B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement
C. Determine whether inadequate provisions for the safeguarding of assets have been corrected
D. Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud |
|
|
Term
| D. The disclosure of fraudulent activities to parties other than the client's senior management and its audit committee is not ordinarily part of the auditor's responsibility |
|
Definition
33. Which of the following statements is correct concerning an auditor's responsibility to report fraud?
A. The auditor is required to communicate to the client's audit committee all minor fraudulent acts perpetrated by low-level employees, even if the amounts involved are inconsequential.
B. The disclosure of material management fraud to principle stockholders is when senior management and the board of directors fail to acknowledge the fraudulent activities.
C. Fraudulent activities involving senior management of which the auditor becomes aware should be reported directly to the SEC.
D. The disclosure of fraudulent activities to parties other than the client's senior management and its audit committee is not ordinarily part of the auditor's responsibility. |
|
|
Term
|
Definition
34. When assessing the risk of material misstatement, an auditor is required to document:
I. The basis for the assessment
II. Significant risks identified and the related controls that were evaluated
A. I only
B. II only
C. Both I & II
D. Neither I nor II |
|
|
Term
| C. Change the timing of substantive tests from year-end to an interim date |
|
Definition
35. As the acceptable level of detection risk increases, the auditor may:
A. Increase the assessed level of control risk
B. Change the assurance provided by tests of controls by using a larger sample size than planned
C. Change the timing of substantive tests from year-end to an interim date
D. Change the nature of substantive tests from a less effective to a more effective procedure |
|
|
Term
| A. Control policies and procedures are unlikely to pertain to the assertions |
|
Definition
36. An auditor may decide to perform only substantive procedures for specific assertions because the auditor believes:
A. Control policies and procedures are unlikely to pertain to the assertions.
B. The entity's control environment, monitoring, and control activities are interrelated.
C. Sufficient audit evidence to support the assertions is likely to be available.
D. More emphasis on tests of control than substantive tests is warranted. |
|
|
Term
| C. Substantive tests to restrict detection risk for significant transactions classes |
|
Definition
37. Regardless of the assessed level of control risk, an auditor would perform some
A. Tests of controls to determine the effectiveness of internal control policies
B. Analytical procedures to verify the design of internal control procedures
C. Substantive tests to restrict detection risk for significant transactions classes
D. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk |
|
|
Term
|
Definition
38. Which of the following matters is an auditor required to communicate to an entity's audit committee:
I. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolved
II. Initial selection of significant accounting policies in emerging areas that lack authoritative guidance
A. I only
B. II only
C. Both I & II
D. Neither I nor II |
|
|
Term
| B. Has a significant effect on the entity's financial reporting process |
|
Definition
39. An auditor is obligated to communicate a proposed audit adjustment to an entity's audit committee only if the adjustment:
A. Has not been recorded before the end of the auditor's field work
B. Has a significant effect on the entity's financial reporting process
C. Is a recurring matter that was proposed to management the prior year
D. Results from the correction of a prior period's departure from GAAP |
|
|
Term
| D. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance |
|
Definition
40. Which of the following matters would an auditor most likely communicate to an entity's audit committee?
A. A list of negative trends that may lead to working capital deficiencies and adverse financial ratios
B. The level of responsibility assumed by management for the preparation of the financial statements
C. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables
D. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance |
|
|
Term
| D. The degree of reliance the auditor placed on the management representation letter |
|
Definition
41. Which of the following is an auditor not required to communicate to an entity's audit committee?
A. Significant adjustments arising from the audit that were recorded by management
B. The basis for the auditor's conclusions about the reasonableness of management's sensitive accounting estimates
C. The level of responsibility assumed by the auditor under generally accepted auditing standards
D. The degree of reliance the auditor placed on the management representation letter |
|
|
Term
| C. Bank statements obtained from the client |
|
Definition
42. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered client purchase order forms
B. Client work sheets supporting cost allocations
C. Bank statements obtained from the client
D. Management representation letter |
|
|
Term
| D. A recalculation of bad debt expense |
|
Definition
43. Which of the following procedures would yield the most appropriate evidence?
A. A scanning of trial balances
B. An inquiry of client personnel
C. A comparison of beginning and ending retained earnings
D. A recalculation of bad debt expense |
|
|
Term
| B. Examination of evidence |
|
Definition
44. Which of the following procedures would be most effective in reducing attestation risk?
A. Discussion with responsible individuals
B. Examination of evidence
C. Inquiries of senior management
D. Analytical procedures |
|
|
Term
| A. Suspense debits that management believes will benefit future operations |
|
Definition
45. A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remain in the suspense account at year end, the auditor would be most concerned about
A. Suspense debits that management believes will benefit future operations
B. Suspense debits that the auditor verifies will have realizable value to the client
C. Suspense credits that management believes should be classified as "Current liability"
D. Suspense credits that the auditor determines to be customer deposits |
|
|
Term
| D. Classification, and Valuation & Allocation |
|
Definition
46. An auditor scans a client's investment records for the period just before and just after the year end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertions of
A. Rights & Obligations, and Existence & Occurrence
B. Valuation & Allocation, and Rights & Obligations
C. Existence & Occurrence, and Classification
D. Classification, and Valuation & Allocation |
|
|
Term
|
Definition
47. The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions?
A. Completeness
B. Rights & Obligations
C. Valuation or Allocation
D. Classification & Understandability |
|
|
Term
| D. Performing analytical procedures designed to disclose differences from expectations |
|
Definition
48. An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this misstatement by:
A. Tracing a sample of journal entries to the general ledger
B. Evaluating the effectiveness of internal control policies and procedures
C. Investigating the reconciliations between controlling accounts and subsidiary records
D. Performing analytical procedures designed to disclose differences from expectations |
|
|
Term
| A. Performing analytical procedures |
|
Definition
49. An auditor may achieve audit objectives related to particular assertions by
A. Performing analytical procedures
B. Adhering to a system of quality control
C. Preparing auditor working papers
D. Increasing the level of detection risk |
|
|
Term
| C. Obtain additional evidence regarding the valuation of inventory |
|
Definition
50. At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?
A. Consult with the audit committee and issue a disclaimer of opinion
B. Consult with the audit committee and issue a qualified opinion
C. Obtain additional evidence regarding the valuation of inventory
D. Obtain a statement from management supporting their inventory valuation |
|
|
Term
| D. Transactions selected for testing are not supported by proper documentation |
|
Definition
51. Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?
A. Management places little emphasis on meeting earnings projections.
B. The board of directors makes all major financing decisions.
C. Significant deficiencies previously communicated to management are not corrected.
D. Transactions selected for testing are not supported by proper documentation. |
|
|
Term
| B. Differences between reconciliations of control accounts and subsidiary records are not investigated |
|
Definition
52. Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements?
A. The assumptions used in developing the prior year's accounting estimates have changed.
B. Differences between reconciliations of control accounts and subsidiary records are not investigated.
C. Negative confirmation requests yield fewer responses than in the prior year's audit.
D. Management consults with another CPA firm about complex accounting matters. |
|
|
Term
| A. Place limited reliance on the work performed by the internal auditors |
|
Definition
53. Miller Retailing, Inc. maintains a staff of three full-time internal auditors who report directly to the controller. In planning to use the internal auditors to provide assistance in performing the audit, the independent auditor most likely will
A. Place limited reliance on the work performed by the internal auditors
B. Decrease the extent of the tests of control needed to support the assessed level of detection risk
C. Increase the extent of the procedures needed to reduce control risk to an acceptable level
D. Avoid using the work performed by the internal auditors |
|
|
Term
| B. Educational background and professional certification of internal auditors |
|
Definition
54. When assessing the internal auditors' competence, the independent CPA should obtain information about the
A. Organizational level to which internal auditors report
B. Educational background and professional certification of internal auditors
C. Policies prohibiting internal auditors from auditing areas where relatives are employed in important or audit-sensitive positions
D. Policies prohibiting internal auditors from auditing areas where they were recently assigned or are scheduled to be assigned on completion of their responsibilities as internal auditors |
|
|
Term
| A. Quality of the internal auditor's working paper documentation |
|
Definition
55. In assessing the competence of the internal auditor, an independent CPA most likely would obtain information about the:
A. Quality of the internal auditor's working paper documentation
B. Organization's commitment to integrity and ethical values
C. Influence of management on the scope of the internal auditor's duties
D. Organizational level to which the internal auditor reports |
|
|
Term
| c) Obtaining an understanding of internal control; Performing tests of controls; Performing substantive tests |
|
Definition
During an audit, an internal auditor may provide direct assistance to an independent CPA in
a) Obtaining an understanding of internal control
b) Obtaining an understanding of internal control; Performing tests of controls
c) Obtaining an understanding of internal control; Performing tests of controls; Performing substantive tests
d) None of the above |
|
|
Term
| A. Complement, but do not replace, substantive tests designed to support the assertion |
|
Definition
57. When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations:
A. Complement, but do not replace, substantive tests designed to support the assertion
B. Constitute sufficient evidence to support the assertion when considered in combination with the assessment of control risk
C. Replace the assessment of control risk as evidence to support the assertion
D. Are not part of the audit evidence considered to support the assertion |
|
|
Term
| C. The possibility of a misunderstanding concerning management's responsibility for the financial statements |
|
Definition
58. A purpose of a management representation letter is to reduce
A. Audit risk to an aggregate level of misstatement that could be considered material
B. An auditor's responsibility to detect material misstatements only to the extent that the letter is relied on
C. The possibility of a misunderstanding concerning management's responsibility for the financial statements
D. The scope of an auditor's procedures concerning related party transactions and subsequent events |
|
|
Term
| C. Employees' actions affect the auditor's ability to rely on management's representations |
|
Definition
59. An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the
A. Client receives financial assistance from a federal government agency
B. Audit evidence that is necessary to prove the illegal acts were committed does not exist
C. Employees' actions affect the auditor's ability to rely on management's representations
D. Notes to the financial statements fail to disclose the employees' actions |
|
|
Term
|
Definition
60. The date of the management representation letter should be as of the date of the
A. Balance sheet
B. Latest interim financial information
C. Auditor's report
D. Latest related party transaction |
|
|
Term
| C. Management representation letter |
|
Definition
61. "There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The forgoing passage is most likely from a
A. Report on internal control
B. Special report
C. Management representation letter
D. Letter for underwriters |
|
|
Term
| C. Management's compliance with contractual agreements that may affect the financial statements |
|
Definition
62. For which of the following matters should an auditor obtain written management representations?
A. Management's cost-benefit justifications for not correcting internal control weaknesses
B. Management's knowledge of future plans that may affect the price of the entity's stock
C. Management's compliance with contractual agreements that may affect the financial statements
D. Management's acknowledgement of its responsibility for employees' violations of laws |
|
|
Term
| A. The availability of minutes of stockholders' and directors' meetings |
|
Definition
63. To which of the following matters would materiality limits not apply in obtaining written management representations?
A. The availability of minutes of stockholders' and directors' meetings
B. Losses from purchase commitments at prices in excess of market value
C. The disclosure of compensating balance arrangements involving related parties
D. Reductions of obsolete inventory to net realizable value |
|
|
Term
| A. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements |
|
Definition
64. Which of the following expressions most likely would be included in a management representation letter?
A. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.
B. There are no significant deficiencies identified during the prior-year's audit of which the audit committee of the board of directors is unaware.
C. We do not intend to provide any information that may be construed to constitute a waiver of the attorney-client privilege
D. Certain computer files and other required evidential matter may exist only for a short period of time and only in computer-readable form. |
|
|
Term
| A. Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion |
|
Definition
65. Which of the following statements ordinarily is not included among the written representations made by the chief executive officer and the chief financial officer?
A. Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion.
B. There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed.
C. We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
D. No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements. |
|
|
Term
| A. Provide the principal support for the auditor's report |
|
Definition
66. An auditor's working papers serve mainly to:
A. Provide the principal support for the auditor's report
B. Satisfy the auditor's responsibilities concerning the Code of Professional Conduct
C. Monitor the effectiveness of the CPA firm's quality control procedures
D. Document the level of independence maintained by the auditor |
|
|
Term
|
Definition
67. The audit working paper that reflects the major components of an amount reported in the financial statements is the:
A. Interbank transfer schedule
B. Carryforward schedule
C. Supporting schedule
D. Lead schedule |
|
|
Term
| B. A flowchart depicting the segregation of duties and authorization of transactions |
|
Definition
68. Which of the following is not required documentation in an audit in accordance with GAAS?
A. A written engagement letter formalizing the level of service to be rendered
B. A flowchart depicting the segregation of duties and authorization of transactions
C. A written audit program describing the necessary procedures to be performed
D. Written representations from management |
|
|
Term
| C. Management representation letter |
|
Definition
69. "There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a (an)
A. Client engagement letter
B. Report on compliance with laws and regulations
C. Management representation letter
D. Attestation report on an entity's internal control |
|
|
Term
| D. Borrowing money at an interest rate significantly below the market rate |
|
Definition
70. Which of the following most likely would indicate the existence of related parties?
A. Writing down obsolete inventory just before year-end
B. Failing to correct previously identified internal control deficiencies
C. Depending on a single product for the success of the entity
D. Borrowing money at an interest rate significantly below the market rate |
|
|
Term
| D. Selling real estate at a price significantly different from appraised value |
|
Definition
71. Which of the following events most likely would indicate the existence of related parties?
A. Granting stock options to key executives at favorable prices
B. High turnover of senior management and members of the board of directors
C. Failure to correct internal control weaknesses on a timely basis
D. Selling real estate at a price significantly different from appraised value |
|
|
Term
| C. Obtain an understanding of the business purpose of the transaction |
|
Definition
72. After determining that a related party transaction has, in fact, occurred, an auditor should
A. Add a separate paragraph to the auditor's standard report to explain the transaction
B. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded
C. Obtain an understanding of the business purpose of the transaction
D. Substantiate that the transaction was consummated on terms equivalent to an arm's-length transaction |
|
|
Term
| A. The business structure may be deliberately designed to obscure related party transactions |
|
Definition
73. An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity because
A. The business structure may be deliberately designed to obscure related party transactions.
B. Intercompany transactions may have been consummated on terms equivalent to arm's-length transactions.
C. This may reveal whether particular transactions would have taken place if the parties had not been related.
D. This may permit the audit of intercompany balances to be performed as of concurrent dates. |
|
|
Term
| C. Reviewing confirmations of compensating balance arrangements |
|
Definition
74. Which of the following procedures most likely could assist an auditor in identifying related party transactions?
A. Performing tests of controls concerning the segregation of duties
B. Evaluating the reasonableness of management's accounting estimates
C. Reviewing confirmations of compensating balance arrangements
D. Scanning the accounting records of recurring transactions |
|
|
Term
| C. Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction |
|
Definition
75. An auditor most likely would modify an unqualified opinion if the entity's notes to the financial statements include a not on related party transactions
A. Disclosing loans to related parties at interest rates significantly below prevailing market rates
B. Describing an exchange of real estate for similar property in a nonmonetary related party transaction
C. Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction
D. Presenting the dollar volume of related party transactions and the effects of any change in the method of establishing terms from prior periods |
|
|
Term
| D. Perpetuate and conceal errors and fraud |
|
Definition
76. Proper segregation of duties reduces the opportunities to allow persons to be in positions to both
A. Journalize entries and prepare financial statements
B. Record cash receipts and cash disbursements
C. Establish internal controls and authorize transactions
D. Perpetuate and conceal errors and fraud |
|
|
Term
| B. Affects management's financial statement assertions |
|
Definition
77. In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure
A. Reflects management's philosophy and operating style
B. Affects management's financial statement assertions
C. Provides adequate safeguards over access to assets
D. Enhances management's decision-making processes |
|
|
Term
|
Definition
78. The overall attitude and awareness of an entity's board of directors concerning the importance of internal control usually is reflected in its
A. Computer-based controls
B. System of segregation of duties
C. Control environment
D. Safeguards over access to assets |
|
|
Term
| B. Management is dominated by one individual |
|
Definition
79. Management philosophy and operating style most likely would have a significant influence on an entity's control environment when
A. The internal auditor reports directly to management
B. Management is dominated by one individual
C. Accurate management job descriptions delineate specific duties
D. The audit committee actively oversees the financial reporting process |
|
|
Term
| B. Management is dominated by on individual who is also a shareholder |
|
Definition
80. Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when
A. External policies established by parties outside the entity affect its accounting practices.
B. Management is dominated by on individual who is also a shareholder.
C. Internal auditors have direct access to the board of directors and the entity's management.
D. The audit committee is active in overseeing the entity's financial reporting policies |
|
|
Term
| C. The adequacy of the accounting records |
|
Definition
81. Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?
A. The complexity of the accounting system
B. The existence of related party transactions
C. The adequacy of the accounting records
D. The operating effectiveness of control procedures |
|
|
Term
| A. Internal control policies and procedures may be ineffective due to mistakes in judgment and personal |
|
Definition
82. When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that
A. Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness.
B. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability.
C. Establishing and maintaining internal control is an important responsibility of management.
D. The cost of an entity's internal control should not exceed the benefits expected to be derived |
|
|
Term
| B. The integrity of the entity's management is suspect |
|
Definition
83. Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted?
A. The entity has no formal written code of conduct.
B. The integrity of the entity's management is suspect.
C. Procedures requiring segregation of duties are subject to management override.
D. Management fails to modify prescribed controls for changes in conditions. |
|
|
Term
| C. The chief financial officer waived approvals on all checks to one vendor to expedite payment |
|
Definition
84. Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?
A. The entity announced that the internal audit function would be eliminated after the balance sheet date.
B. The audit committee chairperson unexpectedly resigned during the year under audit.
C. The chief financial officer waived approvals on all checks to one vendor to expedite payment.
D. The frequency of accounts payable check runs was changed from biweekly to weekly. |
|
|
Term
| D. Entity's ability to process and summarize financial data |
|
Definition
85. An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the
A. Methods of assigning production tasks to employees
B. Appropriate prices the entity should charge for its products
C. Efficiency of management's decision-making process
D. Entity's ability to process and summarize financial data |
|
|
Term
| A. The amount of time budgeted to complete the engagement |
|
Definition
86. Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls?
A. The amount of time budgeted to complete the engagement
B. The size and complexity of the client
C. The nature of specific relevant controls
D. The auditor's prior experience with client operations |
|
|
Term
| D. Search for significant deficiencies in the operation of the entity's internal control |
|
Definition
87. In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to
A. Determine whether control procedures have been placed in operation
B. Perform procedures to understand the design of internal control policies
C. Document the understanding of the entity's internal control
D. Search for significant deficiencies in the operation of the entity's internal control |
|
|
Term
| A. Design of the policies and procedures pertaining to the internal control components |
|
Definition
88. In obtaining an understanding of an entity's internal control policies and procedures that are relevant to audit planning, and auditor is required to obtain knowledge about the
A. Design of the policies and procedures pertaining to the internal control components
B. Effectiveness of the policies and procedures that have been placed in operation
C. Consistency with which the policies and procedures are currently being applied
D. Control procedures related to each principal transaction class and account balance |
|
|
Term
| B. Process used to prepare significant accounting estimates |
|
Definition
89. An auditor should obtain sufficient knowledge of an entity's accounting system to understand the
A. Safeguards used to limit access to computer facilities
B. Process used to prepare significant accounting estimates
C. Procedures used to assure proper authorization of transactions
D. Policies used to detect the concealment of fraud |
|
|
Term
| D. Management may establish appropriate procedures but not enforce compliance with them |
|
Definition
90. When obtaining an understanding of an entity's internal control, an auditor should concentrate on the implementation of the procedures because
A. The procedures may be operating effectively but may not be documented.
B. Management may implement procedures whose costs exceed their benefits.
C. The procedures may be so inappropriate that no reliance is contemplated by the auditor.
D. Management may establish appropriate procedures but not enforce compliance with them. |
|
|
Term
| D. Observation of client personnel |
|
Definition
91. Which of the following techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of an internal control procedure?
A. Confirmation with outside parties
B. Inquiry of client personnel
C. Recomputation of account balance amounts
D. Observation of client personnel |
|
|
Term
| D. Evaluate whether internal control procedures operated effectively |
|
Definition
92. The objective of tests of details of transactions performed as tests of controls is to
A. Monitor the design and use of entity documents such as prenumbered shipping forms.
B. Determine whether internal control policies and procedures have been placed in operation.
C. Detect material misstatements in the account balances of the financial statements.
D. Evaluate whether internal control procedures operated effectively. |
|
|
Term
| C. Client records documenting the use of computer programs |
|
Definition
93. Which of the following types of evidence would an auditor most likely examine to determine whether internal control policies and procedures are operating as designed?
A. Gross margin information regarding the client's industry
B. Confirmations of receivables verifying account balances
C. Client records documenting the use of computer programs
D. Anticipated results documented in budgets or forecasts |
|
|
Term
| D. Preparation of system flowcharts |
|
Definition
94. Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?
A. Inquiry of client personnel
B. Inspection of documents and reports
C. Observation of client personnel
D. Preparation of system flowcharts |
|
|
Term
| B. If the auditor uses prior audit evidence for several controls, the auditor should test a sufficient portion of them in each audit so that each is tested every third audit |
|
Definition
95. Which of the following statements is correct concerning the use of prior audit evidence regarding the operating effectiveness of controls?
A. If the auditor plans to rely on controls that have changed since they were last tested, the auditor should test those controls at least once every three years.
B. If the auditor uses prior audit evidence for several controls, the auditor should test a sufficient portion of them in each audit so that each is tested every third audit.
C. If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test those controls at least every other year.
D. If the auditor plans to rely on controls that mitigate a significant risk, those controls should be tested at least every other year. |
|
|
Term
| D. The auditor need not search for deficiencies but should document and communicate any significant deficiencies and material weaknesses that are discovered |
|
Definition
96. Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?
A. The auditor should design and apply tests of controls to discover deficiencies that could result in material misstatements.
B. The auditor need not search for deficiencies unless management requests an attestation that "no significant deficiencies were identified in the audit."
C. The auditor should search for deficiencies if the auditor expects to rely on controls.
D. The auditor need not search for deficiencies but should document and communicate any significant deficiencies and material weaknesses that are discovered. |
|
|
Term
| C. An auditor may communicate some deficiencies during an audit in addition to after the audit's completion |
|
Definition
97. Which of the following statements is correct concerning deficiencies in internal control identified in an audit of financial statements?
A. An auditor is required to search for control deficiencies during an audit.
B. All significant deficiencies are also considered to be material weaknesses.
C. An auditor may communicate some deficiencies during an audit in addition to after the audit's completion.
D. An auditor may report that no significant deficiencies were noted during an audit. |
|
|
Term
| C. Evidence of a lack of objectivity by those responsible for accounting decisions |
|
Definition
98. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to management and those charged with governance?
A. Management's failure to renegotiate unfavorable long-term purchase commitments
B. Recurring operating losses that may indicate going concern problems
C. Evidence of a lack of objectivity by those responsible for accounting decisions
D. Management's current plans to reduce its ownership equity in the entity |
|
|
Term
| B. Increase the assessment of control risk and increase the extent of substantive tests |
|
Definition
99. After testing a client's internal control activities, an auditor discovers a material weakness in the operation of a client's internal controls. Under these circumstances the auditor most likely would
A. Issue a disclaimer of opinion about the internal controls as part of the auditor's report
B. Increase the assessment of control risk and increase the extent of substantive tests
C. Issue a qualified opinion of this finding as part of the auditor's report
D. Withdraw from audit because the internal controls are ineffective |
|
|
Term
| C. The significant deficiency has not been corrected |
|
Definition
100. A previously communicated significant deficiency ordinarily should be communicated again if
A. The deficiency has a material effect on the auditor's assessment of control risk.
B. The entity accepts that degree of risk because of cost-benefit considerations.
C. The significant deficiency has not been corrected.
D. There has been major turnover in upper-level management and the board of directors. |
|
|
Term
| B. Observing the employees as they apply control procedures |
|
Definition
101. Audit evidence concerning segregation of duties ordinarily is best obtained by
A. Performing tests of transactions that corroborate management's financial statement assertions
B. Observing the employees as they apply control procedures
C. Obtaining a flowchart of activities performed by available personnel
D. Developing audit objectives that reduce control risk |
|
|
Term
| B. Deter dishonestly by making employees aware that insurance companies may investigate and prosecute dishonest acts |
|
Definition
102. Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and
A. Protect employees who make unintentional errors from possible monetary damages resulting from their errors
B. Deter dishonestly by making employees aware that insurance companies may investigate and prosecute dishonest acts
C. Facilitate an independent monitoring of the receiving and depositing of cash receipts
D. Force employees in position of trust to take periodic vacations and rotate their assigned duties |
|
|
Term
| A. Collection of receivables |
|
Definition
103. An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the
A. Collection of receivables
B. Purchase of merchandise inventory
C. Payment of accounts payable
D. Sale of long-term debt |
|
|
Term
| B. Perform the planned auditing procedures closer to the balance sheet date |
|
Definition
104. Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to
A. Apply the planned substantive tests prior to the balance sheet date
B. Perform the planned auditing procedures closer to the balance sheet date
C. Increase the assessed level of control risk for relevant financial statement assertions
D. Decrease the extent of auditing procedures to be applied to the class of transactions |
|
|
Term
|
Definition
105. The expected population deviation rate of client billing misstatements is 2%. The auditor has established a tolerable rate of 3%. In the review of client invoices the auditor should use
A. Stratified sampling
B. Discovery sampling
C. Variable sampling
D. Attribute sampling |
|
|
Term
|
Definition
106. In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?
A. Variables
B. Stratified
C. Ratio
D. Attributes |
|
|
Term
|
Definition
107. Which of the following sampling methods would be used to estimate a numerical estimate of a population, such as a dollar value?
A. Attributes sampling
B. Stop-or-go sampling
C. Variable sampling
D. Random-number sampling |
|
|
Term
| B. Inspecting employee time cards for proper approval by supervisors |
|
Definition
108. For which of the following audit tests would an auditor most likely use attribute sampling?
A. Selecting accounts receivable for confirmation of account balances
B. Inspecting employee time cards for proper approval by supervisors
C. Making an independent estimate of the amount of a LIFO inventory
D. Examining invoices in support of the valuation of fixed asset additions |
|
|
Term
|
Definition
109. In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year's audit, the auditor most likely would choose
A. Individual overdue balances
B. Individual invoices
C. Small account balances
D. Large account balances |
|
|
Term
| B. Estimate whether the dollar amount of inventory is reasonable |
|
Definition
110. An auditor examining inventory most likely would use variables sampling rather than attributes sampling to
A. Identify whether inventory items are properly priced
B. Estimate whether the dollar amount of inventory is reasonable
C. Discover whether misstatements exist in inventory records
D. Determine whether discounts for inventory are properly recorded |
|
|
Term
| A. The control procedures are operating effectively |
|
Definition
111. Samples to test internal control procedures are intended to provide a basis for an auditor to conclude whether
A. The control procedures are operating effectively.
B. The financial statements are materially misstated.
C. The risk of incorrect acceptance is too high.
D. Materiality for planning purposes is at a sufficiently low level. |
|
|
Term
|
Definition
112. An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. The allowance for sampling risk was:
A. 5.5%
B. 4.5%
C. 3.5%
D. 1.0% |
|
|
Term
| D. The cost and effort of selecting additional sample items is low |
|
Definition
113. An auditor may decide to increase the risk of incorrect rejection when
A. Increased reliability from the sample is desired.
B. Many differences (audit value minus recorded value) are expected.
C. Initial sample results do not support the planned level of control risk.
D. The cost and effort of selecting additional sample items is low. |
|
|
Term
| A. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the internal control justifies such an assessment |
|
Definition
114. The likelihood of assessing control risk too high is the risk that the sample selected to test controls
A. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the internal control justifies such an assessment
B. Contains misstatement that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes
C. Contains proportionately fewer monetary errors or deviations from prescribed internal control structure policies or procedures than exist in the balance or class as a whole
D. Does not support the tolerable error for some or all of management's assertions |
|
|
Term
| D. More than the deviation rate in the auditor's sample |
|
Definition
115. As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was
A. Less than the risk of assessing control risk too low, based on the auditor's sample
B. Less than the deviation rate in the auditor's sample
C. More than the risk of assessing control risk too low, based on the auditor's sample
D. More than the deviation rate in the auditor's sample |
|
|
Term
| D. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity |
|
Definition
116. As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because
A. Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control activity.
B. The auditor believes that the control activity relates to the client's assertions when, in fact, it does not.
C. The auditor believes that he control activity will reduce the extent of substantive testing when, in fact, it will not.
D. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity. |
|
|
Term
| A. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the internal control justifies such an assessment |
|
Definition
114. The likelihood of assessing control risk too high is the risk that the sample selected to test controls
A. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the internal control justifies such an assessment
B. Contains misstatement that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes
C. Contains proportionately fewer monetary errors or deviations from prescribed internal control structure policies or procedures than exist in the balance or class as a whole
D. Does not support the tolerable error for some or all of management's assertions |
|
|
Term
| D. More than the deviation rate in the auditor's sample |
|
Definition
115. As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was
A. Less than the risk of assessing control risk too low, based on the auditor's sample
B. Less than the deviation rate in the auditor's sample
C. More than the risk of assessing control risk too low, based on the auditor's sample
D. More than the deviation rate in the auditor's sample |
|
|
Term
| D. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity |
|
Definition
116. As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because
A. Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control activity.
B. The auditor believes that the control activity relates to the client's assertions when, in fact, it does not.
C. The auditor believes that he control activity will reduce the extent of substantive testing when, in fact, it will not.
D. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity. |
|
|
Term
| c) the allowable risk of assessing control risk too low |
|
Definition
117. An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider
a) the average dollar value of the check requests; the allowable risk of assessing control risk too low
b) the average dollar value of the check requests
c) the allowable risk of assessing control risk too low
d) None of the above |
|
|
Term
| D. Payroll register entry |
|
Definition
118. The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a(an)
A. Clock card or time ticket
B. Employee Form W-2
C. Employee personnel record
D. Payroll register entry |
|
|
Term
| C. Be related to preliminary judgments about materiality levels |
|
Definition
119. When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should
A. Be related to the auditor's business risk
B. Not be adjusted for qualitative factors
C. Be related to preliminary judgments about materiality levels
D. Not be changed during the audit process |
|
|
Term
| B. Stratify the cash disbursements population so that the unusually large disbursements are selected |
|
Definition
120. Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?
A. Set the tolerable rate of deviation at a lower level than originally planned.
B. Stratify the cash disbursements population so that the unusually large disbursements are selected.
C. Increase the sample size to reduce the effect of the unusually large disbursements.
D. Continue to draw new samples until all unusually large disbursements appear in the sample. |
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Term
|
Definition
121. When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as
A. Precision
B. Reliability
C. Projected error
D. Standard deviation |
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Term
|
Definition
122. A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the
A. Risk of assessing control risk too low
B. Expected population deviation rate
C. Tolerable rate
D. Sample size |
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Term
| C. Measure the sufficiency of the audit evidence obtained |
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Definition
123. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to
A. Eliminate the risk of nonsampling errors
B. Reduce the level of audit risk and materiality to a relatively low amount
C. Measure the sufficiency of the audit evidence obtained
D. Minimize the failure to detect errors and fraud |
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Term
| C. Lower than assessing control risk too low for the larger population |
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Definition
124. Given random selection, the same sample size, and the same precision requirement for the testing of two unequal populations, the risk of assessing control risk too low on the smaller population is
A. Higher than assessing control risk too low for the larger population
B. Indeterminate relative to assessing control risk too low for the larger population
C. Lower than assessing control risk too low for the larger population
D. The same as assessing control risk too low for the larger population |
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Term
| B. May occur in a systematic pattern, thus destroying the sample randomness |
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Definition
125. An auditor may use a systematic sampling technique with a start at any randomly selected item when performing a test of controls with respect to control over cash receipts. The biggest disadvantage of this type of sampling is that the items in the population
A. Must be systematically replaced in the population after sampling
B. May occur in a systematic pattern, thus destroying the sample randomness
C. Must be recorded in a systematic pattern before the sample can be drawn
D. May systematically occur more than once in the sample |
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Term
| B. The population has highly variable recorded amounts |
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Definition
126. In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if
A. Probability proportional to size (PPS) sampling is used.
B. The population has highly variable recorded amounts.
C. The auditor's estimated tolerable misstatement is extremely small.
D. The standard deviation of recorded amounts is relatively small. |
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Term
| a) Variability in the dollar amounts of inventory items; Risk of incorrect acceptance |
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Definition
127. An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the
a) Variability in the dollar amounts of inventory items; Risk of incorrect acceptance
b) Variability in the dollar amounts of inventory items
c) Risk of incorrect acceptance
d) None of the above |
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Term
| A. Expected deviation rate |
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Definition
128. To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the
A. Expected deviation rate
B. Upper precision limit
C. Risk of incorrect acceptance
D. Risk of incorrect rejection |
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Term
| A. Tolerable rate (7%) was less than the achieved upper precision limit (8%) |
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Definition
129. An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. In the evaluation of this sample, the auditor decided to increase the level of preliminary assessment of control risk because the
A. Tolerable rate (7%) was less than the achieved upper precision limit (8%).
B. Expected deviation rate (7%) was more than the percentage of errors in the sample (3.5%).
C. Achieved upper precision limit (8%) was more than the percentage of errors in the sample (3.5%).
D. Expected deviation rate (2.5%) was less than the tolerable rate (7%). |
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Term
| B. Has been properly voided |
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Definition
130. An auditor is testing internal control procedures that are evidenced on an entity's vouchers by matching random numbers with voucher numbers. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher
A. Constitutes a deviation
B. Has been properly voided
C. Cannot be located
D. Represents an immaterial dollar amount |
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Term
| D. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate |
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Definition
131. What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?
A. Modify the planned assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate.
B. Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
C. Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate.
D. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. |
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Term
|
Definition
132. In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the prior year's rate because of the results of the prior year's tests of controls and the overall control environment. The auditor most likely would then increase the planned
A. Tolerable rate
B. Allowance for sampling risk
C. Risk of assessing control risk too low
D. Sample size |
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Term
| D. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate |
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Definition
133. An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the
A. Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate.
B. Sample rate of deviation is less than the expected rate of deviation used in planning the sample.
C. Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation.
D. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate. |
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Term
|
Definition
134. In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider:
I. The likely rate of deviations
II. The allowable risk of assessing control risk too high
A. I only
B. II only
C. Both I & II
D. Neither I nor II |
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Term
| A. An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling |
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Definition
135. Which of the following statements is correct concerning the auditor's use of statistical sampling?
A. An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling.
B. The selection of zero balances usually does not require special sample design considerations when using PPS sampling.
C. A classical variables sample needs to be designed with special considerations to include negative balances in the sample.
D. An assumption of PPS sampling is that the underlying accounting population is normally distributed. |
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Term
| A. The calculated audit amounts are approximately proportional to the client's book amounts |
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Definition
136. The use of the ratio estimation sampling technique is most effective when
A. The calculated audit amounts are approximately proportional to the client's book amounts.
B. A relatively small number of differences exist in the population.
C. Estimating populations whose records consist of quantities, but not book values.
D. Large overstatement differences and large understatement differences exist in the population. |
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Term
| a) Expected amount of misstatement; Measure of tolerable misstatement |
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Definition
137. Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?
a) Expected amount of misstatement; Measure of tolerable misstatement
b) Expected amount of misstatement
c) Measure of tolerable misstatement
d) None of the above |
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Term
| C. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan |
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Definition
138. Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar-unit sampling?
A. The sampling distribution should approximate the normal distribution.
B. Overstated units have a lower probability of sample selection than units that are understated.
C. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
D. The sampling interval is calculated by dividing the number of physical units in the population by the sample size. |
|
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Term
| C. Inclusion of zero and negative balances generally does not require special design considerations |
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Definition
139. Which of the following would be an advantage in using classical variable sampling rather than PPS sampling?
A. An estimate of the standard deviation of the population's recorded amounts is not required.
B. The auditor rarely needs the assistance of a computer program to design an efficient sample.
C. Inclusion of zero and negative balances generally does not require special design considerations.
D. Any amount that is individually significant is automatically identified and selected. |
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Term
|
Definition
140. In a PPS sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 has an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be
A. $1,000
B. $2,000
C. $4,000
D. $5,000 |
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Term
|
Definition
1. Interpretations of Rule 101 prohibit covered members from owning any stock or other direct investment in audit clients. Covered members include
a. all partners in the office that is responsible for the attest engagement.
b. the firm and its employee benefit plans.
c. individuals on the attest engagement.
d. all of the above. |
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Term
| d. All of the above are prohibited |
|
Definition
2. Which of the following activities is not prohibited for the CPA firm’s attestation service clients?
a. Contingent fees based on savings due to implementation of an information system.
b. Commissions for referring a review client to an insurance agency for additional insurance coverage.
c. Preparation of a tax return and receive fees based upon the refund received by the client.
d. All of the above are prohibited. |
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Term
| b. The client must hire an external CPA to approve all of the journal entries prepared by the auditor |
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Definition
3. CPAs may provide bookkeeping services to their non-public audit clients, but there are a number of conditions that must be met if the auditor is to maintain his/her independence. Which of the following conditions is not necessary?
a. The CPA must not assume a management role or function.
b. The client must hire an external CPA to approve all of the journal entries prepared by the auditor.
c. The auditor must comply with GAAS when auditing work prepared by his/her firm.
d. The client must accept responsibility for the financial statements |
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Term
| c. have the independent auditor report to an audit committee of outside members of the board of directors |
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Definition
4. To emphasize auditor independence from management, many corporations
a. appoint a partner of the CPA firm conducting the examination to the corporation’s audit committee.
b. establish a policy of discouraging social contact between employees of the corporation and the staff of the independent auditor.
c. have the independent auditor report to an audit committee of outside members of the board of directors.
d. request that a representative of the independent auditor be on hand at the annual stockholders’ meeting. |
|
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Term
| d. the Rules of Conduct are enforceable |
|
Definition
5. Of the various parts of the AICPA’s Code of Professional Conduct,
a. the Principles are enforceable.
b. the Ethical Rulings are enforceable.
c. the Interpretations are enforceable.3
d. the Rules of Conduct are enforceable |
|
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Term
| a. The auditor is not independent |
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Definition
Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client?
a. The auditor is not independent.
b. The auditor is independent if he or she is able to maintain a level of professional detachment.
c. The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements.
d. The auditor cannot audit the financial statements since a lack of integrity exists. |
|
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Term
| b. Safeguards implemented by the client |
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Definition
Which of the following is not a broad category of threat to auditor independence?
a. Familiarity.
b. Safeguards implemented by the client.
c. Financial self interest.
d. Undue Influence. |
|
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Term
| c. Prohibited for clients for whom attestation services are provided |
|
Definition
8. Contingency fee based pricing of accounting services is:
a. Always strictly prohibited in public accounting practice.
b. Never restricted in public accounting practice.
c. Prohibited for clients for whom attestation services are provided.
d. Considered an act discreditable to the profession. |
|
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Term
| c. A partner in the Oklahoma City office, who does not work on the audit, previously served as controller for the audit client |
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Definition
9. Which of the following is least likely to impair a CPA firm's independence with respect to a nonpublic audit client in the Oklahoma City office of a national CPA firm?
a. A partner in the Oklahoma City office owns an immaterial amount of stock in the client.
b. A partner in the Jersey City office owns 7% of the client's stock.
c. A partner in the Oklahoma City office, who does not work on the audit, previously served as controller for the audit client.
d. A partner in the Chicago office is also the vice president of finance for the audit client |
|
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Term
| a. A distinguishing mark of a profession is its acceptance of responsibility to the public |
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Definition
10. Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of professional conduct and to establish a mechanism for enforcing observation of the code?
a. A distinguishing mark of a profession is its acceptance of responsibility to the public.
b. A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues.
c. A requirement of most state laws calls for the profession to establish a code of ethics.
d. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the professions. |
|
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Term
| c. Considered discreditable to the profession |
|
Definition
11. A CPA's retention of client records as a means of enforcing payment of an audit fee is:
a.. Considered acceptable by the AICPA Code of Professional Conduct.
b. Ill advised since it would impair the CPA's independence with respect to the client.
c. Considered discreditable to the profession.
d. A violation of generally accepted auditing standards |
|
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Term
| d. Payable if the audit of the financial statements led to a loan |
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Definition
12. The AICPA Code of Professional Conduct would be violated if a CPA accepted a fee that was:
a. Fixed by a public authority.
b. Based on a price quotation submitted in competitive bidding.
c. Based on performing work relating to judicial proceedings.
d. Payable if the audit of the financial statements led to a loan. |
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Term
|
Definition
13. When an accountant is not independent, the accountant is precluded from issuing a:
a. Compilation report.
b. Review report.
c. Management advisory report.
d. Tax planning report. |
|
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Term
| c. Warranting the infallibility of the work performed |
|
Definition
14. Competence as a certified public accountant includes all of the following except:
a. Having the technical qualifications to perform an engagement.
b. Possessing the ability to supervise and to evaluate the quality of staff work.
c. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information is needed. |
|
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Term
| c. A CPA-shareholder of the client corporation |
|
Definition
15. The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule should be understood to preclude a CPA from responding to an inquiry made by:
a. The trial board of the AICPA.
b. An investigative body of a state CPA society.
c. A CPA-shareholder of the client corporation.
d. An AICPA voluntary quality review body. |
|
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Term
| a. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor |
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Definition
16. A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered to be impaired with respect to the client?
a. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor.
b. Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child.
c. No, because the CPA would not be considered to have a direct financial interest in the client.
d. No, because the CPA would not be considered to have a material indirect financial interest in the client. |
|
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Term
| b. An audit partner in the Eloi office |
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Definition
17. ABC Company is audited by the Phoenix office of Willingham CPAs. Which of the following individuals would be least likely to be considered a "covered member" by the independence standard?
a. Staff assistant on the audit.
b. An audit partner in the Eloi office.
c. A tax partner in Phoenix who performs no attest services for ABC Company or for any other clients.
d. The partner in charge of Willingham CPAs (she does no work on the ABC Company Audit). |
|
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Term
| a. The auditor is not independent |
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Definition
18. Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client?
a. The auditor is not independent.
b. The auditor is independent if he or she is able to maintain a level of professional detachment.
c. The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements.
d. The auditor cannot audit the financial statements since a lack of integrity exists. |
|
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Term
| a. Appearance of independence may be lacking |
|
Definition
19. A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPA firm's revenues come from this client. Which statement is most likely to be true?
a. Appearance of independence may be lacking.
b. The small CPA firm does not have the proficiency to perform a larger audit.
c. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit.
d. The auditor should provide an "emphasis of a matter paragraph" to his/her audit report adequately disclosing this information and then it may issue an unqualified opinion. |
|
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Term
| c. The CPA's father is president of the audit client |
|
Definition
20. Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"?
a. A close relative has a material investment in that client of which the CPA is not aware.
b. A cousin has an immaterial investment in the client of which the CPA is aware.
c. The CPA's father is president of the audit client.
d. The CPA's spouse participates in a savings plan sponsored by the client. |
|
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Term
| b. An unacceptable risk of non-independence exists |
|
Definition
21. AICPA independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a reasonable person, aware of all the relevant facts, to conclude that:
a. A questioning mind reveals doubt as to independence.
b. An unacceptable risk of non-independence exists.
c. The accountant is definitely not independent.
d. There is substantial cause for a legal finding of non-independence. |
|
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Term
| c. Consider the threat from the perspective of a reasonable an informed third party who has knowledge of all the relevant information |
|
Definition
22. If the AICPA Code of Professional Conduct does not specifically address a threat to auditor independence the auditor should:
a. Conclude that the threat is not significant unless proven so.
b. Conclude that the threat results in a lack of independence unless it can be shown that no impairment of independence occurs.
c. Consider the threat from the perspective of a reasonable an informed third party who has knowledge of all the relevant information.
d. Consult the Statements on Auditing Standards for guidance. |
|
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Term
| c. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid |
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Definition
23. Which of the following statements is correct?
a. Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received.
b. CPA working papers are the joint property of the CPA and the client.
c. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid.
d. CPA working papers that include copies of client's records are not available to third parties under any circumstances. |
|
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Term
| a. Staff assistants assigned to the engagement |
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Definition
24. Which of the following types of employees must be independent of an audit client?
a. Staff assistants assigned to the engagement.
b. Senior auditors assigned to the office that performs the audit.
c. Managers assigned to an office that does not participate in the engagement.
d. All firm professionals, regardless of their position. |
|
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Term
| c. Statements on Responsibilities in Tax Practice |
|
Definition
25. Which of the following are not enforceable under the AICPA Code of Professional Conduct?
a. Statements on Auditing Standards.
b. Statements on Standards for Accounting and Review Services.
c. Statements on Responsibilities in Tax Practice.
d. Statements of Standards for Consulting Services |
|
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Term
| a. Performance of bookkeeping services for the client |
|
Definition
26. The AICPA allows an auditor to perform which of the following services for an audit client:
a. Performance of bookkeeping services for the client.
b. Authorization of transactions for the client.
c. Preparation of client source documents.
d. Preparation and posting of journal entries without the client's approval. |
|
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Term
| d. A partner in the firm has an investment in a mutual fund that has a direct interest in the client |
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Definition
27. Jones & Company CPAs has one office. Which of the following is least likely to impair independence with respect to an audit client?
a. The client owes the firm for two prior years' audit fees.
b. A partner in the CPA firm is the son of the president of the client.
c. The wife of a partner in the firm has a small direct financial interest in the client.
d. A partner in the firm has an investment in a mutual fund that has a direct interest in the client. |
|
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Term
| a. Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so |
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Definition
28. Which of the following acts by a CPA would not necessarily be considered an act discreditable to the profession under Rule 501 of the AICPA Code of Professional Conduct?
a. Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so.
b. Engaging in discriminatory employment practices.
c. Robbing a convenience store.
d. Knowingly signing a false tax return. |
|
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Term
| c. Advertising including an indication that the firm has a close relationship with several tax court judges |
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Definition
29. Which of the following forms of advertising would most likely to be considered to be a violation of Rule 502 of the AICPA Code of Professional Conduct?
a. Advertising including the types of services offered and the standard fees for the services.
b. Advertising including the experience of the firm's professional staff.
c. Advertising including an indication that the firm has a close relationship with several tax court judges.
d. Advertising including the percentage of the firm's staff that have CPA certificates. |
|
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Term
| d. Revoke the offending member's CPA certificate |
|
Definition
30. If a CPA violates the AICPA Code of Professional Conduct, the AICPA Trial Board may do all of the following, except:
a. Admonish the offending member.
b. Suspend the offending member.
c. Expel the offending member.
d. Revoke the offending member's CPA certificate |
|
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Term
| d. A "covered member" owns an immaterial amount of stock in an audit client |
|
Definition
31. Which of the following acts by a CPA would be most likely to be a violation of the AICPA Code of Professional Conduct?
a. Assisting a client in preparing a financial forecast.
b. Forming a professional corporation to practice as a CPA.
c. Accepting a fee in a tax matter relating to an administrative proceeding.
d. A "covered member" owns an immaterial amount of stock in an audit client. |
|
|
Term
| b. The covered member continues to hold an immaterial indirect financial interest in the client |
|
Definition
32. In which of the following circumstances would a covered member be considered independent when performing the audit of the financial statements of a new client for the year ended December 31, 20X3?
a. The covered member resigned on January 17, 20X3 from the board of directors of the client, prior to accepting the new audit engagement.
b. The covered member continues to hold an immaterial indirect financial interest in the client.
c. The covered member continues to serve as a trustee for the client's pension plan and has the authority to make investment decisions.
d. The covered member's spouse owns an immaterial amount of shares of common stock in the client. |
|
|
Term
| b. All attestation services, but not other professional services |
|
Definition
33. Independence is required of a CPA performing:
a. Audits, but not any other professional services.
b. All attestation services, but not other professional services.
c. All attestation and tax services, but not other professional services.
d. All professional services |
|
|
Term
| d. All professional services |
|
Definition
34. A CPA should maintain objectivity and be free of conflicts of interest when performing:
a. Audits, but not any other professional services.
b. All attestation services, but not other professional services.
c. All attestation and tax services, but not other professional services.
d. All professional services |
|
|
Term
|
Definition
35. Bill Pan, CPA, has posted the general ledger and has maintained the financial records of Zorko Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries. Which of the following best summarize the AICPA and SEC views as to the following question: Is audit independence impaired?
a) AICPA; SEC
b) AICPA
c) SEC
d) None of the above |
|
|
Term
| b. Determine that the performance of all services is consistent with the firm's members' role as professionals |
|
Definition
36. In determining the scope and nature of services to be performed in public practice, a CPA firm should:
a. Require independence for all services performed.
b. Determine that the performance of all services is consistent with the firm's members' role as professionals.
c. Have in place internal control procedures.
d. Only perform accounting related services. |
|
|
Term
| c. The auditor should not make management decisions for an audit client |
|
Definition
37. An audit independence issue might be raised by the auditor's participation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue?
a. Information obtained as a result of a consulting services engagement is confidential to that specific engagement and should not influence performance of the attest function.
b. The decision as to loss of independence must be made by the client based on the facts of the particular case.
c. The auditor should not make management decisions for an audit client.
d. The auditor who is asked to review management decisions, is also competent to make these decisions and can do so without loss of independence. |
|
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Term
| c) The process of filing a form 8-k |
|
Definition
38. While performing an audit an audit of a public company, the auditors discovered material illegal acts and resigned due to the client's refusal to disclose them. The auditors' reason for resignation should be disclosed through:
a) CPA direct communication with shareholders; The process of filing a form 8-k
b) CPA direct communication with shareholders
c) The process of filing a form 8-k
d) None of the above |
|
|
Term
| a. Only to persons qualified to practice public accounting |
|
Definition
39. Pickens and Perkins, CPAs, decide to incorporate their practice of accountancy. According to the AICPA Code of Professional Conduct, shares in the corporation can be issued:
a. Only to persons qualified to practice public accounting.
b. Only to employees and officers of the firm.
c. Only to persons qualified to practice as CPAs and members of their immediate families.
d. To the general public. |
|
|
Term
| d. Effects of a direct financial interest in the client upon the CPA's independence |
|
Definition
40. The concept of materiality would be least important to an auditor when considering the:
a. Decision whether to use positive or negative confirmations of accounts receivable.
b. Adequacy of disclosure of a client's illegal act.
c. Discovery of weaknesses in a client's internal control.
d. Effects of a direct financial interest in the client upon the CPA's independence. |
|
|
Term
|
Definition
41. A client company has not paid its 20X3 audit fees. According to the AICPA Code of Professional Conduct, in order for the auditor to be considered independent with respect to the 20X4 audit, the 20X3 audit fees must be paid before the:
a. 20X3 report is issued.
b. 20X4 fieldwork is started.
c. 20X4 report is issued.
d. 20X5 fieldwork is started. |
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Term
| d. The CPA has an immaterial joint, closely held business investment with the client |
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Definition
42. Independence of a CPA with respect to a client is not impaired if:
a. The CPA has a loan to an officer of the client.
b. The CPA has an immaterial direct interest in the client.
c. The CPA is trustee for the client's pension plan.
d. The CPA has an immaterial joint, closely held business investment with the client. |
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Term
| a. All of its partners or shareholders are members of the Institute |
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Definition
43. A CPA firm may not designate itself as "members of the AICPA" unless:
a. All of its partners or shareholders are members of the Institute.
b. All of its professional staff are members of the Institute.
c. A majority of its professional staff are members of the Institute.
d. At least one partner or shareholder is a member of the Institute |
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Term
| c. He would be liable for losses attributable to his negligence |
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Definition
1. As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp, Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company’s controller. As a matter of common law, to what extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft?
a. He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees.
b. He would have no liability because privity of contract is lacking.
c. He would be liable for losses attributable to his negligence.
d. He would be liable only if it could be proven that he was grossly negligent. |
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Term
| c. when such failure clearly results from failure to comply with generally accepted auditing standards |
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Definition
2. According to Statement on Auditing Standards No. 1, the auditor’s responsibility for failure to detect fraud arises
a. whenever the amounts involved are material.
b. only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor.
c. when such failure clearly results from failure to comply with generally accepted auditing standards.
d. only when the examination was specifically designed to detect fraud. |
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Term
| b. CloseCo will recover damages for breach of contract |
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Definition
3. You have recently opened your CPA practice and have been engaged to issue your opinion on the financial statements of a closely-held corporation, CloseCo, who is selling out to a potential buyer. You diligently plan and begin working on the engagement. You are then requested to bid on providing ongoing audit services to another corporation. Because of the potential for recurring work, you postpone your work with CloseCo to pursue this new opportunity. CloseCo’s potential buyers lose interest because of the delay in obtaining audited financial statements, and they decide not to buy your client’s company. CloseCo sues you. Given this data, what is the likely outcome?
a. You will be compensated for the work you have performed to date.
b. CloseCo will recover damages for breach of contract.
c. CloseCo will recover both punitive damages and damages for breach of contract.
d. Neither you nor CloseCo will recover anything. |
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Term
| c. The Securities Act of 1933 imposes substantial additional potential liability to the CPA firm |
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Definition
4. If a client decides to go public, which of the following statements is true?
a. The Securities Act of 1933 does not apply.
b. If the client does not plan to be listed on an organized exchange, the Securities Exchange Act of 1934 will not apply.
c. The Securities Act of 1933 imposes substantial additional potential liability to the CPA firm.
d. Because the CPA firm and the client operate only within one state, federal securities laws do not apply. |
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Term
| a. The auditor has no responsibility for searching for indirect-effect illegal acts |
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Definition
5. Which of the following statements is correct with respect to the auditor’s responsibilities relative to the detection of indirect-effect illegal acts?
a. The auditor has no responsibility for searching for indirect-effect illegal acts.
b. The auditor has the same responsibility for searching for indirect-effect illegal acts as any other potential misstatement that may occur.
c. Auditors have responsibility for searching for any illegal act, whether direct-effect or indirect-effect.
d. None of the above is correct. |
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Term
| A. Maintain public confidence in the profession |
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Definition
6. An auditor strives to achieve independence in appearance in order to:
A. Maintain public confidence in the profession
B. Become independent in fact
C. Maintain an unbiased mental attitude
D. Comply with the generally accepted auditing standards of fieldwork |
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Term
| D. The misstatement is immaterial in the overall context of the financial statements |
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Definition
A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense?
A. The investor has not proven CPA negligence.
B. The investor did not rely upon the financial statement.
C. The CPA detected the misstatement after the audit report date.
D. The misstatement is immaterial in the overall context of the financial statements. |
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Term
| B. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed |
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Definition
Which of the following is a correct statement related to CPA legal liability under common law?
A. CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence.
B. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed.
C. CPAs may escape all personal liability through incorporation as a limited liability corporation.
D. CPAs are guilty until they prove that they performed the audit with "good faith." |
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Term
| D. Either ordinary or gross negligence |
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Definition
An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the foreseeable third party approach the auditor is generally liable to the bank which subsequently grants the loan for:
A. Lack of due diligence.
B. Lack of good faith.
C. Gross negligence, but not ordinary negligence.
D. Either ordinary or gross negligence. |
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Term
|
Definition
Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for:
A. Lack of due diligence.
B. Existence of scienter.
C. Ordinary negligence.
D. Auditors have no liability to security purchasers under this act. |
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Term
| C. He performed the audit with due diligence |
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Definition
Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general Jones will have to prove that:
A. He is not guilty of gross negligence.
B. He performed the audit with good faith.
C. He performed the audit with due diligence.
D. The plaintiffs did not show him to be negligent. |
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Term
| D. Either ordinary or gross negligence |
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Definition
An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the Restatement of Torts approach to liability the auditor is generally liable to the bank which subsequently grants the loan for:
A. Lack of due diligence.
B. Lack of good faith.
C. Gross negligence, but not ordinary negligence.
D. Either ordinary or gross negligence. |
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Term
| B. Limited liability partnership |
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Definition
Which of the following forms of organization is most likely to protect the personal assets of any partner, or shareholder who has not been involved on an engagement resulting in litigation?
A. Professional corporation.
B. Limited liability partnership.
C. Partnership.
D. Subchapter M Incorporation. |
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Term
|
Definition
Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?
A. Due Diligence Approach.
B. Ultramares Approach.
C. Restatement of Torts Approach.
D. Rosenblum Approach. |
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Term
|
Definition
CPAs should not be liable to any party if they perform their services with:
A. Ordinary negligence.
B. Regulatory providence.
C. Due professional care.
D. Good faith. |
|
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Term
| C. Joint and several liability |
|
Definition
Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. As a result the CPA has been required to pay the entire $500,000. The auditor's liability is most likely based upon which approach to assessing liability?
A. Absolute liability
B. Contributory negligence
C. Joint and several liability.
D. Proportional liability. |
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Term
| D. Proportional liability |
|
Definition
Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. The CPA has been required to pay $50,000. The auditor's liability is most likely based upon which approach to assessing liability?
A. Absolute liability.
B. Contributory negligence.
C. Joint and several liability.
D. Proportional liability. |
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Term
| C. Contributory negligence |
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Definition
Assume that a client has encountered a $500,000 fraud and that the CPA's percentage of responsibility established at 10%, while the company itself was responsible for the other 90%. Under which approach to liability is the CPA most likely to avoid liability entirely?
A. Absolute negligence.
B. Comparative negligence.
C. Contributory negligence.
D. Joint Negligence. |
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Term
|
Definition
In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law?
A. Rosenblum v. Adler.
B. Hochfelder v. Ernst.
C. 1136 Tenants Corporation v. Rothenberg.
D. Continental Vending. |
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Term
| C. Greater than the Securities Act of 1933 |
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Definition
The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be:
A. Less than the Securities Act of 1933.
B. The same as the Securities Act of 1933.
C. Greater than the Securities Act of 1933.
D. Indeterminate in relation to the Securities Act of 1933 |
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Term
| B. Either ordinary or gross negligence |
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Definition
The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for:
A. Only criminal acts.
B. Either ordinary or gross negligence.
C. Only gross negligence.
D. Only fraud. |
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Term
| B. Client contributory negligence |
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Definition
A principle that may reduce or entirely eliminate auditor liability to a client is:
A. Client constructive negligence.
B. Client contributory negligence.
C. Auditor ordinary negligence.
D. Auditor gross negligence. |
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Term
|
Definition
Under the Securities Act of 1933 the burden of proof that the plaintiff sustained a loss must be proven by the:
A. Plaintiff.
B. Defendant.
C. SEC.
D. Jury. |
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Term
|
Definition
A case by a client against its CPA firm alleging negligence would be brought under:
A. The Securities Act of 1933.
B. The Securities Exchange Act of 1934.
C. The state blue sky laws.
D. Common law. |
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Term
| B. A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent |
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Definition
Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement. Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence?
A. A loss sustained by a client in a suit brought under common law.
B. A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent.
C. A loss sustained by initial purchasers of stock in a suit brought under the Securities Act of 1933.
D. A loss sustained by a bank named as a third-party beneficiary in the engagement letter in a suit brought under common law. |
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Term
| D. 1136 Tenants Corporation v. Rothenberg |
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Definition
Which of the following court cases highlighted the need for obtaining engagement letters for professional services?
A. Ultramares v. Touche.
B. Rosenblum v. Adler.
C. Hochfelder v. Ernst.
D. 1136 Tenants Corporation v. Rothenberg. |
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Term
| D. Court cases brought under the Securities Act of 1933 |
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Definition
In which type of court case is proving "due diligence" essential to the auditors' defense?
A. Court cases brought under the Securities Exchange Act of 1934.
B. Court cases brought by clients under common law.
C. Court cases brought by third parties under common law.
D. Court cases brought under the Securities Act of 1933 |
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Term
|
Definition
Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence?
A. Ultramares v. Touche.
B. Restatement of Torts.
C. Rule 10b-5.
D. Rosenblum v. Adler. |
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Term
| B. Lack of gross negligence |
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Definition
Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements?
A. Lack of due diligence.
B. Lack of gross negligence.
C. Contributory negligence on the part of the client.
D. A disclaimer contained in the engagement letter. |
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Term
| C. Material misstatements were contained in the financial statements |
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Definition
Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933?
A. The CPA knew of the misstatement.
B. The CPA was negligent.
C. Material misstatements were contained in the financial statements.
D. The unqualified opinion contained in the registration statement was relied upon by the party suing the CPA. |
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Term
| A. Audit complied with generally accepted auditing standards |
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Definition
A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan. In a suit by the bank issuing the loan the CPA's best defense would be that the:
A. Audit complied with generally accepted auditing standards.
B. Client was aware of the misstatements.
C. Bank was not the CPA's client.
D. Bank's identity was known to the CPA prior to completion of the audit. |
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Term
| A. Unknowingly violates the 1934 Securities Exchange Act |
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Definition
The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who:
A. Unknowingly violates the 1934 Securities Exchange Act.
B. Knowingly or unknowingly violates the 1934 Securities Exchange Act.
C. Unknowingly violates the 1933 Securities Act.
D. Knowingly or unknowingly violates the 1933 Securities Act. |
|
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Term
| C. It makes recovery against CPAs more difficult under common law litigation |
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Definition
Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995?
A. It provides certain small investors better recovery rights than it does large investors.
B. It retains joint and several liability in certain circumstances.
C. It makes recovery against CPAs more difficult under common law litigation.
D. It eliminates securities fraud as an offense under civil RICO. |
|
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Term
| C. Eliminates personal liability for some, but not all, partners |
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Definition
A limited liability partnership form of organization:
A. Decreases liability of all partners of a CPA firm.
B. Has similar liability requirements to that of a professional corporation.
C. Eliminates personal liability for some, but not all, partners.
D. Eliminates personal liability for all partners. |
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Term
| C. A CPA may be exposed to criminal as well as civil liability |
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Definition
Which of the following is accurate with respect to litigation involving CPAs?
A. A CPA will not be found liable for an audit unless the CPA has audited all affiliates of that company.
B. A CPA may not successfully assert as a defense that the CPA had no motive to be part of a fraud.
C. A CPA may be exposed to criminal as well as civil liability.
D. A CPA is primarily responsible, while the client is secondarily responsible for the notes in an annual report filed with the SEC. |
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Term
| C. Failed to exercise due care |
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Definition
Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover certain instances of fraud which have subsequently caused Starr to suffer substantial losses. In order for Cox to be liable under common law, Starr at a minimum must prove that Cox:
A. Acted recklessly or with lack of reasonable grounds for belief.
B. Knew of the instances of fraud.
C. Failed to exercise due care.
D. Was grossly negligent. |
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Term
| A. That the audit was performed in accordance with GAAS |
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Definition
Dexter and Co., CPAs, issued an unqualified opinion on the 20X3 financial statements of Bart Corp. Late in 20X4, Bart determined that its treasurer had embezzled over $1,000,000. Dexter was unaware of the embezzlement. Bart has decided to sue Dexter to recover the $1,000,000. Bart's suit is based upon Dexter's failure to discover the missing money while performing the audit. Which of the following is Dexter's best defense?
A. That the audit was performed in accordance with GAAS.
B. Dexter had no knowledge of the embezzlement.
C. The financial statements were presented in conformity with GAAP.
D. The treasurer was Bart's agent and as such had designed the controls which facilitated the embezzlement. |
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Term
| A. Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances |
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Definition
Under common law, when performing an audit, a CPA:
A. Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances.
B. Must strictly adhere to generally accepted accounting principles.
C. Is strictly liable for failures to discover client fraud.
D. Is not liable unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards |
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Term
| D. Fails to follow generally accepted auditing standards |
|
Definition
A CPA's duty of due care to a client most likely will be breached when a CPA:
A. Gives a client an oral report instead of a written report.
B. Gives a client incorrect advice based on an honest error of judgment.
C. Fails to give tax advice that saves the client money.
D. Fails to follow generally accepted auditing standards |
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Term
| C. The CPA probably is liable to any person who suffered a loss as a result of the fraud |
|
Definition
Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?
A. The CPA is liable only to third parties in privity of contract with the CPA.
B. The CPA is liable only to known users of the financial statements.
C. The CPA probably is liable to any person who suffered a loss as a result of the fraud.
D. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion. |
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Term
| A. Is the client's creditor who sues the accountant for negligence |
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Definition
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:
A. Is the client's creditor who sues the accountant for negligence.
B. Can prove the presence of gross negligence that amounts to a reckless disregard for the truth.
C. Is the accountant's client.
D. Bases the action upon fraud. |
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Term
|
Definition
If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on:
A. Ordinary negligence.
B. Gross negligence.
C. Strict liability.
D. Criminal deceit. |
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Term
| A. Win because there was no privity of contract between Hark and Third |
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Definition
Hark, CPA, negligently failed to follow generally accepted auditing standards in auditing Long Corporation's financial statements. Long's president told Hark that the audited financial statements would be submitted to several, at this point undetermined, banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will:
A. Win because there was no privity of contract between Hark and Third.
B. Lose because Hark knew that a bank would be relaying the financial statements.
C. Win because Third was contributory negligent in granting the loan.
D. Lose because Hark was negligent in performing the audit. |
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Term
|
Definition
Under the Ultramares rule, to which of the following parties will an accountant be liable for ordinary negligence?
a) Parties in privity; Foreseen parties
b) Parties in privity
c) Foreseen parties
d) None of the above |
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Term
| B. There was a material misstatement in the financial statements |
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Definition
Quincy bought Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Quincy must prove that:
A. There was fraudulent activity by Worth.
B. There was a material misstatement in the financial statements.
C. Quincy relied on Worth's opinion.
D. Quincy was in privity with Worth. |
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Term
|
Definition
Bran, CPA, audited Frank Corporation. The shareholders sued both Frank and Bran for securities fraud under the Federal Securities Exchange Act of 1934. The court determined that there was securities fraud and that Frank was 80% at fault and Bran was 20% at fault due to her negligence in the audit. Both Frank and Bran are solvent and the damages were determined to be $1 million. What is the maximum liability of Bran?
A. $0
B. $200,000
C. $500,000
D. $1,000,000 |
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Term
|
Definition
If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on
A. Negligence.
B. Gross negligence.
C. Strict liability.
D. Criminal deceit. |
|
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Term
| a) Registered public accounting firms; Registered public accounting firm employees |
|
Definition
The Public Company Accounting Oversight Board may conduct investigations and disciplinary proceedings of:
a) Registered public accounting firms; Registered public accounting firm employees
b) Registered public accounting firms
c) Registered public accounting firm employees
d) None of the above |
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Term
| a. describes the limitations on the usefulness of the presentation |
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Definition
1. When an accountant examines projected financial statements, the accountant’s report should include a separate paragraph that
a. describes the limitations on the usefulness of the presentation
b. provides an explanation of the differences between an examination and an audit
c. states that the accountant is responsible for events and circumstances up to one year after the report’s date
d. disclaims an opinion on whether the assumptions provide a reasonable basis for the projection |
|
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Term
| D. Electronic commerce systems |
|
Definition
2. The WebTrust engagement relates most directly to
A. Financial statements maintained on the Internet.
B. Health care facilities.
C. Risk assurance procedures.
D. Electronic commerce systems. |
|
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Term
| D. Probability of achieving estimates |
|
Definition
3. When a CPA is associated with a forecast, all of the following should be disclosed except the:
A. Sources of information.
B. Character of the work performed by the CPA.
C. Major assumptions in the preparation of the forecast.
D. Probability of achieving estimates. |
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Term
|
Definition
4. Which of the following is a prospective financial statement for general use upon which a practitioner may appropriately report?
A. Financial projection.
B. Partial presentation.
C. Pro forma financial statement.
D. Financial forecast. |
|
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Term
| B. The client's management |
|
Definition
5. The party responsible for assumptions identified in the preparation of prospective financial statements is usually:
A. A third-party lending institution.
B. The client's management.
C. The reporting accountant.
D. The client's independent auditor. |
|
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Term
|
Definition
6. Given one or more hypothetical assumptions, a responsible party may prepare an entity's expected financial position, results of operations, and changes in financial position. Such prospective financial statements are known as:
A. Pro forma financial statements.
B. Financial projections.
C. Partial Presentation.
D. Financial forecasts. |
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Term
| A. Valuation and allocation |
|
Definition
1. In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of
A. Valuation and allocation
B. Existence
C. Completeness
D. Rights & Obligations |
|
|
Term
| C. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end |
|
Definition
2. An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?
A. Send confirmations for all new customer balances incurred from the interim date to year-end
B. Resend confirmations for any significant customer balances remaining at year-end
C. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end
D. Review cash collections subsequent to the interim date and year-end |
|
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Term
| D. Potentially increases the risk that errors that exist at the balance sheet date will not be detected |
|
Definition
3. An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather date rather than as of the balance sheet date. The auditor should be aware that this practice
A. Eliminates the use of certain statistical sampling methods that would otherwise be available
B. Presumes that the auditor will reperform the tests as of the balance sheet date
C. Should be especially considered when there are rapidly changing economic conditions
D. Potentially increases the risk that errors that exist at the balance sheet date will not be detected |
|
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Term
| B. Internal controls during the remaining period are effective |
|
Definition
4. In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?
A. The client has a new sales incentive program in place.
B. Internal controls during the remaining period are effective.
C. There is a high turnover of senior management.
D. It is a first engagement of a new client. |
|
|
Term
| D. Assess the difficulty in controlling the incremental audit risk |
|
Definition
5. Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should
A. Consider the likelihood of assessing the risk of incorrect rejections too low
B. Project sampling risk at the maximum for tests covering the remaining period
C. Ascertain that accounts receivable are immaterial to the financial statements
D. Assess the difficulty in controlling the incremental audit risk |
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Term
| D. Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts |
|
Definition
6. Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?
A. Compare the amounts included in the statement of cash flows to similar amounts in the prior year's statement of cash flows
B. Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances
C. Vouch all bank transfers to the last week of the year and first week of the subsequent year
D. Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts |
|
|
Term
| C. Accounting records to the supporting evidence |
|
Definition
7. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items
B. Potentially unrecorded items to the financial statements
C. Accounting records to the supporting evidence
D. Supporting evidence to the accounting records |
|
|
Term
| B. Existence or occurrence |
|
Definition
8. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?
A. Completeness
B. Existence or occurrence
C. Valuation or allocation
D. Rights and obligations |
|
|
Term
| C. Sales billed to customers were actually shipped |
|
Definition
9. Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that
A. Shipments to customers were properly billed.
B. Entries in the accounts receivable subsidiary ledger were for sales actually shipped.
C. Sales billed to customers were actually shipped.
D. No duplicate shipments to customers were made. |
|
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Term
| B. Corroborate information regarding deposit and loan balances |
|
Definition
10. The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to
A. Detect kiting activities that may otherwise not be discovered
B. Corroborate information regarding deposit and loan balances
C. Provide the data necessary to prepare a proof of cash
D. Request information about contingent liabilities and secured transactions |
|
|
Term
| D. Be unaware of all the financial relationships that the bank has with the client |
|
Definition
11. The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may
A. Not believe that the bank is obligated to verify confidential information to a third party
B. Sign and return the form without inspecting the accuracy of the client's bank reconciliation
C. Not have access to the client's cutoff bank statement
D. Be unaware of all the financial relationships that the bank has with the client |
|
|
Term
| A. Prior year checks listed in the cutoff statement to the year-end outstanding checklist |
|
Definition
12. On receiving a client's bank cutoff statement, an auditor most likely would trace
A. Prior year checks listed in the cutoff statement to the year-end outstanding checklist
B. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation
C. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist
D. Deposits recorded in the cash receipts journal after year-end to the cutoff statement |
|
|
Term
| C. Low average balance compared to high level of deposits |
|
Definition
13. Which of the following characteristics most likely would be indicative of check kiting?
A. High turnover of employees who have access to cash
B. Many large checks that are recorded on Mondays
C. Low average balance compared to high level of deposits
D. Frequent ATM checking account withdrawals |
|
|
Term
| C. Unrecorded sales at year-end |
|
Definition
14. Which of the following most likely would be detected by an auditor's review of a client's sales cutoff?
A. Shipments lacking sales invoices and shipping documents
B. Excessive write-offs of accounts receivable
C. Unrecorded sales at year-end
D. Lapping of year-end accounts receivable |
|
|
Term
| A. Send positive confirmation requests |
|
Definition
15. Hemp, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Hemp would most likely
A. Send positive confirmation requests
B. Send negative confirmation requests
C. Inspect the internal records such as copies of the tax invoices that were mailed to the residents
D. Examine evidence of subsequent cash receipts |
|
|
Term
| C. Segregation of duties between receiving cash and posting the accounts receivable ledger |
|
Definition
16. Which of the following internal control procedures most likely would deter lapping of collections from customers?
A. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries
B. Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval
C. Segregation of duties between receiving cash and posting the accounts receivable ledger
D. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries |
|
|
Term
|
Definition
17. An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of
A. Occurrence
B. Rights and obligations
C. Valuation and allocation
D. Completeness |
|
|
Term
| B. Valuation and allocation |
|
Definition
18. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivable to support management's financial statement assertion of
A. Existence
B. Valuation and allocation
C. Completeness
D. Rights and obligations |
|
|
Term
| B. Inspect the entity's reports of pre-numbered shipping documents that have not been recorded in the sales journal |
|
Definition
19. Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?
A. Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.
B. Inspect the entity's reports of pre-numbered shipping documents that have not been recorded in the sales journal.
C. Compare the invoiced prices on pre-numbered sales invoices to the entity's authorized price list.
D. Inquire about the entity's credit granting policies and the consistent application of credit checks. |
|
|
Term
| A. Valuation or allocation |
|
Definition
20. An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of
A. Valuation or allocation
B. Completeness
C. Existence or occurrence
D. Rights and obligations |
|
|
Term
| A. Valuation and allocation |
|
Definition
21. An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about
A. Valuation and allocation
B. Classification and understandability
C. Existence
D. Rights and obligations |
|
|
Term
| A. Unreturned negative confirmation requests rarely provide significant explicit evidence |
|
Definition
22. Which of the following statements is correct concerning the use of negative confirmation requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence.
B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation request indicate that alternative procedures are necessary.
D. Negative confirmation request are effective when understatements of account balances are suspected. |
|
|
Term
| C. Ask the client to contact the customers to request that the confirmations be returned |
|
Definition
23. When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would
A. Inspect the allowance account to verify whether the accounts were subsequently written off.
B. Increase the assessed level of detection risk for the valuation and completeness assertions.
C. Ask the client to contact the customers to request that the confirmations be returned.
D. Increase the assessed level of inherent risk for the revenue cycle. |
|
|
Term
| D. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded |
|
Definition
24. An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the
A. Dates checks are deposited per bank statements with the dates remittance credits are recorded
B. Daily cash summaries with the sums of the cash receipts journal entries
C. Individual bank deposit slips with the details of the monthly bank statements
D. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded |
|
|
Term
| C. Customers may not be inclined to report understatement errors in their accounts |
|
Definition
25. The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because
A. Many customers merely sign and return the confirmation without verifying its details.
B. Recipients usually respond only if they disagree with the information on the request.
C. Customers may not be inclined to report understatement errors in their accounts.
D. Auditors typically select many accounts with low recorded balances to be confirmed |
|
|
Term
| B. Cash receipts and accounts receivable |
|
Definition
26. An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting
A. Opening and closing inventory balances
B. Cash receipts and accounts receivable
C. Shipping and receiving activities
D. Cutoffs of sales and purchases |
|
|
Term
| B. Verify the sources and contents of the faxes in telephone calls to the senders |
|
Definition
27. To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would
A. Examine the shipping documents that provide evidence for the existence assertion
B. Verify the sources and contents of the faxes in telephone calls to the senders
C. Consider the faxes to be nonresponses and evaluate them as unadjusted differences
D. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted |
|
|
Term
| D. The combined assessed level of inherent risk and control risk relative to accounts receivable is low |
|
Definition
28. In auditing accounts receivable, the negative form of confirmation request most likely would be used when
A. The total recorded amount of accounts receivable is immaterial to the financial statements taken as a whole.
B. Response rates in prior years to properly designed positive confirmation requests were inadequate.
C. Recipients are likely to return positive confirmation requests without verifying the accuracy of the information.
D. The combined assessed level of inherent risk and control risk relative to accounts receivable is low. |
|
|
Term
| A. Request the senders to mail the original forms to the auditor |
|
Definition
29. To reduce the risk associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would
A. Request the senders to mail the original forms to the auditor
B. Examine subsequent cash receipts for the accounts in question
C. Consider the e-mail responses to the confirmations to be exceptions
D. Mail second request to the e-mail respondents |
|
|
Term
| A. The recipients are likely to sign the confirmations without devoting proper attention to them |
|
Definition
30. Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?
A. The recipients are likely to sign the confirmations without devoting proper attention to them.
B. Subsequent cash receipts are unusually difficult to verify.
C. Analytical procedures indicate that few exceptions are expected.
D. The combined assessed level of inherent risk and control risk is low. |
|
|
Term
| D. A client-prepared statement of account showing the details of the customer's account balance |
|
Definition
31. In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the client's confirmation letter?
A. An auditor-prepared letter explaining that a non-response may cause an inference that the account balance is correct
B. A client-prepared letter reminding the customer that a non-response will cause a second request to be sent
C. An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor
D. A client-prepared statement of account showing the details of the customer's account balance |
|
|
Term
| C. If you do not report any difference within 15 days, it will be assumed that this statement is correct |
|
Definition
32. Which of the following statements would an auditor most likely add to a negative confirmation of account receivable to encourage timely response by the recipients?
A. This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope.
B. Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records.
C. If you do not report any difference within 15 days, it will be assumed that this statement is correct.
D. The following invoices have been selected for confirmation and represent amounts that are overdue. |
|
|
Term
| A. Including a list of items or invoices that constitute the account balance |
|
Definition
14. Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?
A. Including a list of items or invoices that constitute the account balance
B. Restricting the selection of accounts to be confirmed to those customers with relatively large balances
C. Requesting customers to respond to the confirmation requests directly to the auditor by fax or e-mail
D. Notifying the recipients that second request will be mailed if they fail to respond in a timely manner |
|
|
Term
| A. Fictitious credit sales have been recorded during the year |
|
Definition
34. An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that
A. Fictitious credit sales have been recorded during the year
B. Employees have stolen inventory just before the year-end
C. The client recently tightened its credit-granting policies
D. An employee has been lapping receivables in both years |
|
|
Term
|
Definition
35. An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of
A. Accuracy
B. Completeness
C. Existence
D. Control |
|
|
Term
| D. More non-responses are likely to occur |
|
Definition
36. An auditor decides to use the blank form of accounts receivable confirmation rather than the positive form. The auditor should be aware that the blank form may be less efficient because
A. Subsequent cash receipts need to be verified
B. Statistical sampling may not be used
C. A higher assessed level of detection risk is required
D. More non-responses are likely to occur |
|
|
Term
| B. The form was mailed by the controller |
|
Definition
37. An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed and mailed it. What was the major flaw in this procedure?
A. The internal auditor did not sign the form.
B. The form was mailed by the controller.
C. The form was prepared by the internal auditor.
D. The account was closed, so the balance was zero. |
|
|
Term
| C. Represented by inventory tags are included in the listing |
|
Definition
38. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items
A. Included in the listing have been counted
B. Included in the listing are represented by inventory tags
C. Represented by inventory tags are included in the listing
D. Represented by inventory tags are bona fide |
|
|
Term
| D. All goods owned at year-end are included in the inventory balance |
|
Definition
39. When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that
A. No goods observed during the physical count are pledged or sold
B. No goods held on consignment for customers are included in the inventory balance.
C. All goods purchased before year-end are received before the physical inventory count.
D. All goods owned at year-end are included in the inventory balance. |
|
|
Term
| B. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens |
|
Definition
40. Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?
A. Inspect the open purchase order file for significant commitments that should be considered for disclosure
B. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens
C. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales
D. Trace test counts noted during the entity's physical count to the entity's summarization of quantities |
|
|
Term
|
Definition
41. An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of
A. Rights and obligations
B. Completeness
C. Existence
D. Valuation |
|
|
Term
| A. Testing the entity's computation of standard overhead rates |
|
Definition
42. Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?
A. Testing the entity's computation of standard overhead rates
B. Obtaining confirmation of inventories pledged under loan agreements
C. Reviewing shipping and receiving cutoff procedures for inventories
D. Tracing test counts to the entity's inventory listing |
|
|
Term
| B. Request the client to schedule the physical inventory count at the end of the year |
|
Definition
43. A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably
A. Increase the extent of tests of controls of the inventory cycle
B. Request the client to schedule the physical inventory count at the end of the year
C. Insist that the client perform physical counts of inventory items several times during the year
D. Apply gross profit tests to ascertain the reasonableness of the physical counts |
|
|
Term
| A. Completeness of disclosures |
|
Definition
44. An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of
A. Completeness of disclosures
B. Valuation of inventory
C. Existence of inventory
D. Completeness of inventory |
|
|
Term
| A. Valuation and allocation |
|
Definition
45. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of
A. Valuation and allocation
B. Rights and obligations
C. Existence
D. Classification and understandability |
|
|
Term
|
Definition
46. While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record.
A. Purchase discounts
B. Purchase returns
C. Sales
D. Sales returns |
|
|
Term
| C. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets |
|
Definition
47. To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace
A. Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule
B. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices
C. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets
D. Items listed in receiving reports and vendors' invoices to the inventory listing schedule |
|
|
Term
|
Definition
48. To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into
A. Net sales
B. Cost of goods sold
C. Operating income
D. Gross sales |
|
|
Term
| C. All inventory owned by the client is on hand at the time of the count |
|
Definition
49. When auditing inventories, an auditor would least likely verify that?
A. The financial statement presentation of inventories is appropriate.
B. Damaged goods and obsolete items have been properly accounted for.
C. All inventory owned by the client is on hand at the time of the count.
D. The client has used proper inventory pricing |
|
|
Term
| C. Examining an analysis of inventory turnover |
|
Definition
50. Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified?
A. Testing shipping and receiving cutoff procedures
B. Confirming inventories at locations outside the entity's premises
C. Examining an analysis of inventory turnover
D. Tracing inventory observation test counts to perpetual listings |
|
|
Term
| A. Test the computation of standard overhead rates |
|
Definition
51. In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?
A. Test the computation of standard overhead rates
B. Tour the manufacturing plant or production facility
C. Compare inventory balances to anticipated sales volume
D. Review inventory experience and trends |
|
|
Term
| D. Items in the inventory listing to inventory tags and the auditor's recorded count sheets |
|
Definition
52. To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would trace
A. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices
B. Items listed in receiving reports and vendors' invoices to the inventory listing
C. Inventory tags noted during the auditor's observation to items in the inventory listing
D. Items in the inventory listing to inventory tags and the auditor's recorded count sheets |
|
|
Term
| D. Expenditures for property and equipment have not been charged to expense |
|
Definition
53. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all
A. Noncapitalized expenditures for repairs and maintenance have been recorded in the proper period.
B. Expenditures for property and equipment have been recorded in the proper period.
C. Noncapitalized expenditures for repairs and maintenance have been properly charged to expense.
D. Expenditures for property and equipment have not been charged to expense. |
|
|
Term
| C. Tests of controls and limited tests of current year property and equipment transactions |
|
Definition
54. When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs
A. Analytical procedures for property and equipment balances at the end of the year
B. Analytical procedures for current year property and equipment transactions
C. Tests of controls and limited tests of current year property and equipment transactions
D. Tests of controls and extensive tests of property and equipment balances at the end of the year |
|
|
Term
| D. Select certain items of equipment from the account records and locate them in the plant |
|
Definition
55. A weakness of internal control over recording retirements of equipment may cause an auditor to
A. Inspect certain items of equipment in the plant and trace those items to the accounting records.
B. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.
C. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used.
D. Select certain items of equipment from the account records and locate them in the plant. |
|
|
Term
| B. Plant assets were retired during the year |
|
Definition
56. Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?
A. The estimated remaining useful lives of plant assets were revised upward.
B. Plant assets were retired during the year.
C. The prior year's depreciation expense was erroneously understated.
D. Overhead allocations were revised at year-end. |
|
|
Term
| C. Discover expenditures that were expensed but should have been capitalized |
|
Definition
57. An auditor's principal objective in analyzing repairs and maintenance expense accounts is to:
A. Determine that all obsolete property, plant, and equipment assets were written off before year-end
B. Verify that all recorded property, plant, and equipment assets actually exist
C. Discover expenditures that were expensed but should have been capitalized
D. Identify property, plant and equipment assets that cannot be repaired and should be written off |
|
|
Term
| D. Repairs and maintenance |
|
Definition
58. An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized?
A. Cash
B. Depreciation expense
C. Property tax expense
D. Repairs and maintenance |
|
|
Term
|
Definition
59. Cooper, CPA, performs a test to determine whether all merchandise for which the client was billed was received. The population for this test would be
A. Merchandise received
B. Vendors' invoices
C. Receiving reports
D. Canceled checks |
|
|
Term
| C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports |
|
Definition
60. Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?
A. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for
B. Receiving the client's mail, unopened, for a reasonable period of time after the year-end to search for unrecorded vendor's invoices
C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports
D. Confirming accounts payable balances with known suppliers who have zero balances |
|
|
Term
|
Definition
61. To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all
A. Payment vouchers
B. Receiving reports
C. Purchase requisitions
D. Vendor's invoices |
|
|
Term
|
Definition
62. In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of:
A. Existence
B. Classification and understandability
C. Completeness
D. Valuation and Allocation |
|
|
Term
| C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices |
|
Definition
63. Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
A. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file
B. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance
C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices
D. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions |
|
|
Term
| C. Determine that purchases were properly recorded |
|
Definition
64. An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to:
A. Identify unusually large purchases that should be investigated further
B. Verify that cash disbursements were for goods actually received
C. Determine that purchases were properly recorded
D. Test whether payments were for goods actually ordered |
|
|
Term
|
Definition
65. An auditor suspects that certain client employees are ordering merchandise for themselves over the internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all
A. Cash disbursements
B. Approved vouchers
C. Receiving reports
D. Vendors' invoices |
|
|
Term
| B. Correlating interest expense recorded for the period with outstanding debt |
|
Definition
66. An auditor's program to examine long-term debt most likely would include steps that require
A. Comparing the carrying amount of the debt to its year-end market value
B. Correlating interest expense recorded for the period with outstanding debt
C. Verifying the existence of the holders of the debt by direct confirmation
D. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt |
|
|
Term
| C. Compare interest expense with the bonds payable amount for reasonableness |
|
Definition
67. In auditing long-term bonds payable, an auditor most likely would
A. Perform analytical procedures on the bond premium and discount accounts
B. Examine documentation of assets purchased with bond proceeds for liens
C. Compare interest expense with the bonds payable amount for reasonableness
D. Confirm the existence of individual bondholders at year-end |
|
|
Term
| D. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation |
|
Definition
68. The primary responsibility of a bank acting as registrar of capital stock is to
A. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation
B. Account for stock certificates by comparing the total shares outstanding to the total in the shareholders subsidiary ledger
C. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock
D. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation |
|
|
Term
| C. Completeness of disclosures |
|
Definition
69. In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertion of
A. Valuation and allocation
B. Occurrence
C. Completeness of disclosures
D. Rights and obligations |
|
|
Term
| D. Trace the authorization for the transaction to a vote of the board of directors |
|
Definition
70. In performing tests concerning the granting of stock options, an auditor should
A. Confirm the transaction with the Secretary of State in the state of incorporation
B. Verify the existence of option holders in the entity's payroll records or stock ledgers
C. Determine that sufficient treasury stock is available to cover any new stock issued
D. Trace the authorization for the transaction to a vote of the board of directors |
|
|
Term
| A. Minutes of board of directors meetings |
|
Definition
71. An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's
A. Minutes of board of directors meetings
B. Transfer agent's records
C. Canceled stock certificates
D. Treasury stock certificate book |
|
|
Term
| C. Number of shares issued and outstanding |
|
Definition
72. When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the
A. Amount of dividends paid to related parties
B. Expected proceeds from stock subscriptions receivable
C. Number of shares issued and outstanding
D. Proper authorization of stock rights and warrants |
|
|
Term
| B. Confirm the number of shares owned that are held by an independent custodian |
|
Definition
73. In establishing the existence and ownership of long-term investments in the form of publicly-traded stock, an auditor most likely would inspect the securities or
A. Correspond with the investee company to verify the number of shares owned
B. Confirm the number of shares owned that are held by an independent custodian
C. Apply analytical procedures to the dividend income and investments accounts
D. Inspect the cash receipts journal for amounts that could represent the sale of securities |
|
|
Term
| B. Examine the contracts for possible risk exposure and the need to recognize losses |
|
Definition
74. An auditor's inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should
A. Perform analytical procedures to determine if the derivatives are properly valued
B. Examine the contracts for possible risk exposure and the need to recognize losses
C. Confirm the marketability of the derivatives with a commodity specialist
D. Document the derivatives in the auditor's communication with the audit committee |
|
|
Term
| C. Records produced by investment services |
|
Definition
75. An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to
A. Stock ledgers maintained by independent registrars
B. Dividend records on file with the SEC
C. Records produced by investment services
D. Minutes of the investee's board of directors |
|
|
Term
| A. Develop an understanding of the economic substance of each derivative |
|
Definition
76. When a client engages in transactions involving derivatives, the auditor should
A. Develop an understanding of the economic substance of each derivative
B. Confirm with the client's broker whether the derivatives are for trading purposes
C. Notify the audit committee about the risks involved in derivative transactions
D. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative |
|
|
Term
| A. Dividend record books produced by investment advisory services |
|
Definition
77. An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies by computing the amounts that should have been received by referring to
A. Dividend record books produced by investment advisory services
B. Stock indentures published by corporate transfer agents
C. Stock ledgers maintained by independent registrars
D. Annual auditing financial statements issued by the investee companies |
|
|
Term
| B. Rights and obligations |
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Definition
78. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions of existence and
A. Valuation and allocation
B. Rights and obligations
C. Completeness
D. Classification and understandability |
|
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Term
| C. Confirm the number of shares owned that are held by an independent custodian |
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Definition
79. In establishing the existence and ownership of a long-term investment in the form of publicly-traded stock, an auditor should inspect the securities or
A. Correspond with the investee company to verify the number of shares owned
B. Inspect the audited financial statements of the investee company
C. Confirm the number of shares owned that are held by an independent custodian
D. Determine that the investment is carried at fair market value |
|
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Term
| A. Completeness of recorded investment income |
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Definition
80. In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the
A. Completeness of recorded investment income
B. Classification between current and non-current portfolios
C. Valuation of marketable equity securities
D. Existence of unrealized gains or losses in the portfolio |
|
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Term
| D. Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date |
|
Definition
81. A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will
A. Request the bank to confirm to the auditor the contents of the safe deposit box at the balance sheet date
B. Examine supporting evidence for transactions occurring during the year
C. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date
D. Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date |
|
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Term
| B. Examine the audited financial statements of the investee company |
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Definition
82. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would
A. Inspect the stock certificates evidencing the investment
B. Examine the audited financial statements of the investee company
C. Review the broker's advice or canceled check for the investment's acquisition
D. Obtain market quotations from financial newspapers or periodicals |
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Term
|
Definition
1. If an auditor is satisfied that sufficient audit evidence supports management's assertions about the nature of a matter involving an uncertainty, the auditor should express a(n):
A. Unqualified opinion
B. Unqualified opinion with a separate explanatory paragraph
C. Qualified opinion or disclaimer of opinion, depending up the materiality of the matter
D. Qualified opinion or disclaimer of opinion, depending on whether the uncertainty is adequately disclosed. |
|
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Term
|
Definition
2. King, CPA, was engaged to audit the financial statements of Newton Company after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors, but was satisfied concerning both after applying alternative procedures. King's auditor's report most likely contained a(n)
A. Qualified opinion
B. Disclaimer of opinion
C. Unqualified opinion
D. Unqualified opinion with a separate explanatory paragraph |
|
|
Term
| B. Not refer to consistency in the auditor's report |
|
Definition
3. In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should:
A. Not report on the client's income statement
B. Not refer to consistency in the auditor's report
C. State that the consistency standard does not apply
D. State that the accounting principles have been applied consistently |
|
|
Term
| B. The auditor lacks independence with respect to the audited entity |
|
Definition
4. An auditor may not issue a qualified opinion when:
A. An accounting principle at variance with GAAP is used
B. The auditor lacks independence with respect to the audited entity
C. A scope limitation prevents the auditor from completing an important audit procedure
D. The auditor's report refers to the work of a specialist |
|
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Term
| A. Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary |
|
Definition
5. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when management:
A. Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary
B. Refuses to disclose in the notes to the financial statement related party transactions authorized by the board of directors
C. Does not sign an engagement letter specifying the responsibilities of both the entity and the auditor
D. Fails to correct a significant deficiency communicated to the audit committee after the prior year's audit |
|
|
Term
| C. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases |
|
Definition
6. In which of the following circumstances would an auditor be most likely to express an adverse opinion:
A. The CEO refuses the auditor access to minutes of the board of directors' meetings
B. Tests of controls show that the entity's internal controls are so poor that they cannot be relied upon
C. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases
D. The auditor has substantial doubt about the entity's ability to continue as a going concern |
|
|
Term
| D. Management's refusal to furnish written representations |
|
Definition
7. An auditor most likely would issue a disclaimer of opinion because of:
A. Inadequate disclosure of material information
B. The omission of the statement of cash flows
C. A material departure from GAAP
D. Management's refusal to furnish written representations |
|
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Term
|
Definition
8. If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows the auditor ordinarily will express a(n):
A. Disclaimer of opinion
B. Qualified opinion
C. Review report
D. Unqualified opinion with a separate explanatory paragraph |
|
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Term
|
Definition
9. An explanatory paragraph following the opinion paragraph of an auditor's report describes an uncertainty as follows:
“As discussed in Note X to the financial statements the Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements.”
What type of opinion should the auditor express under these circumstances?
A. Adverse
B. Qualified due to a scope limitation
C. Qualified due to a GAAP violation
D. Unqualified |
|
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Term
| B. Estimate of the total likely misstatement is less than a material amount |
|
Definition
10. When issuing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the:
A. Amount of known misstatement is documented in the management representation letter.
B. Estimate of the total likely misstatement is less than a material amount.
C. Amount of known misstatement is acknowledged and recorded by the client.
D. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client. |
|
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Term
|
Definition
11. An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n):
A. "Except for" qualified opinion
B. Explanatory paragraph
C. Unqualified opinion
D. Consistency modification |
|
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Term
| C. May express an unqualified opinion with an explanatory paragraph |
|
Definition
12. Management believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial states, the auditor:
A. May express a qualified opinion due to a scope limitation
B. Must express a qualified opinion due to a scope limitation
C. May express an unqualified opinion with an explanatory paragraph
D. Must express an unqualified opinion with an explanatory paragraph |
|
|
Term
| C. Except for qualified opinion or an adverse opinion |
|
Definition
13. If the financial statements, including accompanying notes, fail to disclose information that is required by GAAP, the auditor should express either a(n):
A. Subject to qualified opinion or an unqualified opinion with a separate explanatory paragraph
B. Adverse opinion or a subject to qualified opinion
C. Except for qualified opinion or an adverse opinion
D. Unqualified opinion with a separate explanatory paragraph or an except for qualified opinion |
|
|
Term
| B. Qualified opinion or an adverse opinion |
|
Definition
14. An auditor concludes that a client's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the materiality of the effect on the financial statements, the auditor should express either a(n):
A. Adverse opinion or a disclaimer of opinion
B. Qualified opinion or an adverse opinion
C. Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph
D. Unqualified opinion with a separate explanatory paragraph or a qualified opinion |
|
|
Term
| B. explicitly represented in the opening paragraph of the auditor’s standard report |
|
Definition
15. An auditor’s responsibility to express an opinion on the financial statements is
A. explicitly represented in the opinion paragraph of the auditor’s standard report
B. explicitly represented in the opening paragraph of the auditor’s standard report
C. explicitly represented in the scope paragraph of the auditor’s standard report
D. implicitly represented in the auditor’s standard report |
|
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Term
| A. A statement that the auditor believes that his or her audit provides a reasonable basis for expressing negative assurance |
|
Definition
16. Which of the following is not explicitly included in an audit report for a nonpublic company?
A. A statement that the auditor believes that his or her audit provides a reasonable basis for expressing negative assurance.
B. A statement that the auditor's responsibility is to express an opinion on the financial statements.
C. A statement that the financial statements in the report are the responsibility of management.
D. A title with the word "independent." |
|
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Term
| D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern |
|
Definition
17. When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes:
A. Preparing prospective financial information to verify whether management's plans can be effectively implemented.
B. Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1.
C. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements.
D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern. |
|
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Term
|
Definition
18. When the auditor of a nonpublic company issues an adverse opinion an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified?
a) Introductory; Opinion
b) Scope; Opinion
c) Opinion
d) None of the above |
|
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Term
|
Definition
19. When an auditor issues a qualified report on financial statements due to a scope limitation an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified?
a) Introductory; Scope; Opinion
b) Introductory; Opinion
c) Scope; Opinion
d) Scope |
|
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Term
|
Definition
20. When an auditor issues an unqualified report on financial statements, but adds an emphasis of a matter paragraph to the report, which, if any, paragraphs to the report are modified?
a) Introductory; Scope; Opinion
b) Scope; Opinion
c) Opinion
d) None of the above |
|
|
Term
| B. Prior to the opinion paragraph |
|
Definition
21. An explanatory paragraph relating to a scope limitation in the audit of the financial statements of a nonpublic company should be placed
A. After the opinion paragraph.
B. Prior to the opinion paragraph.
C. Either before or after the opinion paragraph.
D. An audit report modified for a scope limitation does not include an explanatory paragraph |
|
|
Term
| C. Increase ownership equity |
|
Definition
22. After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:
A. Increase current dividend distributions.
B. Reduce existing lines of credit.
C. Increase ownership equity.
D. Purchase assets formerly leased. |
|
|
Term
| B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action |
|
Definition
23. When an auditor of financial statements does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should:
A. Issue an unqualified opinion, but disclose elsewhere in the report this departure from a customary procedure.
B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action.
C. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables.
D. Issue an adverse opinion. |
|
|
Term
| B. Information about the entity's ability to continue as a going concern is not disclosed |
|
Definition
24. When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if
A. The effects of the adverse financial conditions likely will cause a bankruptcy filing
B. Information about the entity's ability to continue as a going concern is not disclosed
C. Management has no plans to reduce or delay future expenditures
D. Negative trends and recurring operating losses appear to be irreversible |
|
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Term
| C. Lease rather than purchase operating facilities |
|
Definition
25. An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to
A. Repurchase the entity's stock at a price below its book value.
B. Issue stock options to key executives.
C. Lease rather than purchase operating facilities.
D. Accelerate the due date of an existing mortgage. |
|
|
Term
| D. Inquiring of the entity's legal counsel about litigation, claims, and assessments |
|
Definition
26. Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
A. Performing cutoff tests of sales transactions with customers with long-standing receivable balances.
B. Evaluating the entity's procedures for identifying and recording related party transactions.
C. Inspecting title documents to verify whether any real property is pledged as collateral.
D. Inquiring of the entity's legal counsel about litigation, claims, and assessments. |
|
|
Term
| B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP |
|
Definition
27. When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should:
A. Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit.
B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.
C. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure.
D. Issue an unqualified opinion, but inform the reader by including the omitted information in the audit report. |
|
|
Term
| B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements |
|
Definition
28. CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct?
A. Such assumption of responsibility violates the profession's standards.
B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements.
C. In such circumstances, when appropriate requirements have been met, Firm A should issue an unqualified opinion on the financial statements but should make appropriate reference to Firm B in the audit report.
D. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved. |
|
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Term
| C. Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern |
|
Definition
29. Which of the following is most accurate with respect to a CPA's responsibility in considering a going concern question on financial statement audits?
A. Perform analytical procedures aimed particularly at assessing whether bankruptcy is probable.
B. Issue a report with a "going concern" modification when failure is at least reasonably probable.
C. Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern.
D. Determine that related uncertainties are properly disclosed and make no mention in the audit report. |
|
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Term
| A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion |
|
Definition
30. The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should:
A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion.
B. Express an unqualified opinion with an explanatory paragraph and disclose the accounting change from 20X3 and its effect on the financial statements.
C. Disclaim an opinion and explain all of the reasons therefore.
D. Express an adverse opinion regarding the 20X4 financial statements, without an explanatory paragraph disclosing the reason therefore since it will be included in the notes to the statements. |
|
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Term
| C. Issue an "except for" qualification or an adverse opinion |
|
Definition
31. When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should:
A. Issue an unqualified report with an explanatory paragraph.
B. Withdraw from the engagement.
C. Issue an "except for" qualification or an adverse opinion.
D. Issue an "except for" qualification or a disclaimer of opinion. |
|
|
Term
| C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets |
|
Definition
32. Which of the following accounting changes requires explanatory language regarding consistency in the auditors' report?
A. A change in the estimated useful lives of a class of fixed assets.
B. A write-off of a patent because future benefits do not appear to exist.
C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets.
D. A change in calculating bad debt expense from one percent to two percent of credit sales. |
|
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Term
| A. Introductory paragraph |
|
Definition
33. The first paragraph of a standard unqualified audit report for a nonpublic client is referred to as the:
A. Introductory paragraph.
B. Scope paragraph.
C. Opinion paragraph.
D. Explanatory paragraph. |
|
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Term
|
Definition
34. A scope restriction is least likely to result in a(an):
A. Qualified opinion.
B. Disclaimer of opinion.
C. Adverse opinion.
D. Standard unqualified opinion. |
|
|
Term
| B. Reliance placed upon a specialist to evaluate the diamonds |
|
Definition
35. Which of the following is least likely to result in explanatory language being added to an unqualified auditor's report on the financial statements of a client that sells jewelry through a retail store?
A. A decision by the auditor to emphasize that the client is a part of a larger organization.
B. Reliance placed upon a specialist to evaluate the diamonds.
C. A change from FIFO to specific identification accounting for inventory.
D. A question as to whether the client will be able to remain a going concern |
|
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Term
| C. Sometimes they precede and sometimes they follow the opinion paragraph |
|
Definition
36. Which of the following statements is correct with respect to explanatory paragraphs in reports on audits of the financial statements of nonpublic companies?
A. They always precede the opinion paragraph.
B. They always follow the opinion paragraph.
C. Sometimes they precede and sometimes they follow the opinion paragraph.
D. They always precede the scope paragraph. |
|
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Term
|
Definition
37. A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report on the financial statements is:
A. Standard unqualified.
B. Unqualified with explanatory language as to consistency.
C. Qualified for consistency.
D. Disclaimer. |
|
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Term
| A. The shareholders of the corporation whose financial statements were examined |
|
Definition
38. Which of the following would be most likely to be an appropriate addressee for an audit report?
A. The shareholders of the corporation whose financial statements were examined.
B. A third party who requested that a copy of the audit report be sent to her.
C. The president of the corporation whose financial statements were examined.
D. The chief financial officer. |
|
|
Term
| C. Used in a qualified opinion |
|
Definition
39. The term "except for" in an audit report is:
A. Used in an adverse opinion.
B. No longer considered appropriate.
C. Used in a qualified opinion
D. Used for an unqualified opinion when an explanatory paragraph is added. |
|
|
Term
| B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America |
|
Definition
40. The unqualified standard audit report of a nonpublic company does not explicitly state that:
A. The financial statements are the responsibility of the company's management.
B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America.
C. The auditors believe that the audit provides a reasonable basis for their opinion.
D. An audit includes assessing the accounting principles used. |
|
|
Term
| C. The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures |
|
Definition
41. Which of the following is not a difference between the audit report of a nonpublic and public company?
A. The nonpublic company report includes the word "Registered" in the title.
B. The nonpublic company report refers to standards of the PCAOB.
C. The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures.
D. The nonpublic company report must include the city and state in which the report has been issued. |
|
|
Term
| B. The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles |
|
Definition
42. If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows:
A. The auditors may still issue an unqualified opinion.
B. The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles.
C. The auditors should issue an opinion "subject to" the information that would have been contained in the statement of cash flows.
D. The auditors should refuse to issue an opinion on only the two financial statements. |
|
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Term
| A. Circumstances have significantly limited the scope of the auditors' procedures |
|
Definition
43. Which of the following circumstances generally results in the issuance of a report that is other than unqualified?
A. Circumstances have significantly limited the scope of the auditors' procedures.
B. The principal auditors for the engagement are relying on the work of other auditors.
C. The financial statements depart from a standard established by the FASB because the auditors have concluded that application of the standard would result in materially misleading financial statements.
D. The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions |
|
|
Term
| C. The audit report indicates a division of responsibility between two CPA firms |
|
Definition
44. Which of the following modifications of the auditors' report does not include an additional paragraph?
A. The report is qualified because the financial statements contain a material departure from generally accepted accounting principles.
B. The report includes an emphasis of a matter.
C. The audit report indicates a division of responsibility between two CPA firms.
D. The report is qualified because the scope of the auditors' work was restricted |
|
|
Term
| D. Refer to the report of the predecessor auditors |
|
Definition
45. If the predecessor auditors fail to reissue their audit report on comparative financial statements the successor auditors should:
A. Express a qualified opinion on the comparative financial statements audited by the predecessor auditors.
B. Reproduce the predecessor auditors' report and include it with the new set of financial statements.
C. Have the client omit the comparative financial statements.
D. Refer to the report of the predecessor auditors. |
|
|
Term
| A. A disclaimer of opinion |
|
Definition
46. An audit client has refused to allow the auditors to perform a generally accepted auditing procedure. The circumstance would normally result in the issuance of:
A. A disclaimer of opinion.
B. An adverse opinion.
C. An "except for" qualification of the report.
D. An unqualified report with explanatory language. |
|
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Term
|
Definition
47. Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public?
A. Form 8-K.
B. Form S-1.
C. Form 10-Q.
D. Form 10-K. |
|
|
Term
| C. Are assuming full responsibility for the work of the other auditors |
|
Definition
48. If principal auditors make no reference to other auditors whose work they have relied on as a part of the basis for their report, the principal auditors:
A. Are not required to investigate the professional reputation of the other auditors.
B. Are issuing an inappropriate report.
C. Are assuming full responsibility for the work of the other auditors.
D. Are issuing a qualified opinion. |
|
|
Term
| D. Use the date of the previous report |
|
Definition
49. After performing all necessary procedures the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should:
A. Delete the date of the report.
B. Dual-date the report.
C. Use the reissue date.
D. Use the date of the previous report. |
|
|
Term
| C. A separate paragraph which discusses the basis for the opinion rendered |
|
Definition
50. When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:
A. A note to the financial statements which discusses the basis for the opinion.
B. The scope paragraph which discusses the basis for the opinion rendered.
C. A separate paragraph which discusses the basis for the opinion rendered.
D. The consistency in the application of generally accepted accounting principles |
|
|
Term
| D. There are significant scope limitations on the audit |
|
Definition
51. Under which of the following set of circumstances might the auditors disclaim an opinion?
A. The financial statements contain a departure from generally accepted accounting principles, the effect of which is material.
B. The principal auditors decide to make reference to the report of another auditor who audited a subsidiary.
C. There has been a material change between periods in the method of application of accounting principles.
D. There are significant scope limitations on the audit. |
|
|
Term
| B. Unqualified opinion and an explanatory paragraph |
|
Definition
52. The management of Stanley Corporation has decided not to account for a material transaction in accordance with the provisions of a recent statement of the FASB. They have set forth their reasons in note "B" of the financial statements, which clearly demonstrates that due to unusual circumstances the financial statements would otherwise have been misleading. The auditors' report on the financial statements will probably contain a(an):
A. Qualified opinion and an explanatory paragraph with a reference to note "B".
B. Unqualified opinion and an explanatory paragraph.
C. Adverse opinion and an explanatory paragraph.
D. "Except for" opinion and an explanatory paragraph. |
|
|
Term
| A. Is appropriate and would not negate the unqualified opinion |
|
Definition
53. The auditors include explanatory language in an otherwise unqualified report in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this explanatory language:
A. Is appropriate and would not negate the unqualified opinion.
B. Is considered a qualification of the report.
C. Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements.
D. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." |
|
|
Term
| B. Limitation in the scope of the audit |
|
Definition
54. It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an):
A. Change in accounting principle.
B. Limitation in the scope of the audit.
C. Uncertainty.
D. Related party transaction. |
|
|
Term
| A. It applies equally to a complete set of financial statements and to each individual financial statement |
|
Definition
55. Which of the following best describes the reference to the expression "taken as a whole" in the fourth generally accepted auditing standard of reporting?
A. It applies equally to a complete set of financial statements and to each individual financial statement.
B. It applies only to a complete set of financial statements.
C. It applies equally to each item in each financial statement.
D. It applies equally to each material item in each financial statement. |
|
|
Term
| B. Reliance placed upon the report of other auditors |
|
Definition
56. Which of the following will not result in qualification of the auditors' report due to a scope limitation?
A. Restrictions imposed by the client.
B. Reliance placed upon the report of other auditors.
C. Inability to obtain sufficient competent evidential matter.
D. Inadequacy in the accounting records. |
|
|
Term
| D. Each of the years in the two-year period |
|
Definition
57. For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to:
A. Only the current year under audit.
B. Either one or both years at the option of the auditors.
C. Each of the two years plus the preceding year.
D. Each of the years in the two-year period. |
|
|
Term
| d) Conformity with PCAOB Standards (Explicitly); Adequacy of disclosure (Implicitly) |
|
Definition
58. Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion on public company financial statements?
a) Conformity with PCAOB Standards (Explicitly); Adequacy of disclosure (Explicitly)
b) Conformity with PCAOB Standards (Implicitly); Adequacy of disclosure (Implicitly)
c) Conformity with PCAOB Standards (Implicitly); Adequacy of disclosure (Explicitly)
d) Conformity with PCAOB Standards (Explicitly); Adequacy of disclosure (Implicitly) |
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Term
| D. Be applied on a basis consistent with those followed in the prior year |
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Definition
59. For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected:
A. Be appropriate in the circumstances for the particular entity.
B. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.
C. Present information in the financial statements that is classified and summarized in a reasonable manner.
D. Be applied on a basis consistent with those followed in the prior year. |
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Term
| C. The statements are not in conformity with generally accepted accounting principles regarding pension plans |
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Definition
60. In which of the following circumstances would an adverse opinion be appropriate?
A. The auditor is not independent with respect to the enterprise being audited.
B. The statements are not in conformity with generally accepted accounting principles because they omit a statement of changes in financial position.
C. The statements are not in conformity with generally accepted accounting principles regarding pension plans.
D. A client-imposed scope limitation prevents the auditor from complying with generally accepted auditing standards. |
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Term
| A. Unqualified opinion with an appropriate explanatory paragraph |
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Definition
61. An independent auditor has concluded that a substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an):
A. Unqualified opinion with an appropriate explanatory paragraph.
B. "Except for" qualified opinion.
C. Standard unqualified opinion.
D. Adverse opinion. |
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Term
| B. Refuses to permit its lawyer to respond to the letter of audit inquiry |
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Definition
62. A limitation on the scope of the audit sufficient to preclude an unqualified opinion will always result when management:
A. Asks the auditor to report on the balance sheet and not on the other basic financial statements.
B. Refuses to permit its lawyer to respond to the letter of audit inquiry.
C. Discloses material related party transactions in the notes to the financial statements.
D. Knows that confirmation of accounts receivable is not feasible. |
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Term
| A. A standard unqualified opinion |
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Definition
63. Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to gain satisfaction by applying alternative auditing procedures. Doe's audit report will probably contain:
A. A standard unqualified opinion.
B. An unqualified opinion and an explanatory paragraph.
C. Either a qualified opinion or a disclaimer of opinion.
D. An "except for" qualification. |
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Term
| B. Misinterpretations regarding the degree of responsibility that the auditor is assuming |
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Definition
64. The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent:
A. The CPA from reporting on one basic financial statement and not the others.
B. Misinterpretations regarding the degree of responsibility that the auditor is assuming.
C. The CPA from expressing different opinions on each of the basic financial statements.
D. Management from reducing its final responsibility for the basic financial statements. |
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Term
| A. The introductory, scope, and opinion paragraphs of the report |
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Definition
65. The principal auditor is satisfied with the independence and professional reputation of the other auditor who has audited a subsidiary. To indicate the division of responsibility, the principal auditor should modify:
A. The introductory, scope, and opinion paragraphs of the report.
B. Only the scope paragraph of the report.
C. Only the opinion paragraph of the report.
D. Only the opinion paragraph of the report and include an explanatory paragraph. |
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Term
| C. May refer to the audit of the other CPA |
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Definition
66. Morgan, CPA, is the principal auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan:
A. Must not refer to the audit of the other CPA.
B. Must refer to the audit of the other CPA.
C. May refer to the audit of the other CPA.
D. May refer to the audit of the other CPA, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the other CPA. |
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Term
| D. The type of opinion expressed by the predecessor auditor |
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Definition
67. When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report:
A. The reasons why the predecessor auditor's report is not presented.
B. The identity of the predecessor auditor who examined the financial statements of the prior year.
C. Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion.
D. The type of opinion expressed by the predecessor auditor. |
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Term
| B. Disclosed in the notes to the financial statements of the current year |
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Definition
68. If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be:
A. Referred to in the auditor's report for the current year.
B. Disclosed in the notes to the financial statements of the current year.
C. Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year.
D. Treated as a subsequent event. |
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Term
| D. Updating the report on the previous financial statements regardless of the opinion previously issued |
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Definition
69. When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for:
A. Expressing dual dated opinions.
B. Updating the report on the previous financial statements only if there has not been a change in the opinion.
C. Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist.
D. Updating the report on the previous financial statements regardless of the opinion previously issued. |
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Term
| A. May accept the engagement because such engagements merely involve limited reporting objectives |
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Definition
70. An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor:
A. May accept the engagement because such engagements merely involve limited reporting objectives.
B. May accept the engagement but should disclaim an opinion because of an inability to apply the procedures considered necessary.
C. Should refuse the engagement because there is a client-imposed scope limitation.
D. Should refuse the engagement because of a departure from generally accepted auditing standards. |
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Term
|
Definition
71. When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(an):
A. "Subject to" qualified opinion.
B. Disclaimer of opinion.
C. Adverse opinion.
D. Unqualified opinion with a separate explanatory paragraph. |
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Term
| A. Magnitude of the portion of the financial statements examined by the other auditor |
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Definition
72. If the principal auditor decides to make reference to the other auditor's audit, the introductory paragraph must specifically indicate the:
A. Magnitude of the portion of the financial statements examined by the other auditor.
B. Name of the other auditor.
C. Name of the consolidated subsidiary examined by the other auditor.
D. Type of opinion expressed by the other auditor. |
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Term
| B. A change from an unacceptable accounting principle to a generally accepted one |
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Definition
73. Which of the following will result in explanatory language as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements?
A. A change in accounting estimate.
B. A change from an unacceptable accounting principle to a generally accepted one.
C. Correction of an error not involving a change in accounting principle.
D. A change in classification. |
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Term
| B. Accumulation of sufficient appropriate audit evidence |
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Definition
74. An auditor's report on comparative financial statements should be dated as of the date of the:
A. Issuance of the report.
B. Accumulation of sufficient appropriate audit evidence.
C. Latest financial statements being reported on.
D. Last related-party transaction disclosed in the statements. |
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Term
| A. The statements are not in conformity with the FASB Statements regarding the capitalization of leases |
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Definition
75. In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion?
A. The statements are not in conformity with the FASB Statements regarding the capitalization of leases.
B. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence.
C. The chief executive officer refuses the auditor access to minutes of board of directors' meetings.
D. Tests of controls show that the entity's internal control is so poor that it can not be relied upon. |
|
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Term
| b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements |
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Definition
1. Which of the following statements about materiality is not correct?
a. The concept of materiality recognizes that some matters are important for fair presentation of the financial statements in accordance with GAAP while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.
c. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements.
d. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. |
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Term
| b. explicitly represented in the opening paragraph of the auditor’s standard report |
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Definition
2. An auditor’s responsibility to express an opinion on the financial statements is
a. explicitly represented in the opinion paragraph of the auditor’s standard report
b. explicitly represented in the opening paragraph of the auditor’s standard report
c. explicitly represented in the scope paragraph of the auditor’s standard report
d. implicitly represented in the auditor’s standard report |
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Term
| d. not be relied upon to provide assurance that illegal acts will be detected |
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Definition
3. An auditor’s examination performed in accordance with generally accepted auditing standards generally should
a. be expected to provide assurance that illegal acts will be detected where internal control is effective.
b. be relied upon to disclose violations of truth-in-lending laws.
c. encompass a plan to search actively for illegalities which relate to operating aspects.
d. not be relied upon to provide assurance that illegal acts will be detected. |
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Term
| b. An auditor may draft an entity’s financial statements based on information from management’s accounting system |
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Definition
4. Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?
a. Making suggestions (that are adopted by the client) about the form and content of an entity’s financial statements impairs an auditor’s independence.
b. An auditor may draft an entity’s financial statements based on information from management’s accounting system.
c. The fair presentation of financial statements in accordance with GAAP is an implicit responsibility of the auditor.
d. An auditor’s responsibilities for audited financial statements are NOT confined to the expression of the auditor’s opinion. |
|
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Term
| b. an attitude of professional skepticism |
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Definition
5. “The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered.” This is an example of
a. unprofessional behavior.
b. an attitude of professional skepticism.
c. due diligence.
d. a rule in the AICPA’s Code of Professional Conduct. |
|
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Term
| C. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion |
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Definition
6. Which of the following statements is correct concerning an auditor's responsibilities regarding financial statements?
A. An auditor may not draft an entity's financial statements based on information from management's accounting system.
B. The adoption of sound accounting policies is an implicit part of an auditor's responsibilities.
C. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.
D. Making suggestions that are adopted about a entity's internal control environment impairs an auditor's independence. |
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Term
| C. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits |
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Definition
7. For an entity's financial statements to be presented fairly in conformity with GAAP, the principles selected should:
A. Be applied on a basis consistent with those followed in the prior year
B. Be approved by the Auditing Standards Board or the appropriate industry subcommittee
C. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits
D. Match the principles used by most other entities within the entity's particular industry |
|
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Term
| A. FASB Technical Bulletins |
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Definition
8. Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?
A. FASB Technical Bulletins
B. AICPA Accounting Interpretations
C. FASB Statements of Financial Accounting Concepts
D. AICPA Technical Practice Advice |
|
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Term
| D. An opinion by the auditor |
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Definition
9. The first standard of reporting requires that the report must state whether the financial statements are presented in conformity with GAAP. This should be construed to require:
A. A statement of fact by the auditor
B. An implied measure of fairness
C. An objective measure of compliance
D. An opinion by the auditor |
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Term
| A. AICPA Accounting Trends & Techniques |
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Definition
10. A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements in a Statement of Financial Accounting Standards. Which of the following information sources would the CPA most likely consult for this information?
A. AICPA Accounting Trends & Techniques
B. FASB Technical Bulletins
C. AICPA Audit and Accounting Manual
D. FASB Statements of Financial Accounting Concepts |
|
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Term
| A. Maintain public confidence in the profession |
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Definition
11. An auditor strives to achieve independence in appearance in order to:
A. Maintain public confidence in the profession
B. Become independent in fact
C. Maintain an unbiased mental attitude
D. Comply with the generally accepted auditing standards of fieldwork |
|
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Term
| C. Materiality and audit risk |
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Definition
12. Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
A. Internal control
B. Corroborating evidence
C. Materiality and audit risk
D. Quality control |
|
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Term
| B. Measures of the quality of the auditor's performance |
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Definition
13. Which of the following best describes what is meant by the term “generally accepted auditing standards”?
A. Procedures to be used to gather evidence to support financial statements
B. Measures of the quality of the auditor's performance
C. Pronouncements issued by the Auditing Standards Board
D. Rules acknowledged by the accounting profession because of their universal application |
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Term
|
Definition
14. GAAS require the auditor to document in the workpapers the justification for a departure from a presumptively mandatory requirement. What language indicates a presumptively mandatory requirement?
A. "must" or "is required"
B. "could"
C. "may consider"
D. "should" |
|
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Term
| C. The entity and its environment, including internal control |
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Definition
15. The second standard of fieldwork requires the auditor to obtain an understanding of:
A. Internal control
B. The internal audit function
C. The entity and its environment, including internal control
D. The control environment |
|
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Term
| D. "Sufficient appropriate audit evidence" |
|
Definition
16. The third standard of fieldwork requires the auditor to obtain:
A. "Sufficient competent evidential matter"
B. "An understanding of the entity's industry"
C. "An understanding of the entity's internal control"
D. "Sufficient appropriate audit evidence" |
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Term
| C. Standards of fieldwork |
|
Definition
17. Which of the following categories is included in generally accepted auditing standards?
A. Standards of review
B. Standards of planning
C. Standards of fieldwork
D. Standards of evidence |
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Term
|
Definition
18. A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to which of the following prescribed standards?
A. Quality control
B. Human resources
C. Acceptance and continuance of client relationships and specific engagements
D. Engagement performance |
|
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Term
| C. Relevant ethical requirements |
|
Definition
19. Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures per SQCS 7?
A. Complying with laws and regulations
B. Using statistical sampling techniques
C. Relevant ethical requirements
D. Considering audit risk and materiality |
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Term
|
Definition
20. Under the Sarbanes-Oxley Act of 2002, a registered public accounting firm may perform which of the following services with pre-approval from the audit committee for an audit client that is a publicly-traded company?
A. Internal audit outsourcing services
B. Tax services
C. Bookkeeping services
D. Financial information systems design |
|
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Term
| B. An audit firm may not perform an audit for a client whose controller was previously employed by the audit firm and participated in the audit of the client within the client's previous fiscal year |
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Definition
21. Which of the following statements is correct concerning the Sarbanes-Oxley Act of 2002 and publicly-traded audit clients?
A. The lead engagement and reviewing audit partners must change every seven years.
B. An audit firm may not perform an audit for a client whose controller was previously employed by the audit firm and participated in the audit of the client within the client's previous fiscal year.
C. The audit firm may not also provide tax services to an audit client.
D. The audit firm may also provide tax services to an audit client without the preapproval of the audit committee. |
|
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Term
| d) Hiring Auditor; Negotiating fees; Overseeing audit work |
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Definition
22. The Sarbanes-Oxley Act of 2002 requires audit committees to be directly responsible for which of the following activities?
a) Hiring Auditor; Overseeing audit work
b) Hiring Auditor; Negotiating fees
c) Negotiating fees; Overseeing audit work
d) Hiring Auditor; Negotiating fees; Overseeing audit work |
|
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Term
| D. the Securities and Exchange Commission |
|
Definition
23. Members of the of the Public Company Accounting Oversight Board are appointed and overseen by
A. the U.S. Congress.
B. the American Institute of Certified Public Accountants.
C. the Auditing Standards Board.
D. the Securities and Exchange Commission. |
|
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Term
| D. They are interpretations which are intended to clarify the meaning of “generally accepted auditing standards.” |
|
Definition
24. Which of the following statements best describes the primary purpose of Statements on Auditing Standards?
A. They are guides intended to set forth auditing procedures which are applicable to a variety of situations.
B. They are procedural outlines which are intended to narrow the areas of inconsistency and divergence of auditor opinion.
C. They are authoritative statements, enforced through the Code of Professional Conduct, and are intended to limit the degree of auditor judgment.
D. They are interpretations which are intended to clarify the meaning of “generally accepted auditing standards.” |
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Term
|
Definition
25. The risk that an auditor will conclude that a material error does not exist in the financial statements when, in fact, such error DOES exist is referred to as:
a. audit risk
b. business risk
c. inherent risk
d. sampling risk |
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Term
| a. The auditor has no responsibility for searching for indirect-effect illegal acts |
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Definition
26. Which of the following statements is correct with respect to the auditor’s responsibilities relative to the detection of indirect-effect illegal acts?
a. The auditor has no responsibility for searching for indirect-effect illegal acts.
b. The auditor has the same responsibility for searching for indirect-effect illegal acts as any other potential misstatement that may occur.
c. Auditors have responsibility for searching for any illegal act, whether direct-effect or indirect-effect.
d. None of the above is correct. |
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Term
| C. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts |
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Definition
27. An audit should be designed to achieve reasonable assurance of detecting material misstatements due to:
A. Errors.
B. Errors and fraud.
C. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.
D. Errors, fraud and illegal acts. |
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Term
| C. Appears in the opinion paragraph of the auditors' report |
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Definition
28. In an audit opinion on financial statements, the expression "accounting principles generally accepted in the United States of America":
A. Appears in both the scope paragraph and the opinion paragraph of the auditors' report.
B. Appears in the introductory paragraph of the auditors' report.
C. Appears in the opinion paragraph of the auditors' report.
D. Does not appear in the auditors' report. |
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Term
| A. Criteria for competence, independence, and professional care of individuals performing the audit |
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Definition
29. What is the general character of the three generally accepted auditing standards classified as general standards?
A. Criteria for competence, independence, and professional care of individuals performing the audit.
B. Criteria for the content of the financial statements and related footnote disclosures.
C. Criteria for the content of the auditors' report on financial statements and related footnote disclosures.
D. The requirements for the planning of the audit and supervision of assistants, if any. |
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Term
| B. Whether the results of their client's operating decisions are fairly presented in the financial statements |
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Definition
30. When the auditors express an opinion on financial statements their responsibilities extend to:
A. The underlying wisdom of their client's management decisions.
B. Whether the results of their client's operating decisions are fairly presented in the financial statements.
C. Active participation in the implementation of the advice given to their client.
D. An ongoing responsibility for their client's solvency. |
|
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Term
| B. GAAS in the scope paragraph and GAAP in the opinion paragraph |
|
Definition
31. The standard auditors' report for the audit of a nonpublic company generally includes an introductory paragraph, a scope paragraph, and an opinion paragraph. In the report the auditors refer to both accounting principles generally accepted in the U.S. and auditing standards generally accepted in the U.S. In which of the paragraphs are these terms used?
A. GAAP in the scope paragraph and GAAS in the opinion paragraph.
B. GAAS in the scope paragraph and GAAP in the opinion paragraph.
C. GAAS in all paragraphs and GAAP in the scope paragraph.
D. GAAP in all paragraphs and GAAS in the opinion paragraph |
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Term
| A. Any disputes over significant accounting issues have been settled to the auditors' satisfaction |
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Definition
32. An investor reading the financial statements of The Sundby Corporation observes that the statements are accompanied by an unqualified auditors' report. From this the investor may conclude that:
A. Any disputes over significant accounting issues have been settled to the auditors' satisfaction.
B. The auditors are satisfied that Sundby is operationally efficient.
C. The auditors have ascertained that Sundby's financial statements have been prepared accurately.
D. Informative disclosures in the financial statements but not necessarily in the footnotes are to be regarded as reasonably adequate. |
|
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Term
| D. Responsibility for losses because of errors of judgment |
|
Definition
33. Which of the following is not required by the generally accepted auditing standard that states that due professional care is to be exercised in the performance of the audit?
A. Observance of the standards of field work and reporting.
B. Critical review of the audit work performed at every level of supervision.
C. Degree of skill commonly possessed by others in the profession.
D. Responsibility for losses because of errors of judgment. |
|
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Term
| C. They are authoritative statements, enforced through the Code of Professional Conduct |
|
Definition
34. Which of the following statements best describes the primary purpose of Statements on Auditing Standards?
A. They are guides intended to set forth auditing procedures which are applicable to a variety of situations.
B. They are procedural outlines which are intended to narrow the areas of inconsistency and divergence of auditor opinion.
C. They are authoritative statements, enforced through the Code of Professional Conduct.
D. They are interpretations which may be useful guidance to auditors. |
|
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Term
| F. An opinion by the auditor |
|
Definition
35. The first standard of reporting requires that the report must state whether the financial statements are presented in conformity with GAAP. This should be construed to require:
E. A statement of fact by the auditor
F. An opinion by the auditor
G. An implied measure of fairness
H. An objective measure of compliance |
|
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Term
| C. To minimize the likelihood of association with clients whose managements lack integrity |
|
Definition
36. A CPA firm establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is:
A. To enable the auditor to attest to the integrity or reliability of a client.
B. To comply with the quality control standards established by regulatory bodies.
C. To minimize the likelihood of association with clients whose managements lack integrity.
D. To lessen the exposure to litigation resulting from failure to detect fraud in client financial statements. |
|
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Term
| a) Fraudulent Financial Reporting; Misappropriation of Assets |
|
Definition
Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to:
a) Fraudulent Financial Reporting; Misappropriation of Assets
b) Fraudulent Financial Reporting
c) Misappropriation of Assets
d) None of the above |
|
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Term
| B. Includes a report on subject matter, or on an assertion about subject matter |
|
Definition
An attestation engagement:
A. Has as its primary source of standards the assurance standards.
B. Includes a report on subject matter, or on an assertion about subject matter.
C. Includes search and verification procedures for all major accounts.
D. Is ordinarily an examination, review or compilation engagement. |
|
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Term
| A. Appendices to Statements on Auditing Standards |
|
Definition
Which of the following is considered an interpretive publication in the GAAS Hierarchy?
A. Appendices to Statements on Auditing Standards.
B. Statements on Auditing Standards.
C. Interpretations of FASB Standards.
D. Auditing articles explaining Statements on Auditing Standards in the Journal of Accountancy. |
|
|
Term
|
Definition
In which paragraph of an audit report are auditing standards generally accepted in the United States explicitly mentioned in an audit report of a nonpublic company?
a) Scope; Opinion
b) Scope
c) Opinion
d) None of the above |
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Term
| A. Have substantial authoritative support |
|
Definition
To qualify as "generally accepted," an accounting principle must:
A. Have substantial authoritative support.
B. Be covered in one or more of the SASs issued by the AICPA.
C. Be set forth in a Financial Reporting Release issued by the SEC.
D. Have received the approval of the FASB. |
|
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Term
| B. If audit procedures reveal illegal acts, the auditors should take appropriate actions |
|
Definition
Which of the following best describes a portion of the auditors' responsibility regarding illegal acts by clients?
A. The auditors have a responsibility to discover all material illegal acts.
B. If audit procedures reveal illegal acts, the auditors should take appropriate actions.
C. If the auditors suspect illegal acts have been performed, they should conduct a legal audit of the company.
D. The auditors' responsibility for the detection of all illegal acts is the same as their responsibility regarding material misstatements due to errors and fraud. |
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Term
| C. Knowledge required to fulfill assigned responsibilities and to progress within the firm |
|
Definition
Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with:
A. Technical training that assures proficiency as an auditor.
B. Professional education that is required in order to perform with due professional care.
C. Knowledge required to fulfill assigned responsibilities and to progress within the firm.
D. Knowledge required in order to perform a peer review. |
|
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Term
| D. Relevant ethical requirements |
|
Definition
In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control objective would this be most likely to satisfy?
A. Acceptance and continuance of clients and engagements.
B. Engagement performance.
C. Personnel management.
D. Relevant ethical requirements. |
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