Audit Exam 1 Review

Upon discovering fraudulent data in a client's tax return that the client would not correct, a CPA withdraws from the engagement. How should the CPA respond if asked by the successor CPA why the relationship was terminated?

"I suggest you get the client's permission for us to discuss all matters freely."

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

A CPA in public practice providing auditing and other attestation services.

An auditor's independence is most likely considered impaired if the auditor has

A joint, closely held business investment with the client that is material to the auditor's net worth.

Which of the following is a requirement of the Sarbanes-Oxley Act of 2002?

A second partner review and approval is required of audit reports.

Which of the following legal situations would be considered to impair the auditor's independence?

Actual litigation by the auditor against the current management alleging management fraud or deceit.

An auditor assesses the risks of material misstatement because they

Affect the level of detection risk that the auditor may accept.

Which of the following statements would least likely appear in an auditor's engagement letter?

After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement.

B, the newly hired external auditor for P Corp., is planning an audit engagement. When reviewing the work of P's predecessor auditor, B identified several unusual circumstances requiring further clarification. B should speak with the predecessor auditor

After requesting permission from management for the predecessor auditor to respond fully.

Williams & Co. is a medium-sized CPA firm enrolled in the Private Companies Practice Section (PCPS). The firm is to have a peer review under the AICPA Peer Review program. The review will most likely be performed by

Another CPA firm.

Which of the following matters does an auditor usually include in the engagement letter?

Arrangements regarding fees and billing.

When a PCAOB auditing standard indicates that an auditor "could" perform a specific procedure, how should the auditor decide whether and how to perform the procedure?

By exercising professional judgment in the circumstances.

Which of the following assertions is most closely related to the audit objective to verify that all sales have been recorded?

Completeness.

Which of the following factors would most likely cause an auditor not to accept a new audit engagement?

Concluding that the entity's management probably lacks integrity.

An auditor has determined a materiality threshold of $100,000 for a client. The auditor has accumulated audit evidence that supports an allowance for credit losses in the range of $1.5 million to $1.8 million. The client recorded $800,000 as the allowance for credit losses and declines to record any additional allowance. What proposed adjustment will the auditor include in the summary of unadjusted differences?

Debit credit loss expense $700,000; credit allowance for credit losses $700,000.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risks of material misstatement from those originally planned. To achieve an overall audit risk that is substantially the same as the planned audit risk, the auditor would

Decrease detection risk.

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is

Detection risk.

Each of the following is a type of known misstatement, except

Differences between management and the auditor's judgment regarding estimates.

During the initial planning phase of an audit, a CPA most likely would

Discuss the timing of the audit procedures with the client's management.

The concept of materiality is least important to an auditor when considering the

Effects of a direct financial interest in the client on the CPA's independence.

The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the

Engagement letter.

An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to

Express an opinion as to the fairness of Camden's financial statements.

In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the

Financial statement assertions.

Which of the following best characterizes an auditor's exercise of professional skepticism?

Having an attitude that includes a questioning mind.

In the course of the audit of financial statements for the purpose of expressing an opinion, the auditor will normally prepare a schedule of uncorrected misstatements. The primary purpose served by this schedule is to

Identify the potential financial statement effects of misstatements that were not considered clearly trivial when discovered.

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances, the auditor most likely would

Increase the assessment of control risk and increase the extent of substantive tests.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely will significantly increase opportunities for fraudulent financial reporting when

Management is dominated by one individual who is also a shareholder.

Users of an issuer's financial statements demand independent audits because

Management may not be objective in reporting.

Which of the following groups within an entity is typically in the best position to perpetrate a material fraud?

Management.

Which one of the following statements is correct concerning the concept of materiality?

Materiality is a matter of professional judgment.

Which of the following is considered a fraudulent activity?

Misappropriation of assets.

As the acceptable level of detection risk decreases, an auditor may change the

Nature of substantive procedures from a less effective to a more effective procedure.

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertion(s) of Classification andUnderstandability Existence

No Yes

Which of the following procedures is an auditor most likely to include in the planning phase of a financial statement audit?

Obtain an understanding of the entity's risk assessment process.

In developing an audit plan, an auditor should

Perform risk assessment procedures.

Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information?

Releasing financial information to a local bank with the approval of the client's mail clerk.

Which of the following is an example of an inherent risk that an auditor should consider?

Technological developments that may render inventory obsolete.

Which of the following statements most likely would be included in an engagement letter from an auditor to a client?

The CPA firm will involve information technology specialists in the performance of the audit.

Audit plans should be designed so that

The audit evidence gathered supports the auditor's conclusions

All of the following are audit quality control requirements contained in the Sarbanes-Oxley Act of 2002 except

The audit report must be submitted to the Public Company Accounting Oversight Board prior to issuance.

According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations?

The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client.

When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer would consider each of the following, except

The cost of correcting the misstatements.

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality for the financial statements as a whole?

The entity's year-to-date financial results and position.

In planning the audit engagement, the auditor should consider each of the following except

The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.

Which of the following is an important consideration when deciding the nature of tests to use in a financial statement audit?

The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment.

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

The prospective client is unwilling to make all financial records available to the CPA.

Which of the following is correct regarding the communication between successor and predecessor auditors?

The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor.

The audit plan usually cannot be finalized until the

Understanding of the entity and its environment has been completed.

Which of the following areas of professional responsibility should be observed by a CPA not in public practice? Objectivity Independence

Yes No

In assessing whether to accept a client for an audit engagement, a CPA should consider the Client's Business Risk CPA's Business Risk

Yes Yes

Which of the following audit risk components may be assessed in nonquantitative terms? ControlRisk DetectionRisk InherentRisk

Yes Yes Yes