01 Chapter - The Role of the Public Accountant in the American Economy
Chapter 01 The Role of the Public Accountant in the American Economy Answer Key
True / False Questions
1. Independent audits of today place more emphasis on sampling than did the audits of the 19th century. TRUE
Difficulty: Medium
2. The American Institute of Certified Public Accountants issues CPA certificates and permits CPAs to practice. FALSE
Difficulty: Medium
3. A company is either audited by the GAO or internal auditors, but not both. FALSE
Difficulty: Easy
4. The SEC does not pass on the merits of the securities that are registered with the agency. TRUE
Difficulty: Medium
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Chapter 01 - The Role of the Public Accountant in the American Economy
5. The American Institute of Certified Public Accountants has the primary authority to establish accounting standards. FALSE
Difficulty: Easy
6. An annual peer review is a requirement of the AICPA. FALSE
Difficulty: Medium
7. Many small companies elect to have their financial statements reviewed by a CPA firm, rather than incur the cost of an audit. TRUE
Difficulty: Easy
8. Staff assistants in CPA firms generally are responsible for planning and coordinating audit engagements. FALSE
Difficulty: Easy
9. The Sarbanes-Oxley Act requires that auditors of publicly traded companies in the United States perform an integrated audit that includes providing assurance on both the financial statements and on compliance with laws and regulations. FALSE
Difficulty: Medium
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Chapter 01 - The Role of the Public Accountant in the American Economy
10. Auditing is frequently only a small part of the practice of local CPA firms. TRUE
Difficulty: Medium
Multiple Choice Questions
11. 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.
Difficulty: Medium
12. 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.
Difficulty: Easy
13. 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.
Difficulty: Easy
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14. 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.
Difficulty: Medium
15. 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.
Difficulty: Medium
16. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n): A. Peer Review Engagement. B. Quality Control Engagement. C. Quality Assurance Engagement. D. Attestation Engagement.
Difficulty: Easy
17. 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).
Difficulty: Easy
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Chapter 01 - The Role of the Public Accountant in the American Economy
18. 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.
Difficulty: Easy
19. The risk that information is misstated is referred to as: A. Information risk. B. Inherent risk. C. Relative risk. D. Business risk.
Difficulty: Easy
20. The risk that a company will not be able to meet its obligations when they become due is referred to as: A. Information risk. B. Inherent risk. C. Relative risk. D. Business risk.
Difficulty: Easy
21. Which of the following attributes most clearly differentiates a CPA who audits management's financial statements as contrasted to management? A. Integrity. B. Competence. C. Independence. D. Keeping informed on current professional developments.
Difficulty: Easy
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Chapter 01 - The Role of the Public Accountant in the American Economy
22. The attest function: A. Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or other services. B. Includes the preparation of a report of the CPA's findings. C. Requires a consideration of internal control. D. Requires a complete review of all transactions during the period under examination.
Difficulty: Medium
23. Attestation risk is limited to a low level in which of the following engagement(s)? A. Both examinations and reviews. B. Examinations, but not reviews. C. Reviews, but not examinations. D. Neither examinations nor reviews.
Difficulty: Easy
24. When compared to an audit performed prior to 1900, an audit today: A. Is more likely to include tests of compliance with laws and regulations. B. Is less likely to include consideration of the effectiveness of internal control. C. Has bank loan officers as the primary financial statement user group. D. Includes a more detailed examination of all individual transactions.
Difficulty: Medium
25. Which of the following are issued by the Securities and Exchange Commission? A. Accounting Research Studies. B. Accounting Trends and Techniques. C. Industry Audit Guides. D. Financial Reporting Releases.
Difficulty: Medium
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Chapter 01 - The Role of the Public Accountant in the American Economy
26. 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.
Difficulty: Medium
27. An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences? A. The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually limited to either the balance sheet or the income statement. B. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period. C. Operational audits do not ordinarily result in the preparation of a report. D. The operational audit deals with pre-tax income.
Difficulty: Medium
28. The review of a company's financial statements by a CPA firm: A. Is substantially less in scope of procedures than an audit. B. Requires detailed analysis of the major accounts. C. Is of similar scope as an audit and adds similar credibility to the statements. D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements.
Difficulty: Easy
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Chapter 01 - The Role of the Public Accountant in the American Economy
29. 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.
Difficulty: Medium
30. The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over A. Compliance with laws and regulations. B. Financial reporting. C. Effectiveness of operations. D. Efficiency of operations.
Difficulty: Medium
31. Passage of the Sarbanes-Oxley Act led to the establishment of the: A. Auditing Standards Board. B. Accounting Enforcement Releases Board. C. Public Company Accounting Oversight Board. D. Securities and Exchange Commission.
Difficulty: Medium
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Chapter 01 - The Role of the Public Accountant in the American Economy
32. Which of the following professionals has primary responsibility for the performance of an audit? A. The managing partner of the firm. B. The senior assigned to the engagement. C. The manager assigned to the engagement. D. The partner in charge of the engagement.
Difficulty: Medium
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33. Which of the following types of services is generally provided only by CPA firms? A. Tax audits. B. Financial statement audits. C. Compliance audits. D. Operational audits.
Difficulty: Medium
34. 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.
Difficulty: Medium
35. 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.
Difficulty: Medium
36. Inquiries and analytical procedures ordinarily form the basis for which type of engagement? A. Agreed-upon procedures. B. Audit. C. Examination. D. Review.
Difficulty: Easy
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Chapter 01 - The Role of the Public Accountant in the American Economy
37. 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.
Difficulty: Medium Source: AICPA
38. Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also: A. Accuracy. B. Evaluation. C. Compliance. D. Internal control.
Difficulty: Hard Source: AICPA
39. 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.
Difficulty: Hard Source: AICPA
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Chapter 01 - The Role of the Public Accountant in the American Economy
40. A typical objective of an operational audit is for the auditor to: A. Determine whether the financial statements fairly present the entity's operations. B. Evaluate the feasibility of attaining the entity's operational objectives. C. Make recommendations for improving performance. D. Report on the entity's relative success in attaining profit maximization.
Difficulty: Hard Source: AICPA
41. An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on:
A. Option A B. Option B C. Option C D. Option D
Difficulty: Medium
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Essay Questions
42. The Sarbanes-Oxley Act of 2002 made significant reforms for public companies and their auditors. a. Describe the events that led up to the passage of the Act. b. Describe the major changes made by the Act. a. The events leading up to the passage of the Sarbanes-Oxley Act include: A large number of misstatements of financial statements, many of which resulted from fraudulent financial reporting. Notably including WorldCom and Enron. The conviction of the Big 5 accounting firm of Arthur Andersen on charges of destroying evidence. b. The major reforms made the Act include: Tougher penalties for fraud. Restrictions on the types of consulting services that may be provided by auditors to their public audit clients. The creation of the Public Company Accounting Oversight Board to create auditing standards and oversee accounting firms that audit public companies. Requirements for management to make a assertion about the effectiveness of internal control. Requirements for auditors of public companies to audit and report on internal control.
Difficulty: Hard
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43. Many people confuse the responsibilities of the independent auditors and the client's management with respect to audited financial statements. a. Describe management's responsibility regarding audited financial statements. b. Describe the independent auditors' responsibility regarding audited financial statements. c. Evaluate the following statement: "If the auditors disagree with management regarding an accounting principle used in the financial statements the auditors should express their views in the notes to the financial statements." a. Management has primary responsibility for the fairness of the financial statements. b. The auditors are responsible for performing an independent audit of the financial statements and issuing a report on them in accordance with generally accepted auditing standards. c. The statement if false. The notes to the financial statements should contain only representations of management. The auditors should express their reservations in their report.
Difficulty: Medium
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44. An investor is considering investing in one of two companies. The companies have very similar reported financial position and results of operations. However, only one of the companies has its financial statements audited. a. Describe what creates the demand for an audit in this situation. Include a discussion of how audited financial statements facilitate this investment transaction, and the effect of the audit on business risk and information risk. b. Identify the potential consequences to the company of not having its financial statements audited. a. Audits add credibility to the financial statements of the company. The individual can invest in the company knowing that there is a low probability that the financial statements depart materially from generally accepted accounting principles. Audited financial statements facilitate this transaction by reducing risk related to the investment. Specifically, audits reduce information risk--the risk that information used to make the investment decision is misstated-related to the financial statements. Audited financial statements do not directly affect business risk, which is the risk that the company will not be able to meet its financial obligations. b. The potential consequences of not having an audit are: If the investor is particularly risk averse, he or she may not invest in the company at all. If the investor decides to invest in the company, he or she will not be willing to pay as high a price because the investor will want to be compensated for the additional risk that is involved in relying upon unaudited financial statements.
Difficulty: Medium
Chapter 02 Professional Standards Answer Key
True / False Questions
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Chapter 01 - The Role of the Public Accountant in the American Economy
1. The generally accepted auditing standards of field work include a requirement that the auditors obtain sufficient appropriate audit evidence. TRUE
Difficulty: Easy
2. The auditors' report on a corporation's financial statements usually is addressed to the president of the company. FALSE
Difficulty: Easy
3. The auditors are primarily responsible for preparing the financial statements and expressing an opinion on whether they follow generally accepted auditing standards. FALSE
Difficulty: Medium
4. Partners in CPA firms usually have the responsibility for signing the audit report. TRUE
Difficulty: Medium
5. An audit is more likely to detect tax evasion than violations of antitrust laws. TRUE
Difficulty: Hard
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6. The attestation standards do not supersede any of the generally accepted auditing standards. TRUE
Difficulty: Medium
7. A peer review is generally performed by employees of the AICPA. FALSE
Difficulty: Medium
8. If the auditors discover illegal acts by a client, they ordinarily must immediately resign from the engagement. FALSE
Difficulty: Medium
9. An audit should be designed to provide reasonable assurance of detecting all illegal acts. FALSE
Difficulty: Medium
10. The pronouncements of the International Auditing Assurance Standards Board do not override the national auditing standards of its members, even when financial statements are issued by a multinational company. TRUE
Difficulty: Medium
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Multiple Choice Questions
11. Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to:
A. Option A B. Option B C. Option C D. Option D
Difficulty: Hard
12. Which of the following has the highest level of accounting authority within the "GAAP Hierarchy"? A. Authoritative body pronouncements. B. Pronouncements of bodies composed of expert accountants exposed for public comment. C. Pronouncements of bodies composed of expert accountants, not exposed for public comment. D. Pronouncements of the Federal Accounting Reserve Board.
Difficulty: Easy
13. 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.
Difficulty: Hard
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14. An audit provides reasonable assurance of detecting which of the following types of important illegal acts?
A. Option A B. Option B C. Option C D. Option D
Difficulty: Medium
15. Which of the following is not a type of auditors' opinion? A. Adverse. B. Ordinary. C. Qualified. D. Unqualified.
Difficulty: Medium
16. Which of the following is one of the elements of AICPA quality control? A. Assurance of proper levels of association. B. Due professional care. C. Engagement performance. D. Supervision.
Difficulty: Hard
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17. A procedure in which a quality control partner periodically tests the application of quality control procedures is most directly related to which quality control element? A. Engagement performance. B. Human resources. C. Leadership responsibilities for quality with the firm. D. Monitoring
Difficulty: Hard
18. Requirements for training, independence and due professional care are included in which group of the generally accepted auditing standards? A. Fieldwork. B. General. C. Reporting. D. Quality control.
Difficulty: Medium
19. 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.
Difficulty: Hard
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20. 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. Option A B. Option B C. Option C D. Option D
Difficulty: Medium
21. 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.
Difficulty: Hard
22. 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.
Difficulty: Medium
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23. 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.
Difficulty: Medium
24. The generally accepted auditing standards adopted by the AICPA include a requirement that the CPAs: A. Assume responsibility for any losses to the client from fraud which existed during the audit but was not detected by the auditors. B. Follow accounting principles adopted by the SEC. C. Not accept as audit clients companies which compete directly with one another. D. Exercise due professional care in the performance of the examination and the preparation of the report.
Difficulty: Easy
25. When a Statement Auditing Standards uses the word "should" relating to a requirement, it means that the auditor: A. Must fulfill the responsibilities under all circumstances. B. Must comply with requirements unless the auditor demonstrates and documents that alternative actions were sufficient to achieve the objectives of the standards. C. Should consider whether to follow the advice based on the exercise of professional judgment in the circumstances. D. May choose to change responsibilities relating to various professional standards that remain under consideration.
Difficulty: Hard
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26. An unconditional responsibility to follow an AICPA professional standard exists when the professional standard uses the term(s)
A. Option A B. Option B C. Option C D. Option D
Difficulty: Medium
27. 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.
Difficulty: Medium
28. The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the: A. Management fails to take appropriate corrective action. B. Illegal act has material financial statement implications. C. Illegal act has received widespread publicity. D. Auditors cannot reasonably estimate the effect of the illegal act on the financial statements.
Difficulty: Medium
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29. The first paragraph of the standard unqualified audit report is referred to as the: A. Introductory paragraph. B. Opening paragraph. C. Opinion paragraph. D. Scope paragraph.
Difficulty: Easy
30. Primary responsibility for the financial statements lies with:
A. Option A B. Option B C. Option C D. Option D
Difficulty: Medium
31. When a conflict exists between an accounting principle supported by a pronouncement of an authoritative body and an accounting principle supported by widely recognized practice, which standard prevails? A. The authoritative body pronouncement. B. The widely recognized pronouncement. C. Both are of equal authority and the form of the transaction prevails over its substance. D. Neither, other accounting literature must be consulted to determine the appropriate accounting treatment.
Difficulty: Medium
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32. The auditors' report for a nonpublic company should indicate: A. That the audit was made in accordance with auditing standards generally accepted in the United States of America. B. Any weakness in internal control observed by the auditors. C. That accounting principles have been consistently applied. D. That no illegal acts have been identified.
Difficulty: Medium
33. Which of the following is not one of the six elements of AICPA quality control? A. Engagement performance. B. Monitoring. C. Relevant ethical requirements. D. Review.
Difficulty: Medium
34. A requirement that working papers be reviewed by the supervisor, and any deficiencies be discussed with the preparer is an example of a quality control procedure in the area of: A. Acceptance and continuance of client relationships and specific engagements. B. Engagement performance. C. Human resources. D. Relevant ethical requirements.
Difficulty: Hard
35. A requirement to design recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm is an example of a quality control procedure in the area of: A. Acceptance and continuance of client relationships and specific engagements. B. Engagement performance. C. Human resources. D. Relevant ethical requirements.
Difficulty: Hard
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36. The body that issues international pronouncements providing auditing procedural and reporting guidance is the: A. International Federation of Auditors. B. Multinational Reporting Commission. C. International Auditing and Assurance Standards Board. D. Auditing Standards Board.
Difficulty: Medium
37. To present fairly in conformity with generally accepted accounting principles the financial statements must: A. Be consistently applied. B. Inform users of all matters that could materially affect a decision. C. Reflect transactions and events within a range of reasonable limits. D. Be considered preferable to the users of those financial statements.
Difficulty: Medium
38. 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.
Difficulty: Medium Source: AICPA
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39. An audit performed in accordance with generally accepted auditing standards generally should: A. Be expected to provide absolute 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 actively search for all illegalities which relate to operating aspects. D. Not be relied upon to provide absolute assurance that all illegal acts will be detected.
Difficulty: Medium Source: AICPA
40. 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.
Difficulty: Medium Source: AICPA
41. 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.
Difficulty: Medium Source: AICPA
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42. 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.
Difficulty: Hard Source: AICPA
43. The auditors' report may be addressed to the company whose financial statements are being examined or to that company's: A. Chief operating officer. B. President. C. Board of Directors. D. Chief financial officer.
Difficulty: Medium Source: AICPA
44. Which of the following best describes what is meant by generally accepted auditing standards? A. Acts to be performed by the auditors. B. Measures of the quality of the auditors' performance. C. Procedures to be used to gather evidence to support financial statements. D. Audit objectives generally determined on audit engagements.
Difficulty: Medium Source: AICPA
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45. If an illegal act is discovered during the audit of a publicly held company, the auditors should first: A. Notify the regulatory authorities. B. Determine who was responsible for the illegal act. C. Intensify the examination to identify all illegal acts. D. Report the act to high level personnel within the client's organization and to the audit committee.
Difficulty: Hard Source: AICPA
46. 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.
Difficulty: Easy Source: AICPA
47. 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.
Difficulty: Medium Source: AICPA
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48. The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the: A. Partner assigned to the audit engagement. B. Management of the company. C. Auditor in charge of the fieldwork. D. Securities and Exchange Commission.
Difficulty: Easy Source: AICPA
49. 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.
Difficulty: Hard Source: AICPA
50. 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.
Difficulty: Hard Source: AICPA
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51. 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.
Difficulty: Medium Source: AICPA
52. Which of the following is not an element of quality control? A. Documentation. B. Engagement performance. C. Monitoring. D. Relevant ethical requirements.
Difficulty: Medium Source: AICPA
53. The generally accepted auditing standards established by the AICPA: A. Have been accepted as interim standards by the Public Company Accounting Oversight Board. B. Provide accounting guidance for nonpublic companies. C. Have been superseded by Public Company Accounting Oversight Board standards for all audits. D. Are now developed by the Securities and Exchange Commission.
Difficulty: Medium
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54. The Public Company Accounting Oversight Board has authority to establish which of the following relating to public companies?
A. Option A B. Option B C. Option C D. Option D
Difficulty: Hard
55. Which of the following is least likely to be directly examined in an inspection performed by the PCAOB? A. Audit engagements. B. Review engagements. C. Compilation engagements. D. CPA firm quality control system.
Difficulty: Medium
56. As compared with the US nonpublic company audit report, the international audit report: A. Is shorter in length. B. Includes enhanced explanation of the audit process. C. Includes the name of the partner and managers on the audit, while the US report includes only the CPA firm name. D. Is dated as of year-end, whereas the US report is dated as of the last date of significant field work.
Difficulty: Hard
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57. A peer review in which the peer reviewers study and appraise a CPA firm's system of quality control to perform accounting and auditing work is referred to as a(n): A. Engagement review. B. Inspection review. C. Supervision review. D. System review.
Difficulty: Hard
58. An engagement review form of peer review is least likely to include a peer reviewer's detailed analysis of: A. Compilation reports. B. Documentation of procedures followed on a review C. Overall system of quality control. D. Review reports.
Difficulty: Hard
59. Of the following, which are current types of peer review?
A. Option A B. Option B C. Option C D. Option D
Difficulty: Medium
Essay Questions
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60. Auditors must be concerned with both generally accepted auditing standards and generally accepted accounting principles in performing an audit. (a) Compare generally accepted auditing standards with generally accepted accounting principles. (b) Summarize two of the three generally accepted auditing standards known as the general standards. (a) Generally accepted auditing standards are authoritative rules for measuring the quality of audits. The ten generally accepted auditing standards were adopted by the membership of the AICPA. Generally accepted accounting principles are principles of measurement and presentation for financial statements that have "substantial authoritative support." (b) The general standards include (only two required): Technical training and proficiency Independence Exercise due professional care
Difficulty: Easy
61. The standard unqualified auditors' report for audits of nonpublic companies consists of three paragraphs. Identify the three paragraphs and describe the purpose of each. Introductory paragraph--describes the financial statements being auditing and the responsibilities of management and the auditors. Scope paragraph--describes the nature of an audit and indicates whether the audit was performed in accordance with generally accepted auditing standards. Opinion paragraph--expresses the auditors' opinion on the financial statements.
Difficulty: Easy
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62. Auditors must consider the possibility of fraud by employees or management on every audit engagement. They must also consider the possibility that the client has engaged in illegal acts. (a) Distinguish between employee and management fraud. (b) Describe the auditors' responsibility for the detection of fraud in an audit. (c) Describe the auditors' responsibility regarding illegal acts by a client. (a) Employee fraud is dishonest actions by lower level employees that occur within a company despite management's efforts to prevent such actions. Management fraud occurs when the top executives of a company deliberately deceive stockholders, creditors, and the auditors by misstating the financial statements. (b) The auditors have a responsibility to design the audit to provide reasonable assurance of detecting material errors and fraud and to conduct the audit with due care and skepticism. (c) An audit cannot be relied upon to detect all illegal acts by the client. For illegal acts which have a direct and material effect on the financial statement amounts, the responsibility for detection is the same as that for errors and fraud--that is to design the audit to provide reasonable assurance of detection. For illegal acts having an indirect effect on the financial statement amounts, an audit provides no assurance of detection.
Difficulty: Hard
Chapter 03 Professional Ethics Answer Key
True / False Questions
1. The Rules portion of the AICPA Code of Professional Conduct must be followed by only those members in private practice. FALSE
Difficulty: Medium
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2. The AICPA Code of Professional Conduct derives its authority from the Bylaws of the AICPA. TRUE
Difficulty: Medium
3. An immaterial loan from the CPA to an officer of a client impairs the independence of the CPA. TRUE
Difficulty: Medium
4. Financial interests of a CPA's nondependent children are attributed directly to the CPA. FALSE
Difficulty: Medium
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5. Statements on Accounting and Review Services are enforceable under the AICPA Code of Professional Conduct. TRUE
Difficulty: Easy
6. CPAs may not advertise as to any special expertise other than in accounting, auditing, and tax. FALSE
Difficulty: Medium
7. A CPA may receive a commission for recommending a particular computer system to an audit client. FALSE
Difficulty: Easy
8. The communications between CPAs and their clients are privileged under federal law. FALSE
Difficulty: Easy
9. CPAs can advertise the fees only for their nonattest services. FALSE
Difficulty: Easy
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10. The American Institute of Certified Public Accountants has been the primary source for ethical rules for internal auditors. FALSE
Difficulty: Easy
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Multiple Choice Questions
11. 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).
Difficulty: Hard
12. 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.
Difficulty: Medium
13. Auditors are periodically punished for holding an investment in a client. This violates which ethical rule? A. Integrity. B. Independence. C. Non compliance with GAAP. D. Confidentiality.
Difficulty: Easy
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14. The AICPA Conceptual Framework for Independence Standards suggests that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-independence exists? A. AICPA ethics examiner. B. Peer. C. PCAOB inspector. D. Reasonably informed third party.
Difficulty: Medium
15. 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.
Difficulty: Easy
16. 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.
Difficulty: Easy
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17. 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.
Difficulty: Hard
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18. 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.
Difficulty: Hard
19. 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.
Difficulty: Medium
20. 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.
Difficulty: Medium
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21. 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.
Difficulty: Hard
22. Which of the following is not a broad category of safeguards that mitigate or eliminate threats to independence? A. Safeguards created by the profession, legislation, or regulation. B. Safeguards created to assure proper training within both the client and attest environment. C. Safeguards implemented by the attest client. D. Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements.
Difficulty: Hard
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.
Difficulty: Medium
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24. When a threat to independence arises an auditor should consider A. Alternative threats to a lack of independence. B. Available safeguards to independence. C. Global independence rules. D. Required lack of independence approaches.
Difficulty: Easy.
25. Which of the following attributes is more closely associated with attestation services performed by a CPA firm than with other lines of professional work? A. Integrity. B. Competence C. Independence D. Keeping informed on current professional developments.
Difficulty: Medium
26. 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.
Difficulty: Hard
27. 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.
Difficulty: Hard
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28. 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 client of source documents. D. Preparation and posting of journal entries without the client's approval.
Difficulty: Hard
29. 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
Difficulty: Medium
30. 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.
Difficulty: Hard
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31. 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.
Difficulty: Easy
32. 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.
Difficulty: Medium
33. 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.
Difficulty: Medium
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34. 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.
Difficulty: Hard
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35. 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.
Difficulty: Hard
36. 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.
Difficulty: Medium
37. 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.
Difficulty: Medium
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38. 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. Option A B. Option B C. Option C D. Option D
Difficulty: Hard
39. 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.
Difficulty: Medium
40. 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.
Difficulty: Hard
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41. 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.
Difficulty: Medium
42. 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. Option A B. Option B C. Option C D. Option D
Difficulty: Hard
43. 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.
Difficulty: Medium Source: AICPA
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44. 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.
Difficulty: Easy Source: AICPA
45. A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that 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.
Difficulty: Medium Source: AICPA
46. The AICPA Code of Professional Conduct would be violated if a CPA accepted a fee for services and the fee 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.
Difficulty: Medium Source: AICPA
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47. 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.
Difficulty: Hard Source: AICPA
48. The AICPA Code of Professional Conduct will ordinarily be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the: A. Actual fee would be substantially higher. B. Actual fee would be substantially lower than the fees charged by other CPAs for comparable services. C. Fee was a competitive bid. D. CPA would not be independent.
Difficulty: Medium Source: AICPA
49. 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.
Difficulty: Hard Source: AICPA
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50. 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.
Difficulty: Medium Source: AICPA
51. 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.
Difficulty: Easy Source: AICPA
52. 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.
Difficulty: Medium Source: AICPA
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53. 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.
Difficulty: Medium Source: AICPA
54. 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.
Difficulty: Hard Source: AICPA
55. A primary purpose for establishing a code of conduct within a professional organization is to: A. Reduce the likelihood that members of the profession will be sued for substandard work. B. Ensure that all members of the profession perform at approximately the same level of competence. C. Demonstrate acceptance of responsibility to the interests of those served by the profession. D. Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization.
Difficulty: Medium Source: IIA
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56. An accounting association established a code of ethics for all members. The most likely primary purpose for establishing the code of ethics was to: A. Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association. B. Establish standards to follow for effective accounting practice. C. Provide a framework within which accounting policies could be effectively developed and executed. D. Outline criteria that can be utilized in conducting interviews of potential new accountants.
Difficulty: Medium Source: IIA
Essay Questions
57. The following is a list of circumstances that might be faced by a public accounting firm. If the circumstance represents a violation of one of the rules of the AICPA Code of Professional Conduct, provide the title of the rule. Write "no violation" in the space if the circumstance does not represent a violation of a rule.
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Difficulty: Hard
58. CPAs are allowed to advertise under the Rules of the AICPA Code of Professional Conduct. a. List the general guidelines regarding the nature of acceptable advertising. b. Describe two specific forms of unacceptable advertising. a. Advertising is acceptable if it is not false, misleading, or deceptive. b. Unacceptable forms of advertising include advertising that (only two required): Creates unjustified expectations of favorable results. Indicates an ability to influence a court or other official body. Misstates professional qualifications.
Difficulty: Medium
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59. The Sarbanes-Oxley Act of 2002 placed significant restrictions on the types of consulting that may be performed by auditors for their public company audit clients. a. List four types of services that are prohibited by the Act. b. List three types of general consulting activities that would the AICPA Code of Professional Conduct indicates impair the auditors' independence. a. Services prohibited by the Act include (4 required): Bookkeeping or other services related to the accounting records or financial statements. Financial information systems design and implementation. Appraisal, valuation and actuarial services. Internal audit outsourcing services, management functions or human resources. Various investment services. Legal services and expert services unrelated to auditing. b. Consulting functions that the AICPA Code of Professional Conduct indicate impair independence include (3 required): Authorizing, executing or consummating a transaction. Preparing source documents. Having custody of client assets. Supervising client employees in their normal recurring activities. Determining which recommendation should be implemented. Reporting to the board of directors on behalf of management. Serving as a client's stock transfer or escrow agent, registrar, or its general counsel.
Difficulty: Hard
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60. The AICPA's Code of Professional Conduct consists of two parts, Principles and Rules. a. Describe the purpose of each of the two parts. b. Describe the disciplinary action that may be taken against a member who violates the Code. c. Must the Rules be followed by members of the AICPA that are not in public practice? Explain your answer. a. Principles-goal-oriented, positively stated discussion of the profession's responsibilities to the public, clients, and fellow practitioners. Rules--enforceable applications of the principles. b. For violations of the Code a member may be required to take remedial action, such as attending continuing education programs. For more serious violations, the member may be censured, suspended, or expelled. c. The Rules apply to all members of the AICPA, unless the wording of the rule indicates otherwise.
Difficulty: Medium
Chapter 05 Audit Evidence and Documentation Answer Key
True / False Questions
1. The professional standards consider calculating depreciation expense a "routine" transaction. FALSE
Difficulty: Hard
2. The most reliable form of documentary evidence generally is considered to be documents created by the client. FALSE
Difficulty: Medium
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3. A vendor's invoice is an example of documentary evidence created by a third party and held by the client. TRUE
Difficulty: Medium
4. In performing analytical procedures, the auditors may use dollar amounts, physical quantities, or percentages. TRUE
Difficulty: Medium
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5. The primary purpose of a letter of representations is to obtain additional evidence about specific accounts. FALSE
Difficulty: Hard
6. The auditors should propose an adjusting journal entry for all material related-party transactions. FALSE
Difficulty: Hard
7. When the risk of material misstatement for an account is high, the auditors may perform additional substantive procedures to restrict detection risk to a lower level. TRUE
Difficulty: Medium
8. Working papers of continuing audit interest usually are filed with the administrative working papers. FALSE
Difficulty: Medium
9. The use of lead schedules is designed to increase the detail of the working trial balance. FALSE
Difficulty: Easy
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10. Adjusting journal entries are ordinarily recorded by the client, while reclassifying journal entries need not be recorded. TRUE
Difficulty: Medium
Multiple Choice Questions
11. To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by. A. The staff accountant who performed the substantive auditing procedures. B. A beginning staff accountant who has had no other work related to the engagement. C. A manager or partner who has a comprehensive knowledge of the client's business and industry. D. The CPA firm's quality control manager.
Difficulty: Medium
12. The components of the risk of misstatement are:
A. Option A B. Option B C. Option C D. Option D
Difficulty: Medium
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13. Financial statement assertions are established for classes of transactions,
A. Option A B. Option B C. Option C D. Option D
Difficulty: Easy
14. Which of the following is correct concerning a "fraud risk factor"? A. It may affect the auditor's assessment of fraud risk. B. It requires modification of planned audit procedures. C. It is also a material weakness in internal control. D. If it involves senior management, it is likely to result in resignation of the auditor.
Difficulty: Hard
15. When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to: A. Fraud. B. Misappropriation. C. Illegal Acts. D. Business risk.
Difficulty: Hard
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16. As planning materiality is decreased, the auditor should plan more work on individual accounts to. A. Find smaller misstatements. B. Find larger misstatements. C. Increase the tolerable misstatement in the accounts. D. Decrease the risk of assessing control risk too low.
Difficulty: Medium
17. Further audit procedures include:
A. Option A B. Option B C. Option C D. Option D
Difficulty: Medium
18. Assertions that have a meaningful bearing on whether an account balance, transaction class or disclosure is fairly stated are referred to as: A. Appropriate assertions. B. Sufficient assertions. C. Relevant assertions. D. Reliable assertions.
Difficulty: Medium
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19. Which of the following is not an assertion relating to classes of transactions? A. Accuracy. B. Sufficiency. C. Cutoff. D. Classification.
Difficulty: Medium
20. Which of the following is required documentation in an audit? A. A written engagement letter formalizing the level of services to be provided. B. A flowchart of the client's organization. C. A written audit program. D. A memo setting forth the scope of the audit.
Difficulty: Hard
21. Which of the following is not considered to be an analytical procedure? A. Comparisons of financial statement amounts with source documents. B. Comparisons of financial statement amounts with nonfinancial data. C. Comparisons of financial statement amounts with budgeted amounts. D. Comparisons of financial statement amounts with comparable prior year amounts.
Difficulty: Medium
22. An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim 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.
Difficulty: Hard
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Source: AICPA
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23. An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed? A. Test of transactions. B. Analytical procedures. C. Test of controls. D. Test of details.
Difficulty: Easy Source: AICPA
24. The inspection of a vendor's invoice by the auditors is: A. Direct evidence about occurrence of a transaction. B. Physical evidence about occurrence of a transaction. C. Documentary evidence about occurrence of a transaction. D. Part of the client's accounting system.
Difficulty: Medium
25. The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable? A. 5%. B. 12.5%. C. 42.7%. D. 60%.
Difficulty: Medium
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26. Analytical procedures are required at the planning stage of all audits and as: A. Tests of internal control. B. Substantive procedures. C. A part of the final overall review. D. Computer generated procedures.
Difficulty: Easy
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27. During financial statement audits, auditors seek to restrict which type of risk? A. Control risk. B. Detection risk. C. Inherent risk. D. Account risk.
Difficulty: Medium
28. Which of the following groups are not considered a specialist by AICPA Professional Standards: A. Appraisers. B. Internal auditors. C. Engineers. D. Geologists.
Difficulty: Medium
29. CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so: A. Violates professional standards. B. Is acceptable, but should only be done when cost justified. C. Is acceptable, but only for non-public clients. D. Is acceptable and desirable under all conditions.
Difficulty: Easy
30. Which of the following best describes the problem with the use of published industry averages for analytical procedures? A. Lack of comparability. B. Lack of sufficiency. C. Lack of accuracy. D. Lack of availability.
Difficulty: Medium
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31. In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence? A. A price for a similar asset obtained from an active market. B. An appraisal obtained discounting future cash flows. C. Management's judgment of the cost to purchase an equivalent asset. D. The historical cost of the asset.
Difficulty: Medium
32. An auditor should expect that fair value is the price that would be received to sell an asset in an orderly transaction between the market participants at the: A. Acquisition date of the asset. B. Audit report date. C. Expected replacement date of the asset. D. Measurement date (ordinarily the date of the financial statements).
Difficulty: Medium
33. Which of the following best describes the reason that auditors are concerned with the detection of related party transactions? A. The financial statements must often be adjusted for the effects of material related party transactions. B. Material related party transactions must be disclosed in the notes to the financial statements. C. The substance of related party transactions will differ from their form. D. In a related party transaction one party has the ability to exercise significant influence over the other party.
Difficulty: Hard
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34. Which of the following is not a basic procedure used in an audit? A. Risk assessment procedures. B. Substantive procedures. C. Tests of controls. D. Tests of direct evidence.
Difficulty: Medium
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35. Which of the following is not a financial statement assertion relating to account balances? A. Completeness B. Existence. C. Rights and obligations. D. Valuation and allowances.
Difficulty: Hard
36. Which of the following is generally true about the sufficiency of audit evidence? A. The amount of evidence that is sufficient varies inversely with the risk of material misstatement. B. The amount of evidence concerning a particular account varies inversely with the materiality of the account. C. The amount of evidence concerning a particular account varies inversely with the inherent risk of the account. D. When evidence is appropriate with respect to an account it is also sufficient.
Difficulty: Hard
37. Which of the following is true about analytical procedures? A. Performing analytical procedures results in the most reliable form of evidence. B. Analytical procedures are tests of controls used to evaluate the quality of a client's internal control. C. Analytical procedures are used for planning, but they should not be used to obtain evidence as to the reasonableness of specific account balances. D. Analytical procedures are used in planning, as a substantive procedure for specific accounts, and in the final review of the audited financial statements.
Difficulty: Medium
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38. Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? A. Confirmation. B. Observation. C. Reviewing subsequent events or transactions. D. Analyzing corporate organizational structure.
Difficulty: Hard
39. An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as: A. Vertical analysis. B. Horizontal analysis. C. Cross-sectional analysis. D. Comparison analysis.
Difficulty: Easy
40. An auditor is performing an analytical procedure that involves comparing a client's ratios with other companies in the same industry. This technique is referred to as: A. Vertical analysis. B. Horizontal analysis. C. Cross-sectional analysis. D. Comparison analysis.
Difficulty: Easy
41. An auditor is performing an analytical procedure that involves developing common-size financial statements. This technique is referred to as: A. Vertical analysis. B. Horizontal analysis. C. Cross-sectional analysis. D. Comparison analysis.
Difficulty: Easy
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42. Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? A. Confirmation of amounts. B. Review of management's process of development. C. Independent development of an estimate. D. Review of subsequent events.
Difficulty: Medium
43. The audit time budget is an example of: A. A supporting schedule. B. An administrative working paper. C. A lead schedule. D. A corroborative working paper.
Difficulty: Easy
44. A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a: A. Supporting schedule. B. Lead schedule. C. Corroborating schedule. D. Reconciling schedule.
Difficulty: Easy
45. Which of the following is not a function of working papers? A. Provide support for the auditors' report. B. Provide support for the accounting records. C. Aid partners in planning and conducting future audits. D. Document staff compliance with generally accepted auditing standards.
Difficulty: Easy
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46. A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final amount that will appear in the financial statement, is referred to as a: A. Working trial balance. B. Lead schedule. C. Summarizing schedule. D. Supporting schedule.
Difficulty: Easy
47. The auditors use analytical procedures during the course of an audit. The most important phase of performing these procedures is the: A. Vouching of all data supporting various ratios. B. Investigation of significant variations and unusual relationships. C. Comparison of client-computed statistics with industry data on a quarterly and full-year basis. D. Recalculation of industry date.
Difficulty: Medium
48. The auditors must obtain written client representations that normally should be signed by: A. The president and the chairperson of the board. B. The treasurer and the internal auditor. C. The chief executive officer and the chief financial officer. D. The corporate counsel and the audit committee chairperson.
Difficulty: Easy Source: AICPA
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49. Which of the following ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion? A. The audit time budget. B. The auditors' judgment. C. Generally accepted accounting quality standards. D. The auditors' working papers.
Difficulty: Easy Source: AICPA
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50. Failure to detect material dollar errors in the financial statements is a risk which the auditors primarily mitigate by: A. Performing substantive procedures. B. Performing tests of controls. C. Assessing control risk. D. Obtaining a client representation letter.
Difficulty: Easy Source: AICPA
51. An independent auditor finds that the Simmer Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding indicates the existence of: A. Management fraud. B. Related party transactions. C. Window dressing. D. Weak internal control.
Difficulty: Medium Source: AICPA
52. Which of the following would not necessarily be considered a related party transaction? A. Payment of a bonus to the president. B. Purchases from another corporation that is controlled by the corporation's chief stockholder. C. Loan from the corporation to a major stockholder. D. Sale of land to the corporation by the spouse of a director.
Difficulty: Easy Source: AICPA
53. The date of the management representation letter should coincide with the: A. Date of the auditor's report. B. Balance sheet date. C. Date of the latest subsequent event referred to in the notes to the financial statements. D. Date of the engagement agreement.
Difficulty: Medium
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Source: AICPA
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54. An example of an analytical procedure is the comparison of: A. Financial information with similar information regarding the industry in which the entity operates. B. Recorded amounts of major disbursements with appropriate invoices. C. Results of a statistical sample with the expected characteristics of the actual population. D. EDP generated data with similar data generated by a manual accounting system.
Difficulty: Medium Source: AICPA
55. 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 procedures designed to support the assertion. B. Constitute sufficient evidence to support the assertion when considered in combination with a moderate assessed level of control risk. C. Are generally sufficient audit evidence to support the assertion regardless of the assessed level of control risk. D. Replace the assessed level of control risk as evidence to support the assertions.
Difficulty: Medium Source: AICPA
56. Which of the following expressions is least likely to be included in a client's representation letter? A. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements. B. The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance. C. Management acknowledges responsibility for illegal actions committed by employees. D. Management has made available all financial statements, including notes.
Difficulty: Medium Source: AICPA
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57. Which of the following statements is generally correct about audit evidence? A. The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. B. To be appropriate, audit evidence must be sufficient. C. Accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on financial statements. D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.
Difficulty: Easy Source: AICPA
58. Which of the following statements relating to audit evidence is the most accurate statement? A. Audit evidence gathered by an auditor from outside an enterprise is reliable. B. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions. C. Oral representations made by management are not valid evidence. D. The auditor must obtain sufficient appropriate audit evidence.
Difficulty: Easy Source: AICPA
59. Which of the following is not a typical analytical procedure? A. Study of relationships of the financial information with relevant nonfinancial information. B. Comparison of the financial information with similar information regarding the industry in which the entity operates. C. Comparison of recorded amounts of major disbursements with appropriate invoices. D. Comparison of the financial information with budgeted amounts.
Difficulty: Medium Source: AICPA
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60. Which of the following is not a primary purpose of audit working papers? A. To coordinate the examination. B. To assist in preparation of the audit report. C. To support the financial statements. D. To provide evidence of the audit work performed.
Difficulty: Medium Source: AICPA
61. Concerning retention of working papers, the Sarbanes-Oxley Act: A. Has no provisions. B. Requires permanent retention. C. Requires retention for at least 7 years. D. Requires retention for a period of 4 or less years.
Difficulty: Medium
62. During an audit engagement pertinent data are prepared and included in the audit working papers. The working papers primarily are considered to be: A. A client-owned record of conclusions reached by the auditors who performed the engagement. B. Evidence supporting financial statements. C. Support for the auditors' representations as to compliance with generally accepted auditing standards. D. A record to be used as a basis for the following year's engagement.
Difficulty: Medium Source: AICPA
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63. Although the quantity, type, and content of working papers will vary with the circumstances, the working papers generally would include the: A. Copies of those client records examined by the auditor during the course of the engagement. B. Evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit. C. Auditor's comments concerning the efficiency and competence of client management personnel. D. Auditing procedures followed and the testing performed in obtaining audit evidence.
Difficulty: Medium Source: AICPA
64. The permanent file section of the working papers that is kept for each audit client most likely contains: A. Review notes pertaining to questions and comments regarding the audit work performed. B. A schedule of time spent on the engagement by each individual auditor. C. Correspondence with the client's legal counsel concerning pending litigation. D. Narrative descriptions of the client's accounting procedures and controls.
Difficulty: Medium Source: AICPA
65. Working papers that record the procedures used by the auditor to gather evidence should be: A. Considered the primary support for the financial statements being examined. B. Viewed as the connecting link between the books of account and the financial statements. C. Designed to meet the circumstances of the particular engagement. D. Destroyed when the audited entity ceases to be a client.
Difficulty: Easy Source: AICPA
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66. In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit? A. The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation. B. The working papers are subject to the privileged communication rule which, in a majority of jurisdictions, prevents third-party access to the working papers. C. The working papers are the property of the client after the client pays the fee. D. The working papers must be retained by the CPA firm for a period of ten years.
Difficulty: Easy Source: AICPA
67. Confirmation would be most effective in addressing the existence assertion for the: A. Addition of a milling machine to a machine shop. B. Payment of payroll during regular course of business. C. Inventory held on consignment. D. Granting of a patent for a special process developed by the organization.
Difficulty: Medium Source: AICPA
In preparing for an audit of the retail footwear division of a major retail organization, the auditor gathered the following information about the organization's stores:
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68. An auditor performs analytical procedures that involve comparing the gross margins of various divisional operations with those of other divisions and with the individual division's performance in previous years. The auditor notes a significant increase in the gross margin at one division. The auditor does some preliminary investigation and also notes that there were no changes in products, production methods, or divisional management during the year. Based on the above information, the most likely cause of the increase in gross margin would be: A. An increase in the number of competitors selling similar products. B. A decrease in the number of suppliers of the material used in manufacturing the product. C. An overstatement of year-end inventory. D. An understatement of year-end accounts receivable.
Difficulty: Hard Source: IIA
69. Management is concerned about the lower level of profitability in the Mid-Central Region. Which of the following would be a reasonable possible explanation(s) of the lower profitability for the Mid-Central Region? I. The lower number of stores in the Mid-Central Region. II. Sales employees are not as productive in generating sales as those in other regions. III. The Mid-Central Region has a lower gross margin. A. I only. B. II only. C. II and III only. D. I, II and III.
Difficulty: Medium Source: IIA
70. Based on the previous information, which of the following preliminary conclusions can the auditor use as a basis for further investigations? A. Sales per store are directly related to the size of the store. B. Sale clerks are less productive in larger size stores. C. Gross margin is directly related to the size of the store. D. Average square feet of store correlates with the number of stores in the district.
Difficulty: Medium Source: IIA
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71. Which of the following statements is not correct regarding the auditor's further analysis? A. The Mid-Central Region has fewer average full-time equivalent employees per store than the other regions per store. B. The other regions all generate higher sales per square foot than the Mid-Central Region. C. The Mid-Central Region has the highest average wages per full-time equivalent employee. D. The largest contributor to total corporate profits is the Southwest Region.
Difficulty: Medium Source: IIA
72. Management has centralized purchasing and uses a model based upon previous year's sales with adjustments for trends in the market place, e.g., the trend to more casual shoes. A staff auditor has suggested that the centralized purchasing may be one of the reasons for the lower level of profitability in the Mid-Central Region. Which of the following would be the best single audit procedure to address the staff auditor's assertion? A. Take a sample of receiving documents at stores and trace to purchase orders to determine the length of time between the purchase and delivery of the goods. B. Interview store managers in the Mid-Central Region to determine their attitude toward centralized purchasing. C. Perform an inventory count at selected stores in the Mid-Central Region and determine if adjustments are needed to the perpetual records. D. Perform a product-line analysis of sales and purchases in the Mid-Central Region and compare with other regions.
Difficulty: Hard Source: IIA
73. What type of transactions ordinarily have high inherent risk because they involve management judgments or assumptions in formulating accounting balances? A. Estimation. B. Nonroutine. C. Qualified. D. Routine.
Difficulty: Medium
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74. Assertions with high inherent risk are least likely to involve: A. Complex calculations. B. Difficult accounting issues. C. Routine transactions. D. Significant judgment by management.
Difficulty: Medium
75. The date on which no information may be deleted from audit documentation is the A. Client's year-end. B. Documentation completion date. C. Last date of significant fieldwork. D. All of the above are incorrect in that no information may ever be deleted from audit documentation.
Difficulty: Medium
76. In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are A. Prepared in a satisfactory control environment. B. Consistent with industry guidelines. C. Based on verifiable objective assumptions. D. Reasonable in the circumstances.
Difficulty: Hard Source: AICPA
Essay Questions
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77. Analytical procedures are substantive procedures that may be used to provide evidence about specific accounts and classes of transactions. a. Describe three major types of comparisons the auditor might make in performing analytical procedures. b. At what stages of the audit are analytical procedures performed and what purpose do they serve at each stage? a. Comparisons made in performing analytical procedures include (only three required): Comparisons with prior years' data. Comparisons with budgets and forecasts. Comparisons with industry statistics. Comparisons with nonfinancial data. Comparisons of predictable relationships based on past history. b. Analytical procedures may be performed: 1. During planning to identify items that require more audit attention. 2. Throughout the audit as a substantive procedure for accounts or classes of transactions. 3. At the conclusion of the audit for an overall review of the audited financial statements.
Difficulty: Medium
78. Audit working papers are an integral part of an examination in accordance with generally accepted auditing standards. a. Describe three major functions of the audit working papers. b. Distinguish between the permanent working paper file and the current working paper file. a. The functions of audit working papers include (only three required): Provide a means of assigning and coordinating audit work. Aid in review of the work. Provide support for the auditors' report. Document compliance with generally accepted auditing standards. Aid in planning and conducting future audits. b. The permanent file is used to organize working papers of continuing audit interest over a number of years. The current file contains the administrative and evidence working papers for the year under examination.
Difficulty: Medium
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79. The following is an audit working paper prepared by an assistant on the Williams audit: Prepared by ___ Reviewed by ___
Required: Prepare a list of review points as the preparer of this working. You may assume that any other working papers referred to appropriate. You will receive credit for proper points you bring up and lose credit for improper ones and omissions.
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The working paper's deficiencies include: "prepared by" is not initialed ("Rev. by" isn't either, but since we are still performing the review it need not be). Title of schedule is wrong, this is not a bank confirmation, it is a bank reconciliation. The by Balance per Bank is incorrect for two reasons. First, the balance would not be in the general ledger. Second, the balance per bank should be agreed to either a bank confirmation, bank statement, or both. The bank service charge should be added, not subtracted. Concerning balance per books, two things are wrong. First it is not footed in that the is missing. Second, it does not foot properly. The tickmark ;is incorrect relating to the deposit in transit. If it was on the 12/31/0X bank statement, it would not be a deposit in transit. The description is not correct since it should be recorded as a cash receipt as of 12/31/OX if the bank collected it prior to year-end. It is handled on the reconciliation properly, but the final comment is wrong.
Difficulty: Hard
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