ACCT 415 Test 2 Assessments

According to Sarbanes-Oxley, accountants performing an audit or review must maintain all engagement documentation for a period of 3 years. 2 years. 5 years. 7 years.

7 years.

Which of the following would not be included in an accountant's report on the examination of a financial forecast? An indication that the accountant is not responsible to update the report for subsequent events and occurrences. An indication that differences between forecasted and actual results may occur. A limitation on the use of the accountant's report. An indication that the engagement was conducted in accordance with Statements on Standards for Attestation Engagements.

A limitation on the use of the accountant's report.

To be successful in a civil action under Section 11 of the Securities Act of 1933 against auditors for liability for a materially misstated registration statement, the plaintiff must prove which of the following? Auditors' intent to deceive: Yes; Plaintiff's reliance on the registration statement: Yes Auditors' intent to deceive: No; Plaintiff's reliance on the registration statement: No Auditors' intent to deceive: No; Plaintiff's reliance on the registration statement: Yes Auditors' intent to deceive: Yes; Plaintiff's reliance on the registration statement: No

Auditors' intent to deceive: No; Plaintiff's reliance on the registration statement: No

Which of the following is not one of the four major cycles? Multiple Choice Acquisition and expenditure. Cash receipts and disbursements. Revenue and cash collection. Financing and investing.

Cash receipts and disbursements.

Which of the following procedures would an auditor most likely perform in planning a financial statement audit? Multiple Choice Comparing the financial statements to anticipated results. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities. Examining computer-generated exception reports to verify the effectiveness of internal controls. Inquiring of the client's legal counsel concerning pending litigation.

Comparing the financial statements to anticipated results.

Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable? Multiple Choice Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. Receiving the client's unopened mail for a reasonable period of time after year-end to search for unrecorded vendor's invoices. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for. Confirming accounts payable balances with known vendors and suppliers who have zero balances at year-end.

Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

While conducting an audit of a public entity, Wallace failed to identify material misstatements in its client's financial statements. Investors then sued Wallace in connection with this audit. Which of the following would not need to be demonstrated in order for the shareholders to successfully bring suit against Wallace under Section 10(b)-5 of the Securities Act of 1934? Wallace acted with gross negligence in his audit. The shareholders relied upon the materially misstated financial statements. The reliance on the materially misstated financial statements caused the shareholders' losses. Wallace was in privity with the shareholders.

Wallace was in privity with the shareholders.

The procedures used in a review engagement are: physical examination, inquiry, and obtaining a management representation letter. physical examination, reperformance, and obtaining a management representation letter. analytical procedures, inquiry, and obtaining a management representation letter. analytical procedures, reperformance, and obtaining a management representation letter.

analytical procedures, inquiry, and obtaining a management representation letter.

The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the: Multiple Choice assurances provided by substantive tests to a lower level. extent of substantive tests, such as using larger sample sizes. nature of substantive tests to more effective procedures. timing of substantive tests, such as performing them at year-end rather than at an interim date.

assurances provided by substantive tests to a lower level.

Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are required to be filed with a regulatory body by October 1. Humphrey does not complete the audit until October 5. Lauren is late filing the financial statements and is fined $100,000 by the regulatory body. Lauren would most likely sue Humphrey claiming: gross negligence. ordinary negligence. breach of contract. constructive fraud.

breach of contract.

Horizontal analysis refers to: Multiple Choice the change in a suspect's net worth from the beginning to the end of a period. financial statement amounts expressed each year as a proportion of a base amount. the trend of income from year to year of persons suspected of fraud. changes of financial statement numbers and ratios across several years.

changes of financial statement numbers and ratios across several years.

A principle that may reduce or eliminates auditors' liability to clients is: client's contributory negligence. client's constructive negligence. auditors' ordinary negligence. auditors' gross negligence.

client's contributory negligence.

Auditors would use the enterprise risk model: Multiple Choice to evaluate management's risk assessment. to determine detection risk. to monitor client risk. to reduce the client's business risk.

to evaluate management's risk assessment.

The idea of the cycle approach is to group accounts together by: Multiple Choice specific function. financial statement assertion. transactions that affect all accounts in that particular group. audit objective.

transactions that affect all accounts in that particular group.

The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as: Multiple Choice expenditure analysis. vertical analysis. net worth analysis. horizontal analysis.

vertical analysis.

If tests of controls induce the auditor to change the assessed level of control risk for Property Plant & Equipment from 50% to 100%, and audit risk (6%) and inherent risk remain constant, the acceptable level of detection risk: Multiple Choice would most likely change from 20% to 40%. would be unchanged, because the auditor has control over detection risk. cannot be determined because inherent risk is not given. would most likely change from 10% to 5%. would most likely change from 30% to 15%.

would most likely change from 30% to 15%.

If broker-dealers file an exemption report from compliance with SEC reporting requirements, accountants may perform a(n): Agreed-upon procedures engagement. Audit examination. Review engagement. Preparation engagement.

Review engagement.

The party conducting an audit examination of a client that utilizes a service organization in processing its transactions is referred to as a(n): User auditor. Group auditor. Component auditor. Service auditor.

User auditor.

Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable? Multiple Choice Comparing receivable turnover rates to industry statistics for reasonableness. Assessing the allowance for uncollectible accounts for reasonableness. Inquiring about receivables pledged under loan agreements. Tracing amounts in the subsidiary ledger to details on shipping documents.

Assessing the allowance for uncollectible accounts for reasonableness.

For which type of prospective financial information can an accountant conduct an examination engagement? Financial forecast Financial projection A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

Which of the following statements would normally be included in a report on financial statements prepared using a special purpose framework? A brief summary of differences between the financial results using the special purpose framework and generally accepted auditing standards. An indication that the audit was conducted in accordance with generally accepted auditing standards. An opinion on the appropriateness of the special purpose framework. An indication that the auditors examined the balance sheet, statement of operations, and statement of cash flows.

An indication that the audit was conducted in accordance with generally accepted auditing standards.

Which type of entit(ies) may prepare financial statements using a special purpose framework. Issuers Non-issuers A.YesYes B.YesNo C.NoYes D.NoNo

C. No Yes

Which of the following is the best defense auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated financial statements? Lack of privity. A disclaimer contained in the engagement letter. Lack of scienter. Contributory negligence on the part of the client.

Lack of scienter.

Which of the following represents the level of assurance provided in a compilation engagement on a non-issuer's financial statements? No opinion or assurance on the fairness of the financial statements. A summary of findings resulting from the compilation engagement. Limited assurance on the fairness of the financial statements. An opinion on the fairness of the financial statements.

No opinion or assurance on the fairness of the financial statements.

Which of the following procedures should an accountant perform during an engagement to review the financial statements of a non-issuer? Examine cash disbursements in the subsequent period for unrecorded liabilities. Communicate reportable conditions discovered during the assessment of control risk. Send bank confirmation letters to the entity's financial institutions. Obtain a representation letter from members of management.

Obtain a representation letter from members of management.

How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors' liability to purchasers of securities beyond that of common law? Auditors are held to a standard of care described as professional skepticism. Purchasers have to prove either fraud or gross negligence as a basis for recovery. Purchasers only have to prove loss caused by reliance on audited financial statements. Privity with purchasers is not a necessary element of proof.

Privity with purchasers is not a necessary element of proof.

Which of the following is not a principle of Trust Service engagements? Confidentiality of information. Security from unauthorized use. Proficiency in preparing transactions. Availability of the system, products, or services.

Proficiency in preparing transactions.

Paula performed the audit of the financial statements of Abdul Company (a nonpublic entity currently not subject to filing requirements under the Securities Act of 1933 or Securities Exchange Act of 1934). Abdul Company is currently considering several alternatives for raising capital, including seeking financing from area banks or an initial public offering of its securities. Which of the following parties would have the lowest likelihood of successfully bringing suit for ordinary negligence against Paula? Purchasers of Abdul Company's securities in an initial public offering. First State Bank, a bank with whom Abdul Company has not previously done business. Simon Whitaker, a private investor who is considering acquiring Abdul Company. Abdul Company.

Simon Whitaker, a private investor who is considering acquiring Abdul Company.

Which of the following parties is most likely to recover against auditors for losses resulting from acts of ordinary negligence? Third parties whose reliance on the client's financial statements was reasonably foreseeable. Third parties that auditors should have foreseen could rely on the client's financial statements. The auditors' client. Purchasers and sellers of securities under the Securities Exchange Act of 1934.

The auditors' client.

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts? Multiple Choice The failure to develop adequate procedures that detect unauthorized purchases. The exchange of property for similar property in a nonmonetary transaction. The presence of several difficult-to-audit transactions affecting expense accounts. The discovery of unexplained payments made to government employees.

The discovery of unexplained payments made to government employees.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of: Multiple Choice rights and obligations. presentation and disclosure. existence or occurrence. completeness.

completeness.

In auditing accrued liabilities, an auditor's procedures most likely would focus primarily on management's assertion of: Multiple Choice presentation and disclosure. valuation or allocation. existence or occurrence. completeness.

completeness.

Attestation engagements include: examinations, reviews, and agreed-upon procedures. examinations, reviews, compilations, agreed-upon procedures, and assurance services. only examinations. examinations and assurance services.

examinations, reviews, and agreed-upon procedures.

In the planning stage, analytical procedures are used to: Multiple Choice perform all of these. identify potential problem areas. determine the mathematical correctness of the financial statements. provide direct evidence about the balances in accounts.

identify potential problem areas.

Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data. The primary purpose of analytical procedures conducted during the planning stages is to: Multiple Choice identify unusual conditions that deserve additional audit effort. identify the appropriate schedules to be prepared by the client. identify the types of errors or frauds that can occur in transactions. determine the existence of unrecorded liabilities or overstated assets.

identify unusual conditions that deserve additional audit effort.

If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense, Multiple Choice income would not be misstated. income would be overstated. income would be understated. accounts receivable would be understated.

income would not be misstated.

Audit documentation does not normally include the: Multiple Choice decisions made in the course of the audit. record of the procedures performed. specific assertions under audit. industry accounting guides.

industry accounting guides.

Generally accepted auditing standards states that analytical procedures: Multiple Choice should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit. should be applied in the planning and final review stages of the audit and as a substantive test during the audit. should be applied in the final review stage, and can be applied as a substantive test and in the planning stage. should be applied in the planning stage and can be applied as a substantive test and in the final review stage.

should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit.

Special purpose frameworks include all of the following except: statements that conform to accounting principles that are generally accepted. statements prepared on a tax basis. statements prepared on a cash basis. statements that conform to a regulatory agency.

statements that conform to accounting principles that are generally accepted.

In auditing related party transactions, an auditor ordinarily places primary emphasis on: Multiple Choice confirming the existence of the related parties. the adequacy of the disclosure of the related party transactions. verifying the valuation of the related party transactions. the probability that related party transactions will recur.

the adequacy of the disclosure of the related party transactions.

Auditors should design the written audit plan so that: Multiple Choice the audit procedures selected will achieve specific audit objectives. substantive tests prior to the balance sheet date will be minimized. each account balance will be tested under either tests of controls or tests of transactions. all material transactions will be selected for substantive testing.

the audit procedures selected will achieve specific audit objectives.

In a report on compliance with contractual agreements conducted in conjunction with an audit of the financial statements, the auditors' report would include all of the following except: An opinion on the entity's compliance with contractual agreements. An indication that the audit was not directed toward identifying instances of noncompliance with contractual agreements. A limitation on the use of the report to identified parties. A reference to the audit of the financial statements.

An opinion on the entity's compliance with contractual agreements.

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent. Multiple Choice As a substantive test: No; In the final review stage: Yes. As a substantive test: Yes; In the final review stage: Yes. As a substantive test: No; In the final review stage: No. As a substantive test: Yes; In the final review stage: No.

As a substantive test: No; In the final review stage: Yes.

Which of the following would not be included in an SOC 1 Type 2 report? The service auditors' opinion on the operating effectiveness of internal controls. A restriction on the use of the report to certain parties. An indication that the service auditors' engagement was conducted in accordance with generally accepted auditing standards. A summary of the tests of controls performed by the service auditor.

An indication that the service auditors' engagement was conducted in accordance with generally accepted auditing standards.

Which of the following claims concerning the quality of auditors' work would least likely result in civil liability for damages? Gross negligence amounting to constructive fraud. Failure to investigate possible fraud when other entities in the industry have experienced frauds. Reckless disregard of evidence that the financial statements do not conform to generally accepted accounting principles. Issuing an unqualified auditors' opinion when evidence suggests that the financial statements were not prepared according to generally accepted accounting principles.

Failure to investigate possible fraud when other entities in the industry have experienced frauds.

Which of the following statements is most accurate regarding sufficient and appropriate documentation? Multiple Choice Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers. Accounting estimates are not considered sufficient and appropriate documentation. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.

Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.

C. Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was K. Post, CPA, whom Monday has notified by that its services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post? Multiple Choice The chair of Monday's board of directors. Monday's controller or CFO. Hill, the auditor. Post, the predecessor auditor.

Hill, the auditor.

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement? Multiple Choice Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years. Disagreements between the predecessor auditor and management as to significant accounting policies and principles. The predecessor auditor's understanding of the reasons for the change of auditors. Facts known to the predecessor auditor that might bear on the integrity of management.

Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence? Multiple Choice Whether policies prohibit the internal auditor from auditing areas where relatives are employed. The reporting status of the internal auditor within the organization. Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor. The educational level and professional experiences of the internal auditor.

The educational level and professional experiences of the internal auditor.

Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to Key Largo Bank for a loan. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming: it was in privity of the contract. it was a foreseeable party. it was a primary beneficiary. it was a foreseen party.

it was a primary beneficiary.

If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct? Multiple Choice Detection risk will increase. Detection risk will decrease. Audit risk will decrease. Inherent risk will increase.

Detection risk will decrease.

Under the Securities Act of 1933, which of the following defenses is related to auditors performing a reasonable investigation of the financial statements? Causation Contributory negligence Prudent auditor Due diligence

Due diligence

The auditor looked at a bank statement received and held by the client. What kind of audit procedure would this be considered? Multiple Choice Recalculation. Confirmation. Physical observation. Examination of documents.

Examination of documents.

Which of the following would be a step in an internal control program? Multiple Choice Obtain an aged trial balance of the accounts receivable. Prepare and send confirmations on a sample of customers' accounts receivable. Read sales contracts for evidence of customers' rights of return or price allowance terms. Assess the control risk for sales and collections.

Assess the control risk for sales and collections.

Which of the following would not need to be demonstrated by third parties bringing suit against auditors for losses sustained under the Securities Act of 1933? Third-party purchasers suffered a loss. The client's financial statements contained a material misstatement. Auditors were aware of the materially misstated financial statements. Purchasers would need to demonstrate all of these.

Auditors were aware of the materially misstated financial statements.

When applying analytical procedures during an audit, which of the following is the best approach for developing expectations? Multiple Choice Considering the pattern of several unusual changes without trying to explain what caused them. Comparing client data with client-determined expected results to reduce detailed tests of account balances. Considering unaudited account balances and ratios to calculate what adjusted balances should be. Comparing current-year account balances to balances of one or more comparable periods.

Comparing current-year account balances to balances of one or more comparable periods.Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

Which of the following is not required by AU-C 240, "Consideration of Fraud in a Financial Statement Audit"? Multiple Choice Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud. Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor. Conduct a discussion by the audit team of the risks of material misstatement due to fraud. Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit.

Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

Which of the following is not an acceptable response to fraud risks related to sales that were identified in an audit? Multiple Choice Exercise professional skepticism when performing sales testing. Perform additional substantive sales procedures on a surprise basis. Increase the assessment of detection risk for sales. Increase the assessment of control risk for sales.

Increase the assessment of detection risk for sales.

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? Multiple Choice Trace test counts noted during the physical count of inventory to the summarization of quantities. Inspect the open purchase order file for significant commitments to consider for disclosure. Inspect agreements for evidence of inventory held on consignment. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.

Inspect agreements for evidence of inventory held on consignment.

Kerry CPA is the auditor for Sammy Corp. During the audit, Kerry discovers a material misstatement in Sammy's financial statements. Sammy's management tells Kerry that if the misstatement is corrected or if Kerry issues an opinion that indicates there is a material misstatement, Sammy Corp. will likely have to declare bankruptcy and thousands of employees will lose their jobs. Which of the following statements is true if the misstatement is not corrected and Kerry issues an unqualified opinion on Sammy's financial statements? Kerry is liable only to third parties in privity of contract. Kerry is likely liable to any person who suffered a loss as a result of the fraud. Kerry is likely liable to third parties even if the third parties were aware of the fraud and did not rely on the opinion. Kerry is liable only to known users of the financial statements.

Kerry is likely liable to any person who suffered a loss as a result of the fraud.

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion? Multiple Choice Judgmental. Questioning. Criticizing. Presumptive.

Questioning.

Lancaster & Co., CPAs, is auditing the financial statements of Cooper Corporation. During the course of the audit, Cooper Corporation sent the following memo to the engagement partner:We have requested $1 million worth of products from Ladd Corporation with credit terms of net 30 days. Ladd has requested audited financial statements for its credit decision. We notified Ladd that our annual audit was in process and we would provide the audited financial statements to them as soon as they were completed.Which of the following statements is true with regards to this memo? The memo is only a courtesy and does not alter the terms of the engagement letter or change the nature of Ladd Corporation's standing to sue. The memo is an amendment to the engagement letter and makes Ladd Corporation a primary beneficiary of the audited financial statements. The memo is an additional contract placing Ladd in privity of contract. The memo may move Ladd Corporation closer to a primary beneficiary and reposition them as third party with a standing to sue, depending on the jurisdiction of any future lawsuits.

The memo may move Ladd Corporation closer to a primary beneficiary and reposition them as third party with a standing to sue, depending on the jurisdiction of any future lawsuits.

Which of the following is not a difference in the report on an agreed-upon procedures engagement compared to an auditors' report on an audit conducted under generally accepted auditing standards? The report provides a summary of findings as a result of performing the agreed-upon procedures. The report identifies the specified parties and describes the specific procedures performed by the accountant. The report specifically notes that an examination was not performed by the accountant and disclaims an opinion. The report indicates the engagement was conducted in conformity with generally accepted auditing standards.

The report indicates the engagement was conducted in conformity with generally accepted auditing standards.

This year, Blakeney Enterprises engaged a new auditor who must: reject the engagement if the change in auditors resulted from a dispute with the predecessor. review the predecessor's audit documentation if the audit is to be in accordance with GAAS. seek the SEC's permission to accept the engagement if Blakeney is publicly owned. attempt to communicate with the predecessor auditor before accepting the engagement.

attempt to communicate with the predecessor auditor before accepting the engagement.

When assessing internal auditors' objectivity, an independent auditor should: Multiple Choice evaluate the quality of the internal auditors' working paper documentation and their recent audit recommendations. consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned. review the internal auditors' reports to determine that their conclusions are consistent with the work performed. verify that the internal auditors' assessment of control risk is comparable to the independent auditor's assessment.

consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

Sun Corp. approved a merger plan with Cord Corp. One of the determining factors in approving the merger was the financial statements of Cord that were audited by Frank & Co., CPAs. Sun had engaged Frank to audit Cord's financial statements. While performing the audit, Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses. For Frank to be liable under common law liability, Sun at a minimum must prove that Frank acted with scienter. failed to exercise the appropriate level of professional care. demonstrated gross negligence. knew of the irregularities.

failed to exercise the appropriate level of professional care.

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are: Multiple Choice considered at the individual account-balance level whereas detection risk is not. functions of the client and its environment whereas detection risk is not. changed at the auditor's discretion whereas detection risk is not. elements of audit risk whereas detection risk is not.

functions of the client and its environment whereas detection risk is not.

If an auditor encounters significant risks at the client, the auditor should do all of the following except: Multiple Choice include more experienced auditors on the engagement. perform tests closer to year end. perform extended procedures. inform the SEC.

inform the SEC.

In an agreed-upon procedures engagement, an accountant: may restrict the use of the report to specified users. expresses limited assurance in the report. expresses a qualified audit opinion. follows all of the fundamental principles of GAAS.

may restrict the use of the report to specified users.

When an accountant is engaged to compile a non-issuer's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements: might influence users' conclusions about the business, if the disclosures were included. are prepared in conformity with a comprehensive basis of accounting other than GAAP. are not compiled in accordance with Statements on Standards for Accounting and Review Services. are special-purpose financial statements that are not comparable to those of prior periods.

might influence users' conclusions about the business, if the disclosures were included.

If an audit is performed for the benefit of a specific person or organization, that person or organization is known as a(n) prime benefactor. party to the contract. foreseeable third party. primary beneficiary.

primary beneficiary.

An auditors' report on financial statements prepared in conformity with the cash basis of accounting should include an emphasis-of-matter paragraph that: refers to the note to the financial statements that describes the special purpose framework. justifies the reasons for departing from generally accepted principles. explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles. states whether the financial statements are fairly presented in conformity with a special purpose framework.

refers to the note to the financial statements that describes the special purpose framework.

The Securities Act of 1933 approves and guarantees investments. regulates trading in securities. regulates the initial issuance of securities. regulates the accounting profession.

regulates the initial issuance of securities.

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the: Multiple Choice related internal control policies and procedures. degree of management estimation involved in determining the proper account balance. liquidity of the account. complexity of calculations involved.

related internal control policies and procedures.

An auditor who uses 7 percent of income before taxes as a basis for overall materiality would be basing judgment on: Multiple Choice relative size. nature of the item. absolute size. cumulative effects.

relative size.

ABC Company prepares financial statements showing the last two years, years X and Y. (Year X is the year prior to year Y.) The auditor performed an audit of year X and a review of year Y. The auditor may: report on the year Y review and reissue the year X audit report. provide only the report concerning the year Y review. notify the client that prior-year audited financial statements cannot be presented when the current year's statements have not been audited. reissue the year X audit report with an explanatory paragraph disclosing that only a review was performed on year Y.

report on the year Y review and reissue the year X audit report.

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if: Multiple Choice the noncompliance is a violation of generally accepted accounting principles. the illegal act was committed during a prior year that was not audited. the auditor has already assessed control risk at the maximum level. the client does not take the remedial action that the auditor considers necessary.

the client does not take the remedial action that the auditor considers necessary.

Attestation engagements may be more difficult than financial statement audits when: management may not understand the underlying assumptions of the attestation. the report may be submitted to individuals with insufficient knowledge of the nature of an attestation engagement. the establishment of suitable measurement criteria is difficult. internal controls are difficult to assess.

the establishment of suitable measurement criteria is difficult.

Typical defenses for auditors in common law actions include all of the following, except the financial statements were not materially misstated. the plaintiff contributed to the failure to detect material misstatements. the audit was conducted in accordance with generally accepted auditing standards. the plaintiff was foreseen.

the plaintiff was foreseen.

At the request of James Company's management, E.G. audited James Company's financial statements and was aware that James's management intended to deliver the financial statements to its 25 shareholders for the purpose of repurchasing their shares for $50 per share (the investors had originally purchased the shares for $5 per share). The audit was conducted in accordance with generally accepted auditing standards and the financial statements were prepared in accordance with generally accepted accounting principles. Later, the shareholders sued the auditors, claiming that if they fully realized the significance of disclosures about the market value of the assets, they could have received $75 per share from James Company. The shareholders' lawsuit will probably fail because: the shareholders were not primary beneficiaries of the audit engagement and they have no standing to sue. the shareholders failed to prove lack of appropriate professional care on the part of auditors. the shareholders did not suffer a loss. the shareholders did not rely properly on the financial statements.

the shareholders failed to prove lack of appropriate professional care on the part of auditors.