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Gary Watson, a graduating business student at a small college, is currently interviewing for a job. Gary was invited by both Tilly Manufacturing Company and Watson Supply Company to travel to a nearby city for an interview. Both companies have offered to pay Gary's expenses. His total expenses for the trip were $96 for mileage on his car and $45 for meals. As he prepares the letters requesting reimbursement, he is considering asking for the total amount of the expenses from both employers. His rationale is that if he had taken separate trips, each employer would have had to pay that amount. - What parties are directly affected - Are other students potentially affected - Are the professors potentially affected by Garys decision

- Both the employers - Yes - Yes

In which of the following situations would a public accounting firm have violated the AICPA Code of Professional Conduct in determining its fee? - A fee is based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing. - A fee is to be established at a later date by the Bankruptcy Court. - A fee is based upon the nature of the engagement rather than upon the actual time spent on the engagement. - A fee is based on the fee charged by the client's former auditors.

A fee is based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing.

Which of the following business characteristics is not indicative of high inherent risk? - Operating results that are highly sensitive to economic factors. - Large likely misstatements detected in prior audits. - Substantial turnover of management. - A large amount of assets.

A large amount of assets.

Which of the following should not normally be included in the engagement letter for an audit? - A description of the responsibilities of client personnel to provide assistance. - An indication of the amount of the audit fee. - A description of the limitations of an audit. - A listing of the client's branch offices selected for testing.

A listing of the client's branch offices selected for testing.

Which of the following is not a covered member for an attest engagement under the Independence Rule of the AICPA Code of Professional Conduct? - An individual assigned to the attest engagement. - A partner in the office of the partner in charge of the attest engagement. - A manager who is in charge of providing tax services to the attest client. - A partner in the national office of the firm that performs marketing services.

A partner in the national office of the firm that performs marketing services.

A public accounting firm would least likely be considered in violation of the AICPA Independence Rule in which of the following instances? - A partner's checking account, which is fully insured by the Federal Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services. - A manager of the firm donates services as vice president of a charitable organization that is an audit client of the firm. - An attest client owes the firm fees for this and last year's annual engagements. - A covered member's dependent son owns stock in an attest client.

A partner's checking account, which is fully insured by the Federal Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services.

Performing analytical procedures may help an auditor to: - Achieve audit objectives related to a particular assertion. - Develop an effective system of quality control. - Meet PCAOB requirements that analytical procedures be performed relating to every major account. - Increase the level of detection risk.

Achieve audit objectives related to a particular assertion.

At the completion of the audit, the auditors are least likely to know: - The assessed level of control risk. - The planned assessed level of control risk. - Actual control risk. - The scope of tests of controls.

Actual control risk.

Which of the following is not prohibited by the AICPA Code of Professional Conduct? - Advertising in newspapers. - Payment of commission to obtain an audit client. - Acceptance of a contingent fee for a review of financial statements. - Engaging in discriminatory employment practices.

Advertising in newspapers.

In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? - Generous performance-based compensation systems. - Management preoccupation with increased financial performance. - An unreliable accounting system. - Strained relationships between management and competing companies.

An unreliable accounting system.

In developing an expectation for analytical procedures, the auditors are least likely to consider: - Financial information for comparable prior periods. - Relationships between financial information and relevant nonfinancial data. - Anticipated costs of audit completion. - Relationships among elements of financial information within a period.

Anticipated costs of audit completion.

Assume that this position is not in public accounting and that Gary Watson is a CPA and a member of the AICPA who is graduating from an MBA program. e. Which of the following is correct concerning the applicability of the AICPA Code of Professional Conduct relating to Gary Watson in this situation?

Certain, but not all, sections apply

Which of the following is not a primary approach to auditing an accounting estimate? - Review and test management's process for developing the estimate. - Review subsequent transactions. - Confirm the amounts. - Develop an independent estimate.

Confirm the amounts.

When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: - Consider the organizational level to which the internal auditors report the results of their work. - Review the internal auditors' work. - Consider the qualifications of the internal audit staff. - eview the training program in effect for the internal audit staff.

Consider the organizational level to which the internal auditors report the results of their work.

Analytical procedures performed near the end of the audit to assist the auditor in forming an overall conclusion on the financial statements are aimed primarily at: - Gathering evidence concerning account balances that have not changed from the prior year. - Retesting internal control procedures. - Considering unusual or unexpected account balances that were not previously identified. - Performing a test of transactions to corroborate management's financial statement assertions.

Considering unusual or unexpected account balances that were not previously identified.

Of the following, which is the least reliable type of audit evidence? - Confirmations mailed by outsiders to the auditors. - Correspondence between the auditors and suppliers. - Copies of sales invoices inspected by the auditors. - Canceled checks returned in the year-end bank statement directly to the client.

Copies of sales invoices inspected by the auditors.

The primary objective of tests of details of transactions performed as substantive procedures is to: - Comply with auditing standards. - Attain assurance about the reliability of the accounting system. - Detect material misstatements in the financial statements. - Evaluate whether management's policies and procedures are operating effectively.

Detect material misstatements in the financial statements.

Which of the following would be least likely to be considered an objective of internal control? - Checking the accuracy and reliability of accounting data. - Detecting management fraud. - Encouraging adherence to managerial policies. - Safeguarding assets.

Detecting management fraud.

The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as - Business risk - Engagement risk - Control risk - Detection Risk

Detection risk

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: - Employment of temporary personnel to aid in the separation of duties. - Direct participation by the owner in key record-keeping and control activities of the business. - Engaging a CPA to perform monthly write-up work. - Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee.

Direct participation by the owner in key record-keeping and control activities of the business.

Which of the following is not a financial statement assertion made by management? - Existence of recorded assets and liabilities. - Completeness of recorded assets and liabilities. - Valuation of assets and liabilities. - Effectiveness of internal control.

Effectiveness of internal control.

Which of the following best describes what is meant by the term "fraud risk factor"? - Factors that, when present, indicate that risk exists. - Factors often observed in circumstances where frauds have occurred. - Factors that, when present, require modification of planned audit procedures. - Weaknesses in internal control identified during an audit.

Factors often observed in circumstances where frauds have occurred.

Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? - Analysis of balance sheet accounts. - Analysis of income statement accounts. - All matters of continuing accounting significance. - Facts that might bear on the integrity of management.

Facts that might bear on the integrity of management.

Tests of controls do not address: - How controls were applied. - How controls were originated. - The consistency with which controls were applied. - By what means the controls were applied.

How controls were originated.

Gary Watson, a graduating business student at a small college, is currently interviewing for a job. Gary was invited by both Tilly Manufacturing Company and Watson Supply Company to travel to a nearby city for an interview. Both companies have offered to pay Gary's expenses. His total expenses for the trip were $96 for mileage on his car and $45 for meals. As he prepares the letters requesting reimbursement, he is considering asking for the total amount of the expenses from both employers. His rationale is that if he had taken separate trips, each employer would have had to pay that amount. Assume that this position is not in public accounting and that Gary Watson is a CPA and a member of the AICPA who is graduating from an MBA program. d. He is considering this situation using the text's framework for ethical decisions. Which of the following is not a step in that framework?

Identify the source of action that maximizes the ethical dilemma involved

The firm of Schilling & Company CPAs, has offices in Chicago and Green Bay, Wisconsin. Gillington Company, which has 1 million shares of outstanding stock, is audited by the Chicago office of Schilling; Welco, of the Chicago office, is the partner in charge of the audit. For each of the following circumstances, indicate whether the public accounting firm's independence is impaired with respect to Gillington Company. Johnson, a partner in the Chicago office, owns 100 shares of the stock of Gillington. He has no responsibilities with respect to the Gillington audit.

Independence impaired

The firm of Schilling & Company CPAs, has offices in Chicago and Green Bay, Wisconsin. Gillington Company, which has 1 million shares of outstanding stock, is audited by the Chicago office of Schilling; Welco, of the Chicago office, is the partner in charge of the audit. For each of the following circumstances, indicate whether the public accounting firm's independence is impaired with respect to Gillington Company. c. Masterson is a staff assistant in the Green Bay office and owns 10 percent of Gillington's outstanding common stock. Masterson provides no services to Gillington and is not able to influence the engagement.

Independence impaired

The firm of Schilling & Company CPAs, has offices in Chicago and Green Bay, Wisconsin. Gillington Company, which has 1 million shares of outstanding stock, is audited by the Chicago office of Schilling; Welco, of the Chicago office, is the partner in charge of the audit. For each of the following circumstances, indicate whether the public accounting firm's independence is impaired with respect to Gillington Company. d. Schilling, the partner in charge of the entire firm, works in the Green Bay office. He owns 100 shares of Gillington stock (market value $2 per share) but provides no services on the engagement.

Independence impaired

The firm of Schilling & Company CPAs, has offices in Chicago and Green Bay, Wisconsin. Gillington Company, which has 1 million shares of outstanding stock, is audited by the Chicago office of Schilling; Welco, of the Chicago office, is the partner in charge of the audit. For each of the following circumstances, indicate whether the public accounting firm's independence is impaired with respect to Gillington Company. e. Gorman is a staff assistant on the audit. Gorman's mother owns shares of Gillington that are material to her net worth and of which Gorman has knowledge.

Independence impaired

The firm of Schilling & Company CPAs, has offices in Chicago and Green Bay, Wisconsin. Gillington Company, which has 1 million shares of outstanding stock, is audited by the Chicago office of Schilling; Welco, of the Chicago office, is the partner in charge of the audit. For each of the following circumstances, indicate whether the public accounting firm's independence is impaired with respect to Gillington Company. b. Gizmo, a partner in the Green Bay office, owns 600 shares of the stock of Gillington. He has no responsibilities with respect to the Gillington audit.

Independence not impaired

Which of the following is most likely to be a violation of the AICPA rules of conduct by Bill Jones, a sole practitioner with no other employees? - Jones performs consulting services for a percentage of the client's savings; these are the only services provided for the client. - Jones names his firm Jones and Smith, CPAs. - Jones advertises the services he provides in an Internet set of telephone "yellow pages." - Jones, without client consent, makes available working papers for purposes of a peer review of his practice.

Jones names his firm Jones and Smith, CPAs.

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: - Knowledge necessary to determine the nature, timing, and extent of further audit procedures. - Audit evidence to use in reducing detection risk. - A basis for modifying tests of controls. - An evaluation of the consistency of application of management policies.

Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered: - Low - High - Identical - Indeterminate

Low

An entity's ongoing monitoring activities often include: - Periodic audits by internal auditors. - The audit of the annual financial statements. - Approval of cash disbursements. - Management review of weekly performance reports.

Management review of weekly performance reports.

Which of the following elements underlies the application of auditing standards, particularly those related to fieldwork and reporting? - Adequate disclosure. - Quality control. - Materiality and audit risk. - Client acceptance.

Materiality and audit risk.

The audit committee of a company must be made up of: - Representatives from the client's management, investors, suppliers, and customers. - The audit partner, the chief financial officer, the legal counsel, and at least one outsider. - Representatives of the major equity interests, such as preferred and common stockholders. - Members of the board of directors who are not officers or employees.

Members of the board of directors who are not officers or employees.

Which of the following is least likely to be a test of controls? - Inquiries of client personnel. - Inspection of documents. - Observation of confirmations. - Reperformance of controls.

Observation of confirmations.

Tests of controls ordinarily are designed to provide evidence of: - Balance correctness. - Control implementation. - Disclosure adequacy. - Operating effectiveness.

Operating effectiveness.

In what section of the audit working papers would a long-term lease agreement be filed? - Current working paper file. - Permanent working paper file. - Lead schedule file. - Corroborating documents file.

Permanent working paper file.

Which of the following nonattest services may be performed by the auditors of a public company? - Internal audit outsourcing. - Tax planning for all company officers. - Bookkeeping services. - Preparation of the company's tax return.

Preparation of the company's tax return.

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? - Segregation of duties over cash disbursements. - Requiring approval of purchase transactions. - Preparing bank reconciliations. - Maintaining backup copies of key transactions.

Preparing bank reconciliations.

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts? - Trend analysis. - A detailed test of balance analysis. - Ratio Analysis - Risk analysis

Ratio Analysis

As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether: - Each recorded sale represents a bonafide transaction. - All sales have been recorded in the sales journal. - All debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries. - Recorded sales have been properly posted to customer accounts.

Recorded sales have been properly posted to customer accounts.

Which portion of an audit is least likely to be completed before the balance sheet date? - Tests of controls. - Issuance of an engagement letter. - Substantive procedures. - Assessment of control risk.

Substantive procedures.

An auditor may compensate for a weakness in internal control by increasing the extent of: - Tests of controls - Detection Risk - Substantive tests of details - Inherent Risk

Substantive tests of details

Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions. - Incentive or pressure. - Opportunity. - Supervisory position. - Attitude

Supervisory position.

A primary purpose of the audit working papers is to: - Aid the auditors by providing a list of required procedures. - Provide a point of reference for future audit engagements. - Support the underlying concepts included in the preparation of the basic financial statements. - Support the auditors' opinion.

Support the auditors' opinion.

The preliminary assessments of control risk are often referred to as: - The assessed level of control risk. - The planned assessed level of control risk. - Control risk. - Internal control objectives risk.

The planned assessed level of control risk.

Which of the following is implied when a CPA signs the preparer's declaration on a federal income tax return? - The return is not misleading based on all information of which the CPA has knowledge. - The return is prepared in accordance with generally accepted accounting principles. - The CPA has audited the return. - The CPA maintained an impartial mental attitude while preparing the return.

The return is not misleading based on all information of which the CPA has knowledge.

Which of the following statements best describes why auditors investigate related party transactions? - Related party transactions generally are illegal acts. - The substance of related party transactions may differ from their form. - All related party transactions must be eliminated as a step in preparing consolidated financial statements. - Related party transactions are a form of management fraud.

The substance of related party transactions may differ from their form.

c. As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? - To increase the efficiency of the audit by eliminating the need for other audit procedures. - To remind the client's management of its primary responsibility for the financial statements. - To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. - To provide evidence in those areas dependent upon management's future intentions.

To increase the efficiency of the audit by eliminating the need for other audit procedures.

In providing nonattest services to an attest client, a CPA is allowed to perform which of the following functions? - Training client employees. - Maintaining custody of the client's securities. - Supervising client employees. - Acting as the third approver of large client expenditures.

Training client employees

Which of the following symbols indicate that a file has been consulted? - square to trapezoid - survey rectangle to triangle - Diamond - Trapazoid to triangle

Trapazoid to triangle

Analytical procedures are most likely to detect: - Weaknesses of a material nature in internal control. - Unusual transactions. - Noncompliance with prescribed control activities. - Improper separation of accounting and other financial duties.

Unusual transactions.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? - Supervise members of the audit team less closely and rely more upon judgment. - Use less predictable audit procedures. - Use only certified public accountants on the engagement. - Place increased emphasis on the audit of objective transactions rather than subjective transactions.

Use less predictable audit procedures.