Swanger Acct 454 Exam 1
Three stages involved in a financial statement audit include: (1) Plan the audit, (2) Obtain an understanding of the client and its environment and (3) Assess the risks of misstatement and design further audit procedures. Ordinarily the sequence in which these steps occur is:
(1), (2), (3)
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.
Which of the following business characteristics is not indicative of high inherent risk?
A large amount of assets
Which of the following should not normally be included in the engagement letter for an audit?
A listing of the client's branch offices selected for testing.
PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality?
A material amount would significantly alter the "total mix" of information made available to an investor.
Which of the following is not a covered member for an attest engagement under the Independence Rule of the AICPA Code of Professional Conduct?
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 CPA firm that reviews the work of another CPA firm
A peer reviewer
A CPA firm that may conduct audits of public companies
A registered public accounting firm
A basic objective of a CPA firm is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through:
A system of quality control.
A successor auditor is required to attempt communication with the predecessor auditor prior to:
Accepting the engagement
The financial statements are not fairly presented
Adverse opinion
Which of the following is not prohibited by the AICPA Code of Professional Conduct?
Advertising in newspapers.
An attest engagement in which the CPAs agree to perform procedures for a specified party and issue a report that is restricted to use by that party.
Agreed-upon procedures engagement
A CPA should maintain objectivity and be free of conflicts of interest when performing:
All professional services
The national professional organization of CPAs engaged in promoting high professional standards to ensure that CPAs serve the public interest.
American Institute of Certified Public Accountants
Which of the following is the best example of fraudulent financial reporting?
An employee overstates accounts receivable by overstating sales at year-end.
Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in:
An engagement letter
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 decrease 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:
An understatement of year-end inventory
An error in financial statements
An unintentional misstatement
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?
Analytical procedures
representation or declaration made by the responsible party, typically management of the entity.
Assertion
In general, internal auditors' independence will be greatest when they report directly to the:
Audit committee of the board of directors.
In the United States, the hiring of a company's external auditors of a public company is most likely the responsibility of the:
Audit committee.
Audit firms that are subject to inspections by the PCAOB staff include:
Audit firms that are registered with the PCAOB.
An examination designed to provide an opinion that is the CPA's highest level of assurance that the financial statement follow generally accepted accounting principles, or another acceptable basis of accounting.
Audit of Financial Statements
Which of the following statements is correct?
Audit programs prepared by the auditor solely for the engagement need not be provided to the client.
The AICPA over time has played an important role in standards setting. Which of the following standards are currently established by the AICPA?
Auditing standards applicable to audits of nonpublic companies.
Which of the following has primary responsibility for the fairness of the representations made in financial statements?
Client's management.
Which of the following is an example of fraudulent financial reporting?
Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold.
Which of the following is NOT a threat to a CPA's independence?
Competition in the industry
Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries?
Completeness.
What type of audit is most likely to be involved by bank examiners employed by the Federal Deposit Insurance Corporation?
Compliance.
Which of the following is NOT a source of safeguards to protect the independence of a CPA?
Confidential hotlines to report non-compliance
Of the following, which is the least reliable type of audit evidence?
Copies of sales invoices inspected by auditors.
The auditors will typically not initiate discussion with the audit committee regarding the:
Details of the procedures which the auditors intend to apply
The primary objective of tests of details of transactions performed as substantive procedures is to:
Detect material misstatements in the financial statements.
During financial statement audits, auditors seek to manage which type of risk?
Detection risk
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
Detection risk.
The auditors are unable to determine the overall fairness of the financial statements
Disclaimer
What type of evidence is the inspection of a vendor's invoice by the auditors?
Documentary
Which of the following is not a financial statement assertion made by management?
Effectiveness of internal control.
Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002 to regulate public accounting firms:
Ethical scandals of the AICPA.
Auditors must assess fraud risk on every audit and respond to the risks that are identified. Which of the following is not a procedure required to further address the fraud risk of management override of internal control?
Examining physical controls over assets
Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement?
Facts that might bear on the integrity of management.
Communications between a CPA and his/her client are privileged.
False
If the auditors discover illegal acts by a client, they must immediately report the act to law enforcement.
False
Immaterial financial interests of a CPA's nondependent children impair the CPA's independence.
False
The American Institute of Certified Public Accountants has the primary authority to establish accounting standards.
False
The auditors' report on a corporation's financial statements usually is addressed to the president of the company.
False
Vouching is a valid test for completeness
False
When a CPA firm enrolls in the AICPA Peer Review Program, it agrees to comply with the AICPA's Quality Control Standards and to have a peer review of its accounting and auditing practice every seven years.
False
When writing an internal memo, it is typical to double space and indent at the beginning of each paragraph.
False
A set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements.
Financial Reporting framework
An audit of the financial statements of a company is referred to as a(n):
Financial audit
A form filed with the SEC when a company changes auditors is a:
Form 8-K.
Misappropriation of assets
Fraud
Auditors ascertain the degree of correspondence between the financial statement assertions and an established criteria. For financial statement audits, what is the criteria that is typically used?
Generally accepted accounting principles
Competence as a certified public accountant includes all of the following except:
Guaranteeing the accuracy of the work performed
Which of the following is not a service included in the attestation subject matter standard?
Historical financial statement examination
Which of the following is NOT included in the Code of Ethics of the IIA?
Independence
The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as
Inherent Risk
Services provided to public company clients
Integrated audits
Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?
Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices
Which of the following best describes the reason that auditors are concerned with the detection of related party transactions?
Material related party transactions must be disclosed in the notes to the financial statements.
Which of the following element underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
Materiality and audit risk
The permanent file section of the working papers that is retained for each audit client most likely contains:
Narrative descriptions of the transaction cycles and controls
Authoritative GAAP Sources include: FASB Technological Overview Statements and FASB Codification
No and Yes
In what section of the audit working papers would a long-term lease agreement be filed?
Permanent working paper file.
Which of the following nonattest services may be performed by the auditors of a public company?
Preparation of the company's tax return
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:
Principles Underlying an Audit Conducted in Accordance with GAAS.
The auditors are planning an audit engagement for a new client. The business of the client is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors when they are trying to obtain a general understanding of audit problems that could be encountered?
Prior-year working papers of the predecessor auditors
The most important benefit of having an annual audit by a public accounting firm is to:
Provide assurance to investors and other outsiders that the financial statements are reliable.
The 5-member board established in 2002 to oversee the audit of public (issuer) companies that are subject to the securities laws. The board has authority to establish or adopt (or both) rules for auditing, quality control, ethics, independence and other standards relating to the preparation of audit reports.
Public Company Accounting Oversight Board
Which of these organizations had the responsibility to perform inspections of auditors of public companies?
Public Company Accounting Oversight Board.
A material departure from GAAP exists, but not so material as to pervasively misstate the financial statements.
Qualified opinion
Concerning retention of working papers, the Sarbanes-Oxley Act:
Requires retention for at least 7 years.
Which of the following is the correct formula for the accounts receivable turnover ratio?
Revenue divided by average accounts receivable
An engagement designed to express limited assurance relating to a subject matter or an assertion.
Review engagement
A report providing reasonable assurance
Review report
Analytical procedures are required near completion of the audit and as:
Risk assessment procedures
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:
SEC
A set of reforms that toughened penalties for corporate fraud, restricted the kinds of consulting CPAs can perform for audit clients, and created the Public Company Accounting Oversight Board.
Sarbanes-Oxley Act of 2002
A government agency authorized to regulate companies seeking approval to issue securities for sale to the public.
Securities and Exchange Commission
Which of the following is least likely to be a threat to the independence of an auditor?
Serving in an honorary capacity on the board of directors of a local non-profit organization.
Tests for unrecorded assets typically involve tracing from
Source documents to recorded journal entries
This is the report most clients want to receive
Standard unqualified (unmodified)
A series of statements issued by the Auditing Standards Board of the AICPA. Generally accepted auditing standards are developed and issued in the form of these statements.
Statements on Auditing Standards
Which portion of an audit is least likely to be completed before the balance sheet date?
Substantive procedures.
Bill Adams, CPA, accepted the audit engagement of Kelly Company. During the audit, Adams became aware of his lack of competence required for the engagement. What should Adams do?
Suggest that Kelly Company engage another CPA to perform the audit.
Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions.
Supervisory position
A primary purpose of the audit working papers is to:
Support the auditor's opinion.
Which of the following is not explicitly included in a standard report for a nonpublic company?
That internal control of the client was satisfactory
Which of the following is not explicitly included in a standard report for a nonpublic company?
That internal control of the client was satisfactory.
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 may preclude a CPA from responding to an inquiry made by:
The CPA-shareholder of the client corporation.
Which of the following organizations issue international ethics standards for auditors?
The IFAC.
Which of the following organizations can revoke the right of an individual to practice as a CPA?
The applicable state board of accountancy
Which of the following statements is true with respect to the PCAOB independence standards when an auditor both prepares and audits financial statements for a client?
The auditor is not independent.
Which of the following statements is generally correct about audit evidence?
The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.
The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is:
The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements.
In the process of obtaining a new audit client, which step typically occurs first?
The client prepares a request for proposal
Which of the following is not included in an integrated audit report on the financial statements of a public company?
The report states that the audit was performed in accordance with AICPA standards.
Which of the following statements best describes why auditors investigate related party transactions?
The substance of related party transactions may differ from their form.
What best describes the purpose of the auditors' consideration of internal control in a financial statement audit for a nonpublic company?
To determine the nature, timing, and extent of audit testing.
In providing nonattest services to an attest client, a CPA is allowed to perform which of the following functions?
Training client employees.
A vendor's invoice is an example of documentary evidence created by a third party and held by the client.
True
An auditor must document the reasoning behind their materiality decision.
True
Auditors should consider a company's internal controls before auditing the business processes.
True
The AICPA Statements on Attestation Standards do not supersede the AICPA Statements on Auditing Standards.
True
Analytical procedures are most likely to detect:
Unusual transactions
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 mount that will appear in the financial statement, is referred to as a:
Working trial balance.
An audit provides reasonable assurance of detecting material misstatements due to: Fraud and Error
Yes and Yes
Financial statement assertions are established for classes of transactions and which of the following: Account Balances and Disclosures
Yes and Yes
Which measure(s) of materiality consider(s) quantitative considerations?Planning and Evaluation
Yes and Yes
Which of the following is a part of professional skepticism? Questioning mind and Critical assessment of audit evidence
Yes and Yes
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?
Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor.
The SEC does not pass on the merits of the securities that are registered with the agency.
true