Acct 401 Exam 1 Review Questions

A customer that provides 9% of revenues for an audit client experiences a flood in their head offices prior to completion of year-end fieldwork. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should: A. Withhold submission of the auditor's report. B. Advise management to disclose the event in notes to the financial statements. C. Submit the auditor's report because disclosures are only required for events that effect more than 10% of revenues. D. Advise management to adjust the financial statements at a point in the future when the extent of the flood and the direct effect on the financial statements is known.

? Conditions which come into existence after year-end which may have a significant direct effect on the financial statements should be disclosed in the notes to the financial statements.

Which of the following is an example of an advocacy threat to member independence? A. An engagement team member sells securities of the attest client's company. B. An engagement team member is the CFO of the attest client's company. C. An engagement team member is litigating a bill for unpaid invoices by the attest client. D. An engagement team member's spouse has a direct financial interest in the attest client.

A. An engagement team member sells securities of the attest client's company. an advocacy threat stems from action that promote the client's interests. Selling securities is an example of an activity that promotes a clients interest

According to AICPA standards, which of the following situations will not compromise the independence of the CPA performing an audit? A. CPA's wife works as an executive assistant for the client. B. CPA's nondependent son has a material financial interest in the client that the CPA is not aware of. C. CPA's brother works as a stock promoter for the client. D. CPA's father works as the CFO for the client.

A. CPA's wife works as an executive assistant for the client. not employed in a key position

The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: A. Express an adverse opinion with the basis for a modification paragraph disclosing the reason (the accounting change) for the opinion. B. Express an unmodified opinion with an emphasis-of-matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. C. Disclaim an opinion and explain all of the reasons therefore. D. Express an adverse opinion regarding the 20X4 financial statements, without a basis for a modification paragraph since the reason therefore since that reason will be included in the notes to the statements.

A. Express an adverse opinion with the basis for a modification paragraph disclosing the reason (the accounting change) for the opinion.

A basis for a modification paragraph in the audit of the financial statements of a nonpublic company: A. Is only included with qualified, adverse, or disclaimers of opinion. B. Is presented after the opinion paragraph. C. Has a section title: Emphasis-of-Matter. D. Must be included in all nonpublic company audit reports.

A. Is only included with qualified, adverse, or disclaimers of opinion.

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.

A. Only to persons qualified to practice public accounting.

Which of the following would most likely be an appropriate addressee for an audit report? A. The shareholders of the corporation whose financial statements were examined. B. A third party who requested that a copy of the audit report be sent to her. C. The president of the corporation whose financial statements were examined. D. The chief financial officer.

A. The shareholders of the corporation whose financial statements were examined.

The risk associated with a company's survival and profitability a. business risk b. information risk c. detection risk d. control risk

A. business risk

If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be: A. Referred to in the auditor's report for the current year. B. Disclosed in the notes to the financial statements of the current year. C. Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year. D. Treated as a subsequent event.

B. Disclosed in the notes to the financial statements of the current year.

Which type of conduct would not result in an automatic expulsion from AICPA? A. Preparation of a fraudulent tax return. B. Felony conviction. C. Accidentally failing to file a personal tax return. D. Preparation of fraudulent tax return for a client.

B. Felony conviction. because it can be other than fraud

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.

B. Financial statement audits

Which of the following best describes a portion of the auditors' responsibility regarding noncompliance with laws by clients? A. The auditors have a responsibility to discover all material noncompliance. B. If audit procedures reveal noncompliance, the auditors should take appropriate actions. C. If the auditors suspect noncompliance, they should conduct a legal audit of the company. D. The auditors' responsibility for the detection of all noncompliance is the same as their responsibility regarding material misstatements due to errors and fraud.

B. If audit procedures reveal noncompliance, the auditors should take appropriate actions.

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.

B. Includes a report on subject matter, or on an assertion about subject matter.

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.

B. Independence

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified opinion if: A. The effects of the adverse financial conditions are likely to be negative. B. Information about the entity's ability to continue as a going concern is not disclosed in the financial statements. C. Management has no plans to reduce or delay future expenditures. D. Negative trends and recurring operating losses appear to be irreversible.

B. Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.

Which of the following is not an underlying premise of an audit? A. Management must provide the auditor with all information relevant to the preparation and fair presentation of the financial statements. B. Management and the auditors have responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework. C. Where appropriate, the auditor may obtain information from those charged with governance. D. The auditors should be provided unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence.

B. Management and the auditors have responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework.

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.

B. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period.

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.

C. Board of Directors

The following would most likely be a violation of the profession's ethical standards A. CPA provides consulting services with a contingent fee based on reducing the client's tax burden by 5%. B. CPA provides tax preparation service with a contingent fee based on reducing the client's tax burden by 5%. C. CPA represents that consulting services will cost approximately $25,000 when the CPA knew the services would most likely cost twice that amount. D. CPA provides consulting services and charges less than a competitive rate in order to win the business of the client.

C. CPA represents that consulting services will cost approximately $25,000 when the CPA knew the services would most likely cost twice that amount. a CPA would be knowingly misrepresenting the facts by providing a bid that was clearly off the mark.

Under the AICPA Code of Professional Conduct, which of the following rules is not applicable to CPAs in business? A. Integrity and objectivity. B. General standards. C. Independence. D. Acts discreditable.

C. Independence.

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.

C. Make recommendations for improving performance.

According to AICPA standards, which of the following situations will compromise the independence of the CPA performing an audit? A. Acting as an executor of an estate that had an immaterial indirect financial interest in the client. B. Receving a private loan from a hedge fund manager who owns 9% of the outstanding shares of the client company. C. Owning 9% of a client's outstanding shares. D. Refinancning an automobile loan from a bank client.

C. Owning 9% of a client's outstanding shares. A partner or professional cannot own more than 5% of the clients outstanding shares

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.

C. Prohibited for clients for whom attestation services are provided.

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.

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.

Which of the following modifications of the auditors' report does not include an additional paragraph? A. The report is qualified because the financial statements contain a material departure from generally accepted accounting principles. B. The report includes an emphasis of a matter. C. The audit report indicates a division of responsibility between two CPA firms. D. The report is qualified because the scope of the auditors' work was limited.

C. The audit report indicates a division of responsibility between two CPA firms.

When nonattest service are provided, the client must: A. Assume all responsibilities of decision making. B. Designate an individual in senior management with requisite skills and knowledge to oversee these services. C. Must be responsible for establishing internal controls. D. All of the above.

D all of the above The client must oversee, evaluate and accept responsibility for results. In addition the client must establish and maintain internal controls.

In performance of any professional service, a member shall A. Maintain objectivity and integrity B. Avoid conflicts of interest C. Not knowingly misrepresent facts or subordinate judgment D. All of the above

D rule 102 integrity and objectivity states all 3 requirements

Which of the following is not a close relative of the covered member? A. Sibling B. Nondependent child C. Parent D. Dependent child.

D. Dependent child. this is an immediate family member

For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to: A. Only the current year under audit. B. Either one or both years at the option of the auditors. C. Each of the two years plus the preceding year. D. Each of the years in the two-year period.

D. Each of the years in the two-year period.

The Auditing Standards Board's guidance on matters such as the purpose of an audit, the premise of an audit, and auditor personal responsibilities is included in: A. The 10 Generally Accepted Auditing Standards. B. The Code of Professional Conduct. C. Accounting Series Releases. D. Principles Underlying an Audit Conducted in Accordance with GAAS.

D. Principles Underlying an Audit Conducted in Accordance with GAAS.

Which of the following acts is generally prohibited by the professional standards? A. Witholding an audit report because fees charged to client are past due and the client has demanded their return. . B. Witholding an audit report due to outstanding audit issues and the client has demanded their return. C. Witholding an incomplete audit report requested by client. D. Retaining client records after an engagement is terminated prior to completion and the client has demanded their return.

D. Retaining client records after an engagement is terminated prior to completion and the client has demanded their return REQUIRED to return only client records

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.

D. Revoke the offending member's CPA certificate.

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.

D. monitoring

A CPA has been requested by a former audit client to reissue the auditor's report for the prior period. Before reissuing the report, the CPA should a. Obtain a letter of representation from the former client's management. b. Make inquiries of the former client's attorney regarding pending litigation. c. Review the former client's records to verify its compliance with debt and loan agreements. d. Consider whether there is substantial doubt about the former client's ability to continue as a going concern.

a. Obtain a letter of representation from the former client's management.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting? a. The entity's industry is experiencing declining customer demand. b. Employees who handle cash receipts are not bonded. c. Bank reconciliations usually include in-transit deposits. d. Equipment is often sold at a loss before being fully depreciated.

a. The entity's industry is experiencing declining customer demand.

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

b. examinations, but not reviews

Which of the following events most likely would indicate the existence of related party transactions? A. insuring the lives of key executives and listing the entity as beneficiary B. selling real estate at a price that differs significantly from its appraised value C. making a loan with specific scheduled terms for repayment of the funds D. granting stock options to key executives at favorable prices

b. selling real estate at a price that differs significantly from its appraised value

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? a. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. b. Claims received from customers for goods returned may be intentionally recorded in other customers' accounts. c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. d. The failure to prepare shipping documents may cause an overstatement of inventory balances.

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

The serially-numbered pronouncements issued by the Auditing Standards Board over a period of years are known as: a. Auditing Statements of Positions (ASPs) b. Accounting Series Releases (ASRs) c. Statements on Auditing Standards (SASs) d. Statements on Auditing Principles (SAPs)

c. Statements on Auditing Standards (SASs)

An entity prepares its financial statements on its income tax basis. The accompanying notes include a summary of significant accounting policies that discusses the basis of presentation and describes how that basis differs from GAAP. The dollar amount of the effects of the difference between the income tax basis and GAAP a. Is required to be included only in the auditor's report. b. Is required to be included only in the notes to the financial statements. c. Is required to be included both in the notes to the financial statements and the auditor's report. d. Need not be quantified and included in either the notes to the financial statements or the auditor's report.

d. Need not be quantified and included in either the notes to the financial statements or the auditor's report.