ACCT402 Exam 1

The joint project between the AICPA and the IAASB leading to principle-based converged U.S. auditing standards is called: A. The Clarity Project B. Interim Standards C. Auditing Standards (AS) D. The Clarified Standards

A. The Clarity Project

Violet, CPA, audits Big Bank, a local financial institution. Which of the following would most likely impair Violet's independence with regard to Big Bank? A. A home loan with the value of the loan exceeding the value of the house B. A car loan collateralized by the car C. A personal loan collateralized by cash deposits at Big Bank D. A Visa credit card issued by Big Bank with a balance of $2,500

A. A home loan with the value of the loan exceeding the value of the house

The client tells the auditor that their investors find the statement of cash flows confusing and therefore the client declines to include this statement in the set of the annual financials. Given this situation: A. A qualified opinion only with an additional paragraph before the opinion paragraph is appropriate B. An adverse opinion with an additional paragraph after the opinion paragraph is appropriate C. A qualified opinion only with an explanatory paragraph after the opinion paragraph is appropriate D. A disclaimer of opinion is appropriate because the auditor is unable to verify whether the cash flow statement is in accordance with the generally accepted accounting principles.

A. A qualified opinion only with an additional paragraph before the opinion paragraph is appropriate

Which of the following is a correct statement? A. Audit committee consists of independent members of board of directors B. SOX requires lead and concurring partner rotation every seven years and the SEC requires a time out of two years C. The internal audit outsourcing is allowed when auditing public clients as long as the management takes responsibility for the function and direction of the internal audit department D. Independence is required for all professional services

A. Audit committee consists of independent members of board of directors

Which of the following audits is performed by a GAO auditor? A. Audit of the SEC's internal controls over operations and other functions B. Audit of Apple Inc.'s corporate tax returns C. Integrated audit of Google's financial statements and internal controls. D. Audit for compliance with debt agreement for a privately held company

A. Audit of the SEC's internal controls over operations and other functions

Independence and Scope and Nature of Services of the AICPA's Ethical Principles are applicable in: A. Audits of financial statements and internal controls services B. Management advisory services. C. Internal audit outsourcing services. D. All of the above services.

A. Audits of financial statements and internal controls services

Failure to perform under the contract is called A. Breach of contract B. Lack of privity C. Privity D. Gross negligence

A. Breach of contract

Which of the following is not one of the clarified GAAS? A. General standards B. Responsibilities C. Reporting D. Performance

A. General standards

Rule 201, General Standards, requires a member to comply with standards and interpretations. Which of the following is not a standard covered by Rule 201? A. Independence B. Due professional care C. Planning and supervision D. Sufficient relevant data

A. Independence

Peter, CPA, is a staff auditor participating in the audit engagement of Capital Inc. Which of the following circumstances impairs Peter's independence? A. Peter's spouse is chief accountant of Capital. B. Peter's friend, and employee of another local accounting firm, prepares the tax return of Capital's CEO. C. Peter's father owns immaterial stocks in Capital. D. During the period of the audit engagement, Capital and Peter discussed business over lunch at The Upscale Country Club.

A. Peter's spouse is chief accountant of Capital.

Which of the following is not one of the AICPA Principles of Professional Conduct? A. Reasonable assurance B. Public interest C. Objectivity D. Due Care

A. Reasonable assurance

Which of the following is false? A. Review reports issued by the independent CPA provide reasonable assurance as to the fair presentation of financial statements. B. Reporting on compliance with contractual debt agreements by an independent CPA is an example of attestation service. C. Examination of financial statements includes evaluating management's assumptions in projected financial statements. D. Review services provide limited assurance on financial statements and are less in scope than audits.

A. Review reports issued by the independent CPA provide reasonable assurance as to the fair presentation of financial statements.

Generally, the date of the auditor's report signifies: A. The last day of fieldwork B. The date of filing with the SEC through the Edger Filing System C. The date of the balance sheet D. The date of auditor receiving his full compensation for the audit, because otherwise auditor is not independent

A. The last day of fieldwork

Which of the following is false about auditor's report when there is scope limitation due to circumstances? A. The scope paragraph is deleted and the report has an additional paragraph after the opinion B. The opinion paragraph contains an "except for" statement when the effect of the potential misstatement is material C. An additional paragraph comes before the disclaimer of opinion and the scope paragraph is deleted. D. The clean opinion could be appropriate

A. The scope paragraph is deleted and the report has an additional paragraph after the opinion

Perry Pinkney, CPA, is one of the general partners in a partnership on Darby's audit engagement. Pinkney invested 70% of his assets in the common stock of Pinkney's audit client (Darby Corporation). According to the AICPA Code of Professional Conduct, Pinkney is considered to have A. An indirect financial interest in Darby B. A direct financial interest in Darby C. No financial interest in Darby D. A partial financial interest in Darby

B. A direct financial interest in Darby

The client fails to disclose the dividend restrictions and the effect of this disclosure is material. In such situation, the appropriate auditor's report is: A. A qualified scope and opinion only B. A qualified opinion only C. An adverse opinion D. We are unable to determine given the information

B. A qualified opinion only

According to Rule 203, Accounting Principles, requires the auditor to adhere to GAAP pronouncements except when A. Complying would violate client confidentiality B. Adherence to a pronouncement would be misleading C. Pending legislation may change the reporting requirements of the client D. It has been established that financial statement users prefer an alternative presentation of information

B. Adherence to a pronouncement would be misleading

Prior to the passage of the Sarbanes-Oxley Act, which of the following was responsible for establishing auditing standards for public companies? A. Securities and Exchange Commission B. American Institute of Certified Public Accountants C. Financial Accounting Standards Board D. National Association of States Board of Accountancy

B. American Institute of Certified Public Accountants

An audit failure occurs when A. A client goes bankrupt or has serious financial difficulty B. Auditors fail to conduct the audit in accordance with generally accepted auditing standards, which results in the failure to identify material misstatements in the financial statements C. Auditors cannot collect audit fees owed to them by the client D. Auditors are sued by a third party

B. Auditors fail to conduct the audit in accordance with generally accepted auditing standards, which results in the failure to identify material misstatements in the financial statements

The board of directors consists of: A. Independent auditors and managers. B. Directors who are independent and managers. C. Members of management. D. Employees who are independent.

B. Directors who are independent and managers.

When there is a failure to follow GAAP. Which of the following is correct? A. An unqualified opinion must be issued and an explanatory paragraph following the opinion paragraph is added B. Either a qualified opinion or an adverse opinion may be issue and the report will have four paragraphs in either case C. Either a qualified scope and opinion or disclaimer may be issued and the report will have three paragraphs D. Either an "except for" report or an unqualified opinion will be issued, and the report will have one paragraph without a title because this is a lack of independence situation.

B. Either a qualified opinion or an adverse opinion may be issue and the report will have four paragraphs in either case

Which of the following are most likely to be provided by internal auditors? A. The audit of financial statements of public companies to be filed with the SEC. B. Evaluate compliance with quality control procedures in the manufacturing process. C. The audit of federal income tax returns filed with Internal Revenue Service. D. All of the above are potentially correct.

B. Evaluate compliance with quality control procedures in the manufacturing process.

Which of the following best describes the primary role and responsibility of independent external auditor? A. Produce a company's annual financial statements and notes B. Express an opinion on the fairness of a company's annual financial statements and footnotes C. Provide business consulting advice to audit clients D. Obtain an understanding of the client's internal control structure and give management a report about control problems and deficiencies

B. Express an opinion on the fairness of a company's annual financial statements and footnotes

The opinion paragraph includes the words "generally accepted auditing standards" and the scope paragraph includes the words "accounting principles generally accepted in the United States of America." Is this correct? A. Correct B. Incorrect C. Only correct if (and only if) the disclaimer of opinion is issued. D. Depending on the type of the auditor's report, these statements may be correct.

B. Incorrect

Which of the following best describes assurance services? A. Independent professional services that report on the client's financial statements B. Independent professional services that improve the quality of information for decision makers C. Independent professional services that report on specific written management assertions D. Independent professional services that improve the operations of the client

B. Independent professional services that improve the quality of information for decision makers

What is the term used to identify the risk that the client's financial statements may be materially false and misleading? A. Audit failure B. Information risk C. Client risk D. Risk assessment

B. Information risk

The combined standard independent auditor's report on the financial statements and internal controls over financial reporting consists of the following correct sequenced paragraphs: A. Introductory, scope, opinion. B. Introductory, scope, definition, inherent limitation and opinion. C. Introductory, scope, inherent limitation, definition, opinion. D. Introductory, definition, scope, opinion

B. Introductory, scope, definition, inherent limitation and opinion.

" Plan and supervise staff" is one of the: A. Responsibilities standards of Clarified GAAS B. Performance standards of Clarified GAAS C. Reporting standards of GAAS D. General standards of the AICPA Code of Conduct

B. Performance standards of Clarified GAAS

According to AICPA Code of Conduct, which of the following situations would least likely be considered a violation of AICPA Code of Professional Conduct? A. Partner is the office of the audit engagement partner holds immaterial ownership interest in the audit client. B. Receiving jail time of 90 days because of speeding in construction and school zones and endangering workers and school children while driving late to work. C. An aspiring CPA disclosing the CPA exam questions to her friends after taking the exam. D. Accepting a supervisor's conclusions even when the CPA is aware of evidence to the contrary.

B. Receiving jail time of 90 days because of speeding in construction and school zones and endangering workers and school children while driving late to work.

An audit report in which the auditor will identify the portion of work done by the other auditor in the introductory paragraph and still issue an unqualified opinion. The absolute dollar amounts of assets and revenues or percentages are stated in the introductory paragraph. Introductory paragraph, scope paragraph, and opinion paragraph are all modified. This report is called: A. Standard unqualified with explanatory paragraph report B. Shared report or modified wording report C. Disclaimer of opinion report D. Shared of competence report

B. Shared report or modified wording report

As a result of the Sarbanes-Oxley Act, the PCAOB has been created. Which of the following is false? A. The PCAOB members are appointed by the SEC. B. The PCAOB is a government agency that permanently exempted non accelerated filers from compliance with SOX Section 404. C. The PCAOB establishes the professional standards for auditors of publicly traded companies. D. All accounting firms that audit or participate in the preparation of an audit report for a public company must be inspected either annually or once every three years.

B. The PCAOB is a government agency that permanently exempted non accelerated filers from compliance with SOX Section 404.

Which of the following statements is correct? A. The 10-Ks contains audited quarterly financial statements B. The SEC requires annual reports for all public companies C. The PCAOB conducts peer reviews for auditor with public audit clients D. The SEC requires CPA firms to register with the PCAOB

B. The SEC requires annual reports for all public companies

Which of the following is not an example of a compliance audit? A. The audit of corporate tax returns by the IRS agents B. The audit of the cost accounting system to recommend to management areas to improve on the system's efficiency and effectiveness C. The audit of the SEC's financial statements to examine that funds were spent in accordance with the law that authorized the budget. D. The audit of the internal controls over financial reporting for a publicly traded company

B. The audit of the cost accounting system to recommend to management areas to improve on the system's efficiency and effectiveness

Which of the following statements is correct? A. If LBC CPA firm realizes that it is not independent with respect to the audit client, he/she will issue an adverse opinion because of highly material GAAP violation. B. The client will not allow Kassel CPAs to read the minutes of the board of director's meetings. Auditor is unable to conduct alternative procedures. Such a limitation will result in the auditor issuing a disclaimer. C. When circumstances preclude an auditor from performing certain procedures. Yet the auditor can be satisfied using other alternative procedures, a qualified scope and opinion will be rendered. D. The scope paragraph of the clean opinion report refers to the responsibilities of the auditor and the management.

B. The client will not allow Kassel CPAs to read the minutes of the board of director's meetings. Auditor is unable to conduct alternative procedures. Such a limitation will result in the auditor issuing a disclaimer.

Which of the following requires an explanatory paragraph in the auditor's clean opinion report due to GAAP inconsistency? A. The correction of an error in the prior year's financial statements resulting from a mathematical mistake in FIFO inventory computation. B. An immaterial related party transactions that are not disclosed. C. A material change from the cost method to the equity method of accounting for investments in common stock. D. A change in generally accepted accounting principles because client was purchasing fixed assets in the past and now it is leasing its fixed assets.

C. A material change from the cost method to the equity method of accounting for investments in common stock.

According to the ethical standards of the profession, which of the following acts is generally prohibited? A. Promoting management advisory services in a professional publication B. Writing a financial management newsletter promoted and sold by a publishing company C. Accepting a commission for recommending a product to an audit client D. Accepting engagements obtained through the efforts of third parties

C. Accepting a commission for recommending a product to an audit client

Which of the following is an example of a non assurance service: A. The integrated audit of the internal controls over financial reporting with the audit of the financial statements B. Review of historical financial statements C. Aggressive tax planning D. Counting ballots for the Oscar nominations

C. Aggressive tax planning

Rule 301, Confidential Client Information, has been interpreted by the AICPA to explicitly allow a CPA to divulge confidential client information to A. The SEC B. The U.S. Department of Justice C. Court under court subpoena D. The Federal Trade Commission

C. Court under court subpoena

In performing an attestation engagement, a CPA typically A. Supplies litigation support services B. Assesses control risk at a low level C. Expresses an opinion on an assertion made by a third party D. Provides management consulting advice

C. Expresses an opinion on an assertion made by a third party

Parties to the contract "the engagement letter" are called to be in A. Breach of contract B. Ordinary negligence C. Privity D. Constructive fraud

C. Privity

The scope paragraph provides a reference to: A. Independent and registered public accounting firm B. Generally Accepted Accounting Principles of the United States C. The AICPA's Generally Accepted Auditing Standards in the United States D. The COSO Framework on internal controls

C. The AICPA's Generally Accepted Auditing Standards in the United States

In which of the following instances would an auditor violate the AICPA Code of Conduct? A. A charitable organization audit client where the audit partner serves as an honorary board member B. An audit client in bankruptcy and has not paid fees for more than one year from the date of auditor report C. The CPA's spouse has an immaterial financial interest in the audit client D. A CPA firm advertises its new offering of cloud computing advisory services in the Fortune Magazine.

C. The CPA's spouse has an immaterial financial interest in the audit client

Which of the following statements is false? A. The interim standards and the newly issued PCAOB standards are called PCAOB auditing standards B. The general corporation form of business is generally prohibited for CPA firms C. The IAASB has the authority to enforce the International Standards on Auditing throughout the world D. Non accelerated filers are public companies with less than $75 million in market capitalization.

C. The IAASB has the authority to enforce the International Standards on Auditing throughout the world

An audit client hires a member of the audit engagement team to be its new controller. Sarbanes-Oxley rules require that: A. The new controller sever all relations with the CPA firm, including any retirement funds B. The new controller must not take part in any discussions regarding the retention of the audit form C. The client must find a new audit firm D. The client must disclose the controller's relationship in the notes to the financial statements

C. The client must find a new audit firm

Which of the following statements is false about the new audit reporting model? A. Auditor tenure is required to be included in the audit report B. The opinion on the financial statements and/or internal controls comes first in the report C. The title of the report does not include the word "registered" anymore D. The report on the financial statements can be presented either separately or combined with the report on the internal controls

C. The title of the report does not include the word "registered" anymore

The auditor report that contains a disclaimer of opinion due to scope limitation imposed by circumstances has: A. One paragraph. B. Number of paragraphs varies depend on materiality. C. Three paragraphs D. Four paragraphs

C. Three paragraphs

The auditor's report that contains an explanatory paragraph due to going concern that is appropriately disclosed in the footnotes to the financial statements will include an opinion statement stating: A. "In our opinion, and the report of other auditors, financial statements mentioned above are fairly stated in all material respects in accordance with GAAP in the United States". B. "In our opinion, financial statements mentioned above are not fairly stated in all material respects in accordance with GAAP in the United States". C. "In our opinion, except for the scope limitation discussed above, financial statements mentioned above are fairly stated in all material respects in accordance with GAAP in the United States". D. "In our opinion, financial statements mentioned above are fairly stated in all material respects in accordance with GAAP in the United States".

D. "In our opinion, financial statements mentioned above are fairly stated in all material respects in accordance with GAAP in the United States".

Which of the following would not be considered a violation of the AICPA Code of Conduct or the SEC/SOX rules? A. A CPA records journal entries representing transactions that have not taken place in her employer's accounting records. B. A CPA firm charges contingent fees for implementing accounting information services to a public audit client C. The CPA assists his tax client to take a deduction without support to eliminate tax liability (i.e. aggressive tax avoidance service). D. A CPA performs an audit of bank with which he has a preexisting fully secured mortgage.

D. A CPA performs an audit of bank with which he has a preexisting fully secured mortgage.

Which of the following is an output of an operational audit? A. Economic and efficient use of resources B. Effective achievement of business objectives C. Attesting to the fairness of the financial statements D. A and B but not C.

D. A and B but not C.

A change in generally accepted accounting standards of operating leases method to capitalized leases method of accounting that is accounted for appropriately by the client and is adequately disclosed in the footnotes is most likely result in: A. A Qualified Opinion only or a qualified scope and opinion depending on materiality. B. A disclaimer would be appropriate. C. Either a qualified opinion only or an adverse opinion depending on materiality. D. An unqualified opinion with explanatory paragraph or unqualified opinion depending on materiality.

D. An unqualified opinion with explanatory paragraph or unqualified opinion depending on materiality.

The risk that auditor issues an unqualified standard opinion on the financial statements based on an audit that is conducted in accordance with GAAS, when these financial statements are materially misstated is referred to as A. Business risk B. Information risk C. Assurance risk D. Audit risk

D. Audit risk

In an integrated audit, the objective is to issue a report on the internal controls over financial reporting indicating compliance with: A. Generally accepted accounting principles B. Generally accepted auditing standards C. PCAOB standards D. COSO framework

D. COSO framework

Julie and Lisa are second cousins. Julie is a CPA auditing the company where Lisa works. Julie's independence is impaired if A. Lisa owns 25% of the company and this investment is not material to Lisa's own income and net worth B. Lisa is the Controller without accounting responsibilities C. If Lisa is the marketing manager D. Independence is not impaired in any of the situations listed above

D. Independence is not impaired in any of the situations listed above

When the auditor believes that the financial statements may contain a departure from GAAP due to scope limitation imposed by client, the auditor will generally issue a:: Qualified scope Disclaimer of & Opinion only opinion A. Yes No B. Yes Yes C. No No D. No Yes

D. No Yes

Which of the following services are prohibited to provide to nonpublic audit client? A. Tax return preparation services B. Review of financial statement services C. Internal audit outsourcing services D. None of the above services is prohibited

D. None of the above services is prohibited

Evaluating the efficiency of a company's logistic system is an example of? A. Compliance audit that may be performed by the internal auditors B. Financial statements audit performed by the GAO auditors C. Examination service that do not require independence D. Operational audit that may be performed by independent CPAs.

D. Operational audit that may be performed by independent CPAs.

Which of the following forms of organization would NOT be allowed under Rule 505 Form of Organization and Name of the Professional Code of Conduct? A. Limited liability partnership; all partners are CPAs B. Limited liability partnership; 70% of partners are CPAs C. Limited liability company; all members are CPAs D. Partnership; 40% of partners are CPAs

D. Partnership; 40% of partners are CPAs

Which of the following services is prohibited under the Sarbanes Oxley Act of 2002? A. Providing internal audit services to a public company that is not an audit client B. Providing audit of internal controls over financial reporting to a public company that is an audit client C. Providing tax return preparation services that are preapproved by the audit committee of a public audit client D. Providing design and implementation of accounting information system service to a public company client with the pre-approval of the audit committee.

D. Providing design and implementation of accounting information system service to a public company client with the pre-approval of the audit committee.

Red and Green, CPAs are the external auditors for Blue Corporation, a publicly-held company. Blue Corporation has outsourced its internal audit function to Red and Green. Which of the following statements is true? A. Doing internal audit work does not impair the independence of Red and Green B. The independence of Red and Green is impaired only if employees of Red and Green act in a management capacity or make management decisions C. The independence of Red and Green is impaired only if a member of Red and Green's engagement team is hired to manage an accounting function in Blue Corporation D. Public accounting firms cannot be both the internal and external audit for publicly-held companies and maintain independence

D. Public accounting firms cannot be both the internal and external audit for publicly-held companies and maintain independence

According to the ethical standards of the profession, which of the following acts is generally prohibited? A. Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client B. Revealing confidential client information during a peer review of a professional practice by a team from the AICPA. C. Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent 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

Rule 301 Confidential Client information applies to which of the following services: A. Audit B. Tax C. Management advisory services D. Rule 301 applies to all of the above services

D. Rule 301 applies to all of the above services

A client has omitted a significant disclosure from the financial statements. The auditor has asked the client to include the information, but the client refuses and claims the information is confidential. The position of the CPA should be that the information A. Cannot be considered confidential if it is necessary to the completeness of the financial statements B. Cannot be considered confidential unless it can be covered by the attorney-client privilege C. Is confidential and will only be disclosed under subpoena or for a regulatory investigation D. Should be discussed with the audit committee to determine if the information should be disclosed

D. Should be discussed with the audit committee to determine if the information should be disclosed

Which of the following is not a violation of the AICPA Code of Conduct? A. CPA firm is litigating an attest client for unpaid invoices. B. CPA represents that fog computing consulting services will be performed when CPA does not have expertise in such computing systems. C. As a result of insider trading case, a CPA partner is imprisoned for 18 months. D. The auditor of a private client installed Quickbooks accounting information system.

D. The auditor of a private client installed Quickbooks accounting information system.

Four weeks after the year-end date, a major customer of Prince Construction Co. declared bankruptcy. Because the customer had confirmed the balance due to Prince at the balance sheet date, management refuses to charge off the account or otherwise disclose the information. The receivable represents approximately 10% of accounts receivable and 20% of net earnings before taxes.

This is a subsequent event type 1. This needs an adjustment and a disclosure. So, the financial statements are not fairly stated. Materiality? -10% of AR and 20% of net earnings before taxes are very large percentages. We can be conservative and decide on highly material, so adverse opinion will be issued. Or if we decide on material then a qualified opinion only will be issued.

The auditor report that contains a disclaimer of opinion due to client imposed scope limitation has: a. Four paragraphs. b. Three paragraphs. c. Number of paragraphs varies depend on materiality. d. This type of opinion is prohibited and the auditor must withdraw from the engagement.

b. Three paragraphs.

__________ represents the incidences in which auditor issues the incorrect audit opinion as a result of failure to follow the generally accepted auditing standards: a. Audit failure b. Information risk c. Audit risk d. Business failure

a. Audit failure

The auditor's standard report should include reference to the United States as the country of origin of: I. The accounting principles used to prepare the financial statements II. The auditing standards the auditor followed in performing the audit III. Integrated framework of Treadway Commission - COSO a. I and II only b. II and III only c. I, II and III d. II and III but not I

a. I and II only

Hansen Corporation's stock is listed on the New York Stock Exchange and registered with the Securities and Exchange Commission. Hansen's management hires a CPA to perform an independent audit of Hansen's financial statements. The primary objective of this audit is to provide assurance to the: a. Investors of Hansen Corporation's stock. b. Audit committee of Hansen Corporation. c. Securities and Exchange Commission. d. Management of Hansen Corporation.

a. Investors of Hansen Corporation's stock.

Which of the following is an illustration of liability to client? a. Management of client sues auditor for not discovering a theft of assets by an employee. b. Bank sues auditor for not discovering that borrower's financial statements are misstated. c. Combined group of stockholders in a class action sue auditor for not discovering materially misstated financial statements. d. None of the above.

a. Management of client sues auditor for not discovering a theft of assets by an employee.

Under Sarbanes Oxley's Act, the lead and concurring partner rotation is required every five years and with a time out period of five years. This requirement applies to: a. Public company auditors b. Public and private company auditors c. Private company auditors d. Public and private company auditors but non non-for-profit organization auditors

a. Public company auditors

Included as an "direct financial interest" of the CPA would be financial interests of a a. Spouse. b. Non dependent child. c. The CPA's cousin's financial interest. d. Both a and b but not c.

a. Spouse.

Audit services are performed by independent auditors and are mainly for the purpose of public clients which are required to file with the Securities Exchange Commission ______________: a. The 10-Ks. b. The 10-Qs. c. The 8-Ks. d. Both a and b but not c.

a. The 10-Ks.

The introductory paragraph in the standard audit report identifies all of the following except: a. The audit presents a basis for the opinion. b. The financials audited. c. The dates of the statements. d. The management responsibility for the financial statements.

a. The audit presents a basis for the opinion.

You complete the audit of Munich Department Store, and in your opinion, the financial statements are fairly presented. On the last day of the audit, you discover that one of your supervisors assigned to the audit has a material investment in Munich.

auditor is not independent. So, a disclaimer of opinion is issued.

Prior to the passage of the Sarbanes-Oxley Act, which of the following was responsible for establishing auditing standards? a. Securities and Exchange Commission b. American Institute of Certified Public Accountants c. Financial Accounting Standards Board d. National Association of Accounting

b. American Institute of Certified Public Accountants

The auditor who wishes to point out that the entity has material transactions with related parties, that have not adequately been disclosed in the financial statements, would disclose this fact in: a. An explanatory footnote to the financial statements. b. An additional paragraph before the opinion paragraph in the auditor's report. c. The "Summary of significant accounting policies" section of the financial statements. d. An explanatory paragraph after the opinion paragraph in the auditor's report.

b. An additional paragraph before the opinion paragraph in the auditor's report.

Rule 101 of the AICPA's Rules of Conduct requires that a member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by the AICPA. To which of the following services does Rule 101 apply? a. Management advisory services. b. Attest services. c. Internal audit outsourcing services. d. All of the above services.

b. Attest services.

Under Sarbanes-Oxley, the members of a client's "audit committee" should be: a. Directors and managers. b. Directors who are independent. c. Members of management. d. Employees who are independent.

b. Directors who are independent.

Which of the following phrases would an auditor most likely include in the auditor's report when expressing a qualified opinion only because of inadequate disclosure? a. Subject to departure from generally accepted accounting principles, as described above. b. Except for the omission of the information discussed in the preceding paragraph. c. With the foregoing explanation of these omitted disclosures. d. Does not fairly present in all material respects.

b. Except for the omission of the information discussed in the preceding paragraph.

When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion only if: a. The effects of the adverse financial conditions likely will cause a bankruptcy filing. b. Information about the entity's ability to continue as a going concern is not disclosed. 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 a modified wording report "shared report", the principal auditor decides to make reference to the other auditor's audit, the principal auditor's report should always indicate clearly, in the introductory paragraph, the: a. Sharing of responsibility. b. Magnitude of the portion of the financial statements audited by the other auditor. c. Name of the other auditor. d. Change of responsibility.

b. Magnitude of the portion of the financial statements audited by the other auditor.

When the auditor believes that the financial statements may contain a departure from GAAP due to scope limitation imposed by circumstances, the auditor will generally issue a(an), dependent on materiality of the item: Qualified Disclaimer of Opinion only opinion a. Yes No b. No Yes c. Yes Yes d. No No

b. No Yes

When the auditor believes that the financial statements may contain (means I don't know because of the conduct of the audit-> automatically know that it's scope limitation) a departure from GAAP due to scope limitation imposed by circumstances, the auditor will generally issue a (an)...with additional paragraph...the opinion, dependent on materiality of the item: Qualified Opinion only, Disclaimer of opinion, Additional paragraph a. Yes, No, After b. No, Yes, Before c. Yes, Yes, Before d. No, No, After

b. No, Yes, Before

Government Accountability Office auditors perform an audit of the Securities and Exchange Commission (SEC) is likely to be performing: a. Financial statements of public companies registered with the SEC. b. Operational and compliance audit of the SEC. c. The audit of the SEC's federal income tax returns filed with Internal Revenue Service. d. All of the above are potentially correct.

b. Operational and compliance audit of the SEC.

Evaluating the logistic systems of a retail business is considered a (an) ...and can be performed by a (an) a. compliance audit that can be performed by the internal auditors b. Operational audit that can be performed by the CPA c. Operational audit that can be performed by the GAO d. Financial audit that can be performed by the internal auditors

b. Operational audit that can be performed by the CPA

Auditor was hired after the fiscal year and is unable to observe the fiscal count of inventory by the client. Auditor examines receiving reports and shipping documents as alternative procedures, auditor finds an overstatement in inventory account based on the alternative procedures. Auditor is satisfied with the assurance obtained as result of the alternative procedures. Auditor is most likely to issue a: a. Clean opinion because auditor is satisfied with the alternative procedures in the audit of inventory b. Qualified opinion only if inventory is materially misstated and an additional paragraph comes before the opinion c. Disclaimer of opinion may be appropriate if the potential misstatement in inventory account is highly material d. Shared responsibility report may be appropriate in this situation

b. Qualified opinion only if inventory is materially misstated and an additional paragraph comes before the opinion

Several months after an unqualified audit report was issued, the auditor discovers the financial statements were materially misstated. The client's CEO agrees that there are misstatements, but refuses to correct them. She claims that "confidentiality" prevents the CPA from informing anyone. a. The CEO is correct and the auditor must maintain confidentiality. b. The CEO is incorrect, and the auditor has an obligation to issue a revised audit report, even if the CEO will not correct the financial statements. c. The CEO is correct, but to be ethically correct the auditor should violate the confidentiality rule and disclose the error. d. The CEO is incorrect, but because the audit report has been issued it is too late.

b. The CEO is incorrect, and the auditor has an obligation to issue a revised audit report, even if the CEO will not correct the financial statements.

The auditor's opinion due to lack of independence have the following characteristics: a. The auditor must withdraw from the engagement because the auditor is in violation of Rule 101 Independence. b. The report includes a disclaimer of opinion. c. The report has not title and includes a disclaimer of opinion with introductory paragraph describing the service to be provided and the financial statements that are audited and the responsibilities of the management and the auditor. d. The report includes a disclaimer of opinion but otherwise it uses standard wording in the introductory and scope paragraphs.

b. The report includes a disclaimer of opinion.

When misstatements are so material that an adverse opinion is issued, a scope paragraph would be: a. qualified. b. unchanged. c. deleted. d. expanded to identify the additional procedures which the auditor performed.

b. unchanged.

A GAAP consistency paragraph inserted in an auditor report causes the opinion to be worded as: a. "In our opinion, and the report of other auditors, financial statements mentioned above are fairly stated in all material respects in accordance with GAAP in the United States". b. "In our opinion, financial statements mentioned above are not fairly stated in all material respects in accordance with GAAP in the United States". c. "In our opinion, financial statements mentioned above are fairly stated in all material respects in accordance with GAAP in the United States". d. Disclaimer of opinion.

c. "In our opinion, financial statements mentioned above are fairly stated in all material respects in accordance with GAAP in the United States".

The auditor who does not wish to point out that the entity has immaterial disposal of business segment, even though they have adequately been disclosed in the financial statements, would issue: a. An explanatory footnote to the financial statements. b. An explanatory paragraph before the opinion paragraph in the auditor's report. c. A standard unqualified auditor report. d. An explanatory paragraph after the opinion paragraph in the auditor's report.

c. A standard unqualified auditor report.

._____ represents the possibility that the auditor concludes after conducting an adequate audit that the financial statements were fairly stated when they were actually misstated. a. Audit failure b. Information risk c. Audit risk d. Business risk

c. Audit risk

An auditor who accepts a public audit client in the construction industry but lacks the knowledge of revenue recognition principle of percentage-of-completion method and completed contract method is in violation of: a. Rules 201 The General Standards and 202 Compliance with Standards of the AICPA Code of Professional Conduct. b. Generally Accepted Auditing Standards. c. Both a and b. d. a but not b.

c. Both a and b.

A change in generally acceptable accounting standards from operating leases method to capitalized leases method of accounting for leases that is not accounted for appropriately by the client and is not adequately disclosed in the footnotes is most likely result in: a. A Qualified Opinion only or a qualified scope and opinion depending on materiality. b. A disclaimer would be appropriate. c. Either a qualified opinion only or an adverse opinion depending on materiality. d. An unqualified opinion with explanatory paragraph or unqualified opinion depending on materiality.

c. Either a qualified opinion only or an adverse opinion depending on materiality.

. The contract in which the auditor and the client identify services and responsibilities is called a (an): a. Letter of representation. b. Confirmation letter. c. Engagement letter. d. Expert witness' testimony.

c. Engagement letter.

Which of the following audits can be regarded as generally being a compliance audit? a. A CPA firm's evaluation of a public company cost accounting system. b. GAO auditor's evaluation of the computer operations of governmental units. c. IRS agents' examinations of taxpayer returns. d. Both a and b but not c.

c. IRS agents' examinations of taxpayer returns.

Which of the following is a violation of Code of Professional Conduct Rule 501 Name and Form of Business? a. KPMB LLC. b. Delta LLP in which all CPAs own 100% of the limited liability partnership. c. Mike, Muse, and McDonald Corporate d. Tax Practices, Hendricks CPA.

c. Mike, Muse, and McDonald Corporate

The best defense in lawsuits brought by the third parties is: a. Lack of privity b. Contributory negligence c. Non-negligent performance d. No scienter

c. Non-negligent performance

Which of the following forms of organization would NOT be allowed under Name and Form of Organization of the Professional Code of Conduct? a. KPMD LLC b. Limited liability partnership; 70% of partners are CPAs c. Publicly traded company; all attest department are CPAs d. General partnership; 60% of partners are CPAs

c. Publicly traded company; all attest department are CPAs

An auditor's opinion reads as follows: "In our opinion, except for the above-mentioned inventory valuation..." This is an example of a (an) a. Disclaimer of opinion b. Emphasis of a matter c. Qualified opinion only d. Qualified scope and opinion

c. Qualified opinion only

Auditor examined a sample of sales transactions and found a material misstatement that is disclosed in the footnotes to financial statements. What is the appropriate audit report? a. Clean opinion because the material misstatement in sales is disclosed in the footnotes to the financial statements b. Disclaimer of opinion because sales are misstated c. Qualified opinion only because sales are materially misstated d. Clean opinion with explanatory paragraph because the material misstatement in sales is disclosed in the footnotes

c. Qualified opinion only because sales are materially misstated

Because an audit in accordance with GAAS is conducted using test basis and the audit planned and implemented to detect material misstatements due to error or fraud. The audit in accordance with GAAS provides: a. Audit risk. b. Audit failure. c. Reasonable assurance. d. Attest assurance.

c. Reasonable assurance.

Which of the following is not defined as an act discreditable in either the Rules or the Interpretations of the AICPA's Code of Professional Conduct? a. The CPA firm has issued the standard unqualified audit report after auditing a governmental agency, although GAAS was not followed because the government required procedures different from GAAS. b. The CPA retains the client's books and records to enforce past-due payment of the CPA's bill, even after the client has demanded they be returned. c. The CPA firm's partner-in-charge was arrested recently on his way home from the firm's holiday party. He was a passenger in a car driven by his wife and she was charged with "driving while intoxicated." He was also arrested and charged with "lewd and indecent gestures towards an officer of the law" and rowdy behavior. d. The CPA firm discriminates in its hiring practices based on the age of the applicant.

c. The CPA firm's partner-in-charge was arrested recently on his way home from the firm's holiday party. He was a passenger in a car driven by his wife and she was charged with "driving while intoxicated." He was also arrested and charged with "lewd and indecent gestures towards an officer of the law" and rowdy behavior.

Which one of the following statements is correct? a. The Certified Public Accountant exam is written and graded by the federal government but the Securities Exchange Commission provides the licensure to the CPA firms and the AICPA provides licensure to individual CPAs. b. The Certified Public Accountant exam is written and graded by the AICPA but the state provides the licensure to individual CPAs and the PCAOB provides the licensure to the CPA firms c. The Certified Public Accountant exam is written and graded by the AICPA but the State provides the licensure to individual CPAs and the CPA firms d. The Certified Public Accountant exam is written and graded by the AICPA but the PCAOB provides the licensure to individual CPAs and the CPA firms.

c. The Certified Public Accountant exam is written and graded by the AICPA but the State provides the licensure to individual CPAs and the CPA firms

Upon retirement, Alex CPA sells his tax practice to Derrick CPA. The sale includes Alex CPA's client list and tax returns preparation and planning supporting documents. Is this a violation? a. It is a violation of integrity and objectivity b. It is a violation of independence c. it is a violation of confidential client information d. It is not a violation

c. it is a violation of confidential client information

One of your audit clients has a material investment in a privately-held biosciences company. Your audit firm engaged a business valuation specialist to assist in evaluating the client's estimation of the investment's fair value. You conclude that the valuation specialist's work provides sufficient appropriate audit evidence.

clean opinion. A specialist is not an "other auditor". Auditor does not refer to specialist in the audit report unless their work leads to modifying an opinion. The answer is clean opinion.

Which of the following defenses are not available in lawsuits brought by the client against the auditor: a. Lack of privity b. Contributory negligence c. Due diligence performance d. All of the above are available and valid defenses

d. All of the above are available and valid defenses

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, and this fact is adequately disclosed in the notes to the financial statements, the auditor's report should express: a. The standard unqualified opinion without modification. b. An unqualified opinion with additional paragraph before the opinion. c. An adverse opinion with additional paragraph before the opinion. d. An unqualified opinion, with an explanatory paragraph after the opinion.

d. An unqualified opinion, with an explanatory paragraph after the opinion.

According to the Code of Professional Conduct and the SEC/SOX, which of the following is not a violation? a. Issuing a qualified opinion indicating that following the generally accepted accounting principles would have made the financial statements misleading b. Auditor designs an accounting information system for their public audit client. These services are preapproved by the audit committee. c. The quality control partner has immaterial stock ownership in the firm's audit client d. Auditor receives fees contingent upon the result of IRS rulings when representing the client in a tax matter

d. Auditor receives fees contingent upon the result of IRS rulings when representing the client in a tax matter

The trait that distinguishes auditors from accountants is the: a. Auditor's ability to interpret accounting principles generally accepted in the United States. b. Auditor's education beyond the Bachelor's degree. c. Auditor's ability to interpret FASB Statements. d. Auditor's accumulation and evaluation of evidence related to a company's financial statements.

d. Auditor's accumulation and evaluation of evidence related to a company's financial statements.

Which of the following is not a violation of the AICPA Code of Professional Conduct? a. Auditor is litigating the audit client for reputation damage due to a class action brought by the investors (violation of independence) b. Auditor receives commissions for referring a logistic software third party to an audit client (commissions and fees rule: prohibited for audit clients) c. CPA discloses its consulting client's information to a competitor (violation: confidentiality) d. Auditor's nondependent children own immaterial stocks in the audit client that the auditor does not know about

d. Auditor's nondependent children own immaterial stocks in the audit client that the auditor does not know about

Which of the following is not one of the General Standards under the Generally Accepted Auditing Standards: a. Competence. b. Independence. c. Due care. d. Collection of competent sufficient evidence.

d. Collection of competent sufficient evidence.

Which of the following is correct? a. When a CPA performs examination services, independence is not required b. Counting ballots for the Oscars is an attest service c. Audit firms are required to rotate off clients every five years under the SOX d. Examination services include auditing estimates relating to forecasted and projected financial statements

d. Examination services include auditing estimates relating to forecasted and projected financial statements

The standard independent auditor's report on the internal controls over financial reporting consists of the following correct sequenced paragraphs: a. Introductory, definition, inherent limitation, scope, opinion. b. Introductory, scope, inherent limitation, definition, opinion. c. Introductory, scope, definition, opinion, reference to financial statements auditor report. d. Introductory, scope, definition, inherent limitation and opinion.

d. Introductory, scope, definition, inherent limitation and opinion.

The Sarbanes-Oxley Act allows a CPA firm that audits a public company to which of the following types of pre-approved services to that company? a. Most management consultancy. b. Preparation of corporate tax returns. c. Internal audit services. d. None of above services is allowed.

d. None of above services is allowed.

A member in public practice shall receive from a client contingent fee when the member or member's firm performs for that client a. An audit or review. b. A compilation that will be used by a third party. c. An original or amended tax returns preparation. d. None of the above.

d. None of the above.

The organizations that are responsible for overseeing the auditors and establishing the auditing standards are: a. Independence Standards Board for private companies and the PCAOB for public companies b. American Institute of Certified Public Accountants for private companies and for public companies because the PCAOB adapted the AICPA's standards as interim. c. Securities Exchange Commission for public companies and the AICPA for private companies. d. Public Company Accounting Oversight Board for public companies and the AICPA for private companies.

d. Public Company Accounting Oversight Board for public companies and the AICPA for private companies.

An auditor's opinion reads as follows: "In our opinion, except for the above-mentioned scope limitation..." This is an example of a (an) a. Disclaimer of opinion. b. Emphasis of a matter. c. Qualified opinion only. d. Qualified scope and opinion.

d. Qualified scope and opinion.

In which of the following circumstances would a CPA who audits LM Corporation lack independence? a. The CPA reduced LM's usual audit fee by 40% because LM's financial condition was unfavorable. b. The CPA and LM's president are second-generation cousins. c. The CPA has a home mortgage from LM, which is a savings and loan organization. d. The CPA and LM each own 20% of FOB Inc., a closely held company. The CPA's 20% is material to his net worth and income.

d. The CPA and LM each own 20% of FOB Inc., a closely held company. The CPA's 20% is material to his net worth and income.

Which of the following statements best describes the enforceability of the AICPA Code of Professional Conduct? a. Both the Ethical Principles and the Rules of Conduct are enforceable. b. The Interpretations of Rules of Conduct are enforceable but Principles are not enforceable. c. The Interpretations of Rules of Conduct may be enforceable if they have been reviewed and approved by the AICPA's Division of Professional Ethics and so are AICPA's Code of Professional Conduct. d. The Interpretations of Rules of Conduct are not enforceable, but a practitioner must justify departure and so are the Ethical Rulings

d. The Interpretations of Rules of Conduct are not enforceable, but a practitioner must justify departure and so are the Ethical Rulings

You are auditing Deep Clean Services for the first time. Deep Clean has been in business for several years but over the last two years has struggled to stay afloat given the economic conditions. Based on your audit work, you have substantial doubt that Deep Clean will be in business by the end of its next fiscal year.

doubts about going concern situation. Always material. If it is disclosed then explanatory paragraph after the clean opinion. If it is not disclosed, then it is a material GAAP violation that will go into an additional paragraph before the qualified opinion only.

During your audit of Raceway.com, Inc., you conclude that there is a possibility that inventory is materially overstated. The client refuses to allow you to expand the scope of your audit sufficiently to verify whether the balance is actually misstated.

there is a possibility (MAY) contain a material misstatement due to client imposed scope limitation. So, auditor issues a disclaimer of opinion.

Auto Delivery Company has a fleet of several delivery trucks. In the past, Auto Delivery had followed the policy of purchasing all equipment. In the current year, they decided to lease the trucks. The method of accounting for the trucks is therefore changed to lease capitalization. This change in policy is fully disclosed in footnotes.

this is a change in transaction. So GAAP changed as a result. This is not a GAAP consistency situation. Auditor will issue a clean opinion.