Audit exam 1 practice questions

7) Which of the following is a correct statement regarding materiality? A) There are well-defined guidelines that enable auditors to determine if something is material. B) Misstatements must be compared with some benchmark before a decision can be made about the materiality level of the failure of a company to follow GAAP. C) Pervasiveness is not considered when comparing potential misstatements with a base or benchmark. D) To evaluate overall materiality, the auditor does not combine all unadjusted misstatements.

B) Misstatements must be compared with some benchmark before a decision can be made about the materiality level of the failure of a company to follow GAAP.

2) Why does the auditor divide the financial statements into segments around the financial statement cycles? A) Most auditors are trained to audit cycles as opposed to entire financial statements. B) The approach aids in the assignment of tasks to different members of the audit team. C) The cycle approach is required by auditing standards. D) The cycle approach allows the auditor to detect illegal acts.

B) The approach aids in the assignment of tasks to different members of the audit team.

7) Which of the following is not explicitly stated in the standard unmodified opinion audit report? A) The financial statements are the responsibility of management. B) The audit was conducted in accordance with generally accepted accounting principles. C) The auditors believe that the audit evidence provides a reasonable basis for their opinion. D) An audit includes assessing the accounting estimates used.

B) The audit was conducted in accordance with generally accepted accounting principles.

25) Which of the following statements best describes the auditor's responsibility regarding the detection of fraud? A) The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter. B) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud. C) The auditor is responsible for detecting material financial statement fraud, but not a material misappropriation of assets. D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued.

B) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.

23) Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations? A) Auditors can follow an easy, step-by-step procedure to determine how laws and regulations impact the financial statements. B) The auditor's responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements. C) It is the responsibility of the auditor to determine if an act constitutes noncompliance. D) The auditor must inform an outside party if management has knowingly not complied with a law or regulation.

B) The auditor's responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.

14) In which of the following circumstances would an auditor most likely express an adverse opinion? A) The CEO refuses to let the auditor have access to the board of director meeting minutes. B) The financial statements are not in conformity with the FASB statement on loss contingencies. C) Information comes to the auditor's attention that raises substantial doubt about the ability for the client to continue as a going concern. D) Tests of controls show that the internal control structure is so poor that the auditor has to assess control risk at the maximum.

B) The financial statements are not in conformity with the FASB statement on loss contingencies.

1) Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each class of transactions? A) The specific audit objectives are applicable to every class of transactions. B) The general audit objectives are applicable to every class of transactions. C) Once the specific transaction-related audit objectives are established, they can be used to develop the general transaction-related objectives. D) For any given class of transactions, usually only one audit objective must be met to conclude the transactions are properly recorded.

B) The general audit objectives are applicable to every class of transactions.

1) An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and A) the assumption that upper-level management is dishonest. B) a critical assessment of the audit evidence. C) the assumption that all employees are motivated by greed. D) verification of all critical information by independent third parties.

B) a critical assessment of the audit evidence.

7) When the auditor determines that the financial statements are fairly stated, but there is a nonindependent relationship between the auditor and the client, the auditor should issue A) an adverse opinion. B) a disclaimer of opinion. C) either a qualified opinion or an adverse opinion. D) either a qualified opinion or an unqualified opinion with modified wording.

B) a disclaimer of opinion.

A restriction on the scope of the auditor's examination requires A) a qualifying paragraph to be included in the introduction. B) a qualifying paragraph preceding the opinion paragraph. C) a disclaimer opinion. D) a basis for a qualified opinion paragraph.

B) a qualifying paragraph preceding the opinion paragraph.

1) A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of A) the PCAOB. B) a reasonable user of the financial statements. C) an accountant. D) the SEC.

B) a reasonable user of the financial statements.

10) An auditor discovers that the company's bookkeeper unintentionally made an mistake in calculating the amount of the quarterly sales. This is an example of A) employee fraud. B) an error. C) misappropriation of assets. D) a defalcation.

B) an error.

29) If a client has violated federal tax laws, A) the auditor must notify the IRS. B) and the amount is significant, the auditor should communicate with those charged with governance. C) the noncompliance generally will not impact the financial statements. D) the auditor does not need to evaluate the effects of the noncompliance on other aspects of the audit.

B) and the amount is significant, the auditor should communicate with those charged with governance.

2) The detail tie-in objective is not concerned that the details in the account balance A) agree with related subsidiary ledger amounts. B) are properly disclosed in accordance with GAAP. C) foot to the total in the account balance. D) agree with the total in the general ledger.

B) are properly disclosed in accordance with GAAP.

5) When performing the review and completing the documentation and rationale for the conclusion step of the professional judgment process, auditors will A) consider the accounting and auditing standards relevant to the issues. B) articulate in written form the rationale of their judgment. C) identify the issue. D) gather the facts.

B) articulate in written form the rationale of their judgment.

1) Which of the following is not one of the AICPA categories of assertions? A) assertions about classes of transactions and events for the period under audit B) assertions about financial statements and correspondence to GAAP C) assertions about account balances at period end D) assertions about presentation and disclosure

B) assertions about financial statements and correspondence to GAAP

2) Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n) A) accounting and bookkeeping service. B) attestation service. C) assurance service. D) tax service.

B) attestation service.

3) One of the characteristics of professional skepticism is ________, which is the conviction to decide for oneself, rather than accepting the claims of others. A) interpersonal understanding B) autonomy C) suspension of judgment D) self-esteem

B) autonomy

When a qualified or adverse opinion is issued, the qualifying paragraph is inserted A) between the introductory and scope paragraphs. B) between the scope and opinion paragraphs. C) after the opinion paragraph, as a fourth paragraph. D) immediately after the address, as the first paragraph.

B) between the scope and opinion paragraphs.

4) If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor A) can issue an unqualified opinion. B) can significantly reduce other substantive tests. C) can write the engagement letter. D) needs to perform additional tests of controls so that the assurance level can be increased.

B) can significantly reduce other substantive tests.

4) When analyzing the various types of audit reports, A) the unmodified opinion with an emphasis-of-matter paragraph is the most common type of report. B) companies will generally make the appropriate changes to their accounting records to avoid a qualification by the auditor. C) management is more concerned about a qualified report than a disclaimer report. D) an adverse report is issued when the auditor is unable to form an opinion on the financial statements.

B) companies will generally make the appropriate changes to their accounting records to avoid a qualification by the auditor.

1) The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the A) board of directors. B) company management. C) financial statement auditor. D) company's internal audit department.

B) company management.

6) In which type of service does the CPA assemble the financial statements but provide no assurance to third parties? A) audit B) compilation C) review D) bookkeeping

B) compilation

7) Which of the following assertions is described as "this assertion addresses whether all transactions that should be included in the financial statements are in fact included"? A) occurrence B) completeness C) rights and obligations D) existence

B) completeness

3) An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n) A) audit of financial statements. B) compliance audit. C) operational audit. D) production audit.

B) compliance audit.

22) When an auditor knows that an illegal act has occurred, she must A) report it to the proper governmental authorities. B) consider the effects on the financial statements, including the adequacy of disclosure. C) withdraw from the engagement. D) issue an adverse opinion.

B) consider the effects on the financial statements, including the adequacy of disclosure.

7) After the auditor determines whether any conditions exist which require a departure from a standard unmodified opinion audit report, the next step in the decision process is to A) write the report. B) decide the materiality for each condition. C) decide the appropriate type of report for the condition. D) discuss the report with management.

B) decide the materiality for each condition.

9) If the scope restriction imposed by the client is so material that the overall fairness of the financial statements is in question, the auditor should issue a(n) A) standard unmodified opinion. B) disclaimer of opinion. C) adverse opinion. D) unmodified opinion with revised wording in the scope paragraph.

B) disclaimer of opinion.

4) The term "explanatory paragraph" was replaced in the AICPA auditing standards with A) going concern paragraph. B) emphasis-of-matter paragraph. C) departure from principles paragraph. D) consistency paragraph.

B) emphasis-of-matter paragraph.

15) Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to A) determine that they are not in violation of FASB statements. B) examine the substance of transactions and balances for possible misinformation. C) review the statements using the accounting principles promulgated by the SEC. D) assure investors that net income reported this year will be exceeded in the future.

B) examine the substance of transactions and balances for possible misinformation.

16) In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is A) greater for management fraud because managers are inherently more deceptive than employees. B) greater for management fraud because of management's ability to override existing internal controls. C) greater for employee fraud because of the higher crime rate among blue collar workers. D) greater for employee fraud because of the larger number of employees in the organization.

B) greater for management fraud because of management's ability to override existing internal controls.

2) The most common way for users to obtain reliable information is to A) have an internal audit. B) have an independent audit. C) verify all information individually. D) verify the information with management.

B) have an independent audit.

5) The separate report on internal control over financial reporting A) cannot contain a cross-reference to the auditor's report on the financial statements. B) includes a paragraph that addresses the inherent limitations of internal controls. C) is addressed to the PCAOB. D) includes a scope paragraph which refers to the framework used to evaluate internal controls.

B) includes a paragraph that addresses the inherent limitations of internal controls.

5) The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to A) the auditor. B) management. C) both management and the auditor equally. D) management for the statements and the auditor for the notes.

B) management.

1) Auditors have found that generally the most efficient and effective way to conduct audits is to A) obtain complete assurance about the correctness of each class of transactions affecting the account. B) obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts. C) obtain assurance about the ending balance of the account only. D) verify each entry that was made into an account.

B) obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts.

4) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, the auditor must fulfill several performance responsibilities, including A) verifying that all audit work is performed by a CPA with a minimum of three years' experience. B) obtaining sufficient, appropriate audit evidence. C) exercising professional judgment. D) providing an opinion on the financial statements.

B) obtaining sufficient, appropriate audit evidence.

7) When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed A) six months from the date of the financial statements. B) one year from the date of the financial statements. C) six months from the date of the audit report. D) one year from the date of the audit report.

B) one year from the date of the financial statements.

28) The provisions of many laws and regulations affect the financial statements A) directly. B) only indirectly. C) both directly and indirectly. D) materially if direct; immaterially if indirect.

B) only indirectly.

4) When the auditor considers whether he understands the form and substance of the transaction or event, and whether the relevant authoritative literature has been applied consistently by the client, he is performing which step in the professional judgment process? A) identifying and defining the issue B) performing the analysis and identifying potential alternatives C) making the decision D) gathering the facts

B) performing the analysis and identifying potential alternatives

3) Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit A) both private and public companies. B) public companies only. C) private companies, public companies, and nonprofit entities. D) private companies only.

B) public companies only.

Subsequent to the close of Spacely Sprockets fiscal year ending October 31, 2016, a major debtor has declared bankruptcy due to a series of events. The receivable is significantly material in relation to the financial statements, and recovery is doubtful. The debtor had confirmed the full amount due to Spacely Sprocket at the balance sheet date. Because the account was confirmed at the balance sheet date, Spacely refuses to disclose any information in relation to this subsequent event. The CPA believes that all other accounts were stated fairly at the balance sheet date. In addition, Spacely changed their method of inventory valuation from FIFO to LIFO. This change was disclosed in Note X to the financial statements. Accordingly, what type of opinion should be expressed? A) unqualified with an explanatory paragraph B) qualified due to a GAAP departure C) qualified due to a scope limitation D) a combination of B and C

B) qualified due to a GAAP departure

7) A high, but not absolute, level of assurance is called A) probable assurance. B) reasonable assurance. C) limited assurance. D) incomplete assurance.

B) reasonable assurance.

3) All of the following are causes for the addition of an explanatory paragraph under both AICPA and PCAOB standards except for A) emphasis of a matter. B) reports involving other auditors. C) lack of consistent application of generally accepted accounting principles. D) auditor agrees with a departure from promulgated accounting principles.

B) reports involving other auditors.

6) If the financial statements include an income statement and a balance sheet but exclude the statement of cash flows, the auditors A) can issue an unqualified report. B) should issue a qualified opinion due to the departure from GAAP. C) should issue a qualified opinion because the missing statement of cash flows constitutes a scope limitation. D) should include the statement of cash flows, modify the report and issue an unqualified opinion.

B) should issue a qualified opinion due to the departure from GAAP.

2) Which staff level in a CPA firm performs most of the detailed audit work? A) partner B) staff assistant C) senior auditor D) senior manager

B) staff assistant

3) In most audits, the auditor issues a(n) A) modified opinion audit report. B) standard unmodified opinion audit report. C) scope limited audit report. D) adverse audit report.

B) standard unmodified opinion audit report.

2) The use of the Certified Public Accountant title is regulated by A) the federal government. B) state law through the licensing departments of each state. C) the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees. D) the Securities and Exchange Commission.

B) state law through the licensing departments of each state.

1) The procedures used to test the effectiveness of the internal controls are known as A) tests of transactions. B) tests of controls. C) substantive analytical procedures. D) control risk.

B) tests of controls.

26) When reporting identified or suspected noncompliance, A) the auditor must report inconsequential noncompliance to the audit committee. B) the auditor should communicate all material noncompliance matters to those charged with governance. C) any intentional noncompliance must be reported to local law enforcement. D) all noncompliance, whether material or not, must result in a disclaimer of opinion.

B) the auditor should communicate all material noncompliance matters to those charged with governance.

15) All of the following would require an emphasis of matter paragraph except for A) the existence of material related party transactions. B) the lack of auditor independence. C) important events occurring subsequent to the balance sheet date. D) material uncertainties disclosed in the footnotes.

B) the lack of auditor independence.

9) The management's responsibility section of the standard unmodified opinion audit report for a nonpublic company states that the financial statements are A) the responsibility of the auditor. B) the responsibility of management. C) the joint responsibility of management and the auditor. D) none of the above.

B) the responsibility of management.

13) When 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.

4) The dollar amount of some misstatements cannot be accurately measured. For example, if the client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect on A) net income. B) users of the financial statements. C) the auditor's exposure to lawsuits. D) management's future decisions.

B) users of the financial statements.

3) The detail tie-in is part of the ________ assertion for account balances. A) classification B) valuation and allocation C) rights and obligations D) completeness

B) valuation and allocation

1) In testing for cutoff, the objective is to determine A) whether all of the current period's transactions are recorded. B) whether transactions are recorded in the correct accounting period. C) the proper cutoff between capitalizing and expensing expenditures. D) the proper cutoff between disclosing items in footnotes or in account balances.

B) whether transactions are recorded in the correct accounting period.

5) Which of the following is an accurate statement regarding assurance services? A) Assurance services must be performed by a CPA. B) An attestation service is not a type of assurance service. C) Assurance services improve the quality of information for decision makers. D) Assurance services can only be performed on financial data.

C) Assurance services improve the quality of information for decision makers.

2) Who is responsible for establishing auditing standards for privately held companies? A) Securities and Exchange Commission B) Public Company Accounting Oversight Board C) Auditing Standards Board D) National Association of Accounting

C) Auditing Standards Board

4) When using the cycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that A) the transactions are related to financing a company rather than to its operations. B) most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively. C) Both A and B are correct. D) Neither A nor B is correct.

C) Both A and B are correct.

13) If the balance sheet of a private company is dated December 31, 2016, the audit report is dated February 8, 2017, and both are released on February 15, 2017, this indicates that the auditor has searched for subsequent events that occurred up to A) December 31, 2016. B) January 1, 2017. C) February 8, 2017. D) February 15, 2017.

C) February 8, 2017.

8) When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could be I. an unmodified opinion audit report with an explanatory paragraph. II. a disclaimer of opinion. A) I only B) II only C) I or II D) Neither I nor II

C) I or II

3) Auditing standards for public companies are established by the A) SEC. B) FASB. C) PCAOB. D) IRS.

C) PCAOB.

1) Which of the following statements is true as it relates to limited liability partnerships? A) Only senior partners are liable for the partnerships debts. B) Partners have no liability in a limited liability partnership arrangement. C) Partners are personally liable for the acts of those under their supervision. D) All partners must be AICPA members.

C) Partners are personally liable for the acts of those under their supervision.

14) ________ is an attitude that includes a questioning mind, being alert to conditions that might indicate possible misstatements due to fraud or error, and a critical assessment of audit evidence. A) Reasonableness B) Diligence C) Professional skepticism D) Competence

C) Professional skepticism

4) Which of the following statements is true of a public company's financial statements? A) Sarbanes-Oxley requires only the CEO to certify the financial statements. B) Sarbanes-Oxley requires only the CFO to certify the financial statements. C) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements. D) Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements.

C) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements.

12) Which of the following scenarios does not result in a qualified opinion? A) A scope limitation prevents the auditor from completing an important audit procedure. B) Circumstances exist that prevent the auditor from conducting a complete audit. C) The auditor lacks independence with respect to the audited entity. D) An accounting principle at variance with GAAP is used.

C) The auditor lacks independence with respect to the audited entity.

18) Which of the following requires recognition in the auditor's opinion as to consistency? A) The correction of an error in the prior year's financial statements resulting from a mathematical mistake in capitalizing interest. B) A change in the estimate of provisions for warranty costs. C) The change from the cost method to the equity method of accounting for investments in common stock. D) A change in depreciation method which has no effect on current year's financial statements but is certain to affect future years.

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

7) Which of the following is incorrect concerning scope limitations? A) If client imposed, the auditor should be concerned about the client trying to prevent discovery of a material misstatement. B) An unqualified opinion can result if auditors can perform alternative procedures and are satisfied that the information is fairly stated. C) The most common circumstance imposed scope restriction is due to the client changing their auditors. D) The most common circumstance imposed scope limitation is when the auditor is appointed after the balance sheet date.

C) The most common circumstance imposed scope restriction is due to the client changing their auditors.

11) Items that materially affect the comparability of financial statements generally require disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue A) a disclaimer. B) an unqualified opinion. C) a qualified opinion. D) an adverse opinion.

C) a qualified opinion.

5) One of the characteristics of professional skepticism is_______, which is a desire to investigate beyond the obvious. A) self-esteem B) an interpersonal understanding C) a search for knowledge D) a questioning mindset

C) a search for knowledge

8) Management has recorded prepaid insurance as an asset in the previous year. This year, to reduce record-keeping costs, it expenses insurance. If the amount is immaterial to the financial statements, A) a disclaimer opinion is issued. B) a a qualified opinion is issued. C) a standard unmodified opinion audit report is issued. D) no audit report can be issued.

C) a standard unmodified opinion audit report is issued.

1) Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called A) finance. B) auditing. C) accounting. D) economics.

C) accounting.

7) Which balance sheet accounts are included in the payroll and personnel cycle? A) cash in bank, accrued payroll, trade accounts receivable B) accrued payroll, notes payable, and deferred tax C) accrued payroll, cash in bank, and accrued payroll taxes D) salaries and commissions, cash in bank, accrued payroll taxes

C) accrued payroll, cash in bank, and accrued payroll taxes

2) The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction-related audit objective? A) existence B) completeness C) accuracy D) cut-off

C) accuracy

6) Management's disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of the ________ assertion. A) completeness B) existence C) accuracy and valuation D) rights and obligations

C) accuracy and valuation

3) The posting and summarization audit objective is the auditor's counterpart to management's assertion of A) occurrence. B) completeness. C) accuracy. D) classification.

C) accuracy.

1) Internal auditors A) must be independent of the entity that employs them. B) generally report to the accounting department. C) are employed by all types of organizations. D) must be CPAs.

C) are employed by all types of organizations.

6) Audits A) are an assurance service, but not an attestation service. B) are designed to provide absolute assurance that the financial statements are free of material misstatement. C) are required for publicly traded companies in the United States. D) do not require the auditor to express their opinion in a written report.

C) are required for publicly traded companies in the United States.

3) International auditing standards and U.S. GAAP classify assertions into three categories. Which of the following is not a category of assertions that management makes about the accounting information in financial statements? A) assertions about classes of transactions for the period under audit B) assertions about account balances at period end C) assertions about the quality of source documents used to prepare the financial statements D) assertions about presentation and disclosure

C) assertions about the quality of source documents used to prepare the financial statements

5) Which of the following is an element of the CPA's quality control system that should be considered in establishing its quality control policies and procedures? A) considering audit risk and materiality B) using statistical sampling techniques C) assigning personnel to engagements D) complying with laws and regulations

C) assigning personnel to engagements

8) The standard unmodified opinion audit report for a nonpublic entity must A) have a report title that includes the word "CPA." B) be addressed to the company's stockholders and creditors. C) be dated. D) include an explanatory paragraph.

C) be dated.

17) Misappropriation of assets A) is generally committed by company management. B) harms the users of the financial statements by providing them incorrect financial data for their decision making. C) causes harm to stockholders because the assets are no longer available to their rightful owners. D) causes the financial statements to be misstated since the misappropriation usually involves material amounts.

C) causes harm to stockholders because the assets are no longer available to their rightful owners.

14) When an auditor is trying to determine how changes can affect consistency and and/or comparability, he should keep in mind that A) changes that affect comparability but not consistency require an explanatory paragraph. B) items that materially affect the comparability of financial statements requires a disclaimer of opinion. C) changes that affect consistency require an explanatory paragraph if they are material. D) changes that involve either comparability or consistency only need to be mentioned in the footnotes.

C) changes that affect consistency require an explanatory paragraph if they are material.

1) The three requirements for becoming a CPA include all but which of the following? A) uniform CPA examination requirement B) education requirements C) character requirements D) experience requirement

C) character requirements

6) Fraudulent financial reporting is most likely to be committed by whom? A) line employees of the company B) outside members of the company's board of directors C) company management D) the company's auditors

C) company management

9) Which of the following is the auditor least likely to do when aware of an illegal act? A) discuss the matter with the client's legal counsel B) obtain evidence about the potential effect of the illegal act on the financial statements C) contact the local law enforcement officials regarding potential criminal wrongdoing D) consider the impact of the illegal act on the relationship with the company's management

C) contact the local law enforcement officials regarding potential criminal wrongdoing

2) Which of the following is not a step in the professional judgment process? A) make the decision B) perform the analysis C) determine the type of audit opinion D) review and document the rationale for the conclusion

C) determine the type of audit opinion

2) The first step to be followed when deciding the appropriate audit report in a given set of circumstances is to A) decide the appropriate type of report for the condition. B) write the report. C) determine whether any conditions exists requiring a departure from a standard unmodified opinion audit report. D) decide the materiality for each condition.

C) determine whether any conditions exists requiring a departure from a standard unmodified opinion audit report.

15) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, the auditor fulfills several performance responsibilities, including A) complying with the AICPA Code of Professional Conduct. B) issuing a written report on the financial statements. C) determining and applying materiality levels. D) having the appropriate competence to perform the audit.

C) determining and applying materiality levels.

13) Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned that management may be trying to prevent discovery of misstatements. In such cases, the auditor will likely issue a A) disclaimer of opinion in all cases. B) qualification of both scope and opinion in all cases. C) disclaimer of opinion whenever materiality is in question. D) qualification of both scope and opinion whenever materiality is in question.

C) disclaimer of opinion whenever materiality is in question.

4) Which one of the following is more difficult to evaluate objectively? A) presentation of financial statements in accordance with generally accepted accounting principles B) compliance with government regulations C) efficiency and effectiveness of operations D) All three of the above are equally difficult.

C) efficiency and effectiveness of operations

1) Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms? I. A combined report on financial statements and internal control over financial reporting II. Separate reports on financial statements and internal control over financial reporting A) I only B) II only C) either I or II D) neither I nor II

C) either I or II

27) Another term for misappropriation of assets is A) management fraud. B) collusion. C) employee fraud. D) illegal acts.

C) employee fraud.

18) When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility A) more on discovering errors than employee fraud. B) more on discovering employee fraud than errors. C) equally on discovering errors and employee fraud. D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.

C) equally on discovering errors and employee fraud.

5) Management makes the following assertions about account balances: A) existence, completeness, classification and cutoff. B) existence, accuracy, classification and rights and obligations. C) existence, completeness, valuation and allocation, and rights and obligations. D) existence, completeness, rights and obligations, and cutoff.

C) existence, completeness, valuation and allocation, and rights and obligations.

For the report containing a disclaimer for lack of independence, the disclaimer is in the A) second or scope paragraph. B) third or opinion paragraph. C) first and only paragraph. D) fourth or explanatory paragraph.

C) first and only paragraph.

16) Under AICPA auditing standards, the primary auditor issuing the opinion on the financial statements is called the A) component auditor. B) principal auditor. C) group engagement partner. D) majority auditor.

C) group engagement partner.

4) The International Standards on Auditing (ISA) A) are issued by the AICPA. B) override a country's regulations governing the audit of a company. C) has many of the same standards as the Auditing Standards Board (ASB). D) must be followed by companies whose stock is traded in the U.S.

C) has many of the same standards as the Auditing Standards Board (ASB).

2) If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor A) should withdraw from the engagement. B) should request an increase in audit fees so that more resources can be used to conduct the audit. C) has the responsibility of notifying financial statement users through the auditor's report. D) should notify regulators of the circumstances.

C) has the responsibility of notifying financial statement users through the auditor's report.

2) A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is A) included in the scope paragraph. B) included in the opinion paragraph. C) included in a separate paragraph in the report. D) included in the introductory paragraph.

C) included in a separate paragraph in the report.

2) The unqualified opinion audit report for public entities includes the following three paragraphs: A) introductory, scope and management's responsibility. B) materiality, scope and report. C) introductory, scope and opinion. D) scope, fieldwork and conclusion.

C) introductory, scope and opinion.

3) Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide its personnel with A) technical training that assures proficiency as a valuation expert. B) professional education that is required in order to perform with due professional care. C) knowledge required to fulfill assigned responsibilities. D) knowledge required to perform a peer review.

C) knowledge required to fulfill assigned responsibilities.

1) One objective of an operational audit is to A) determine whether the financial statements fairly present the entity's operations. B) determine if the auditee is in compliance with GAAP. C) make recommendations for improving performance. D) report on the entity's relative success in attaining profit maximization.

C) make recommendations for improving performance.

8) In order to properly plan and perform an audit, an important fact for both the auditor and the client to understand is that A) the internal control policies and procedures are developed by the auditors. B) the purpose of an audit is to prevent fraud. C) management is responsible for the preparation of the financial statements. D) management can restrict the auditor's access to important information relevant to the financial statements.

C) management is responsible for the preparation of the financial statements.

5) The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not ________ are detected. A) important to the financial statements B) statistically significant to the financial statements C) material to the financial statements D) identified by the client

C) material to the financial statements

21) When the auditor identifies or suspects noncompliance with laws and regulations, the auditor A) should discuss the matter with those whom they believe committed the illegal act. B) begin communication with the FASB in accordance with PCAOB regulations. C) may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence. D) should withdraw from the engagement.

C) may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence.

10) William Gregory, CPA, is the principal auditor for an international corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's examination. With respect to his report on the consolidated financial statements, taken as a whole, Gregory A) must not refer to the examination of the other auditor. B) must refer to the examination of the other auditor. C) may refer to the examination of the other auditor. D) must refer to the examination of the other auditors along with the percentage of consolidated assets and revenue that they audited.

C) may refer to the examination of the other auditor.

12) The AICPA principles and the auditing standards should be viewed by practitioners as A) ideals to work towards, but which are not achievable. B) maximum standards that denote excellent work. C) minimum standards of performance that must be achieved on each audit engagement. D) benchmarks to be used on all audits, reviews, and compilations.

C) minimum standards of performance that must be achieved on each audit engagement.

6) If there is a deviation in the statements' preparation in accordance with GAAP and another accounting principle was applied on a basis that was not consistent with that of the preceding year, A) the auditor must choose which modification to include in the audit report. B) only the most material modification can be disclosed. C) more than one modification should be included in the report. D) none of the above.

C) more than one modification should be included in the report.

2) An accountant A) must possess expertise in the accumulation of audit evidence. B) must decide the number and types of items to test. C) must have an understanding of the principles and rules that provide the basis for preparing the accounting information. D) must be a CPA.

C) must have an understanding of the principles and rules that provide the basis for preparing the accounting information.

15) Auditing standards make ________ distinction(s) between the auditor's responsibilities for searching for errors and fraud. A) little B) a significant C) no D) various

C) no

5) If most or all users' decisions that are based on the financial statements are likely to be significantly affected, the materiality level is A) unrestricted. B) material. C) pervasive. D) risky.

C) pervasive.

3) Which of the following is not one of the responsibilities of an auditor under the principles underlying an audit? A) possess appropriate competence and capabilities B) comply with ethical requirements C) plan work and supervise assistants D) maintain professional skepticism and exercise professional judgment

C) plan work and supervise assistants

7) Determining that the footnote disclosures related to long-term debt are accurate is an example of the ________ audit objective. A) occurrence B) completeness C) presentation and disclosure D) classification and understandability

C) presentation and disclosure

9) With increases in the complexity of transactions and the need for expanded disclosures about these transactions, assertions about the ________ have increased in importance. A) existence B) account balances C) presentation and disclosure D) classes of transactions

C) presentation and disclosure

5) Balance-related audit objectives A) are never applied to income statement accounts. B) are designed to detect fraud. C) provide a framework to help the auditor accumulate sufficient appropriate evidence related to account balances. D) can have only one specific-related audit objectives.

C) provide a framework to help the auditor accumulate sufficient appropriate evidence related to account balances.

14) After the balance sheet date but prior to issuance of the auditor's report the auditor learns that the client's facility in a foreign country has been expropriated. Management refuses to disclose this information in a financial statement footnote or present pro-forma data as to the effect of the event. The auditor should A) add a footnote to the financial statements. B) disclaim an opinion due to the client imposed scope limitation. C) provide the information in the report and modify the opinion. D) issue an unqualified opinion but provide the information in the auditor report.

C) provide the information in the report and modify the opinion.

2) The methods used by a CPA firm to ensure that the firm meets is professional responsibilities to clients and others is A) continuing professional education. B) compliance with generally accepted reporting standards. C) quality control. D) peer review.

C) quality control.

2) The "Principles Underlying an Audit in Accordance with Generally Accepted Auditing Principles" provides a framework to help auditors A) understand the ten GAAS standards. B) obtain complete assurance that the financial statements are free from any error. C) report on the financial statements. D) prevent fraud.

C) report on the financial statements.

12) The auditor's responsibility section of the standard unmodified opinion audit report states that the auditor is A) responsible for the financial statements and the opinion on them. B) responsible for the financial statements. C) responsible for the opinion on the financial statements. D) jointly responsible for the financial statements with management.

C) responsible for the opinion on the financial statements.

3) In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of A) GAAP. B) the Sarbanes-Oxley Act. C) the Securities Exchange Act of 1934. D) GAAS.

C) the Securities Exchange Act of 1934.

1) In the auditing process A) the types and amounts of evidence remain constant from audit to audit. B) the criteria for evaluating information will not vary depending on the information being audited. C) the audit report communicates the auditor's findings to users. D) records are gathered by the auditor to determine whether the audited information is stated in accordance with SEC standards.

C) the audit report communicates the auditor's findings to users.

14) The appropriate audit report date for a standard unmodified opinion audit report for a nonpublic entity should be A) the date the financial statements are given to the Board of Directors. B) the date of the financial statements. C) the date the auditor completed the auditing procedures in the field. D) 60 days after the date of the financial statements as required by the SEC.

C) the date the auditor completed the auditing procedures in the field.

5) When there is a justified departure from GAAP which is considered material, the auditor should issue a(n) A) standard unmodified opinion. B) disclaimer of opinion. C) unmodified opinion with an explanatory paragraph. D) adverse opinion.

C) unmodified opinion with an explanatory paragraph.

7) Which of the following would most likely be deemed a direct effect illegal act? A) violation of federal employment laws B) violation of federal environmental regulations C) violation of federal income tax laws D) violation of civil rights laws

C) violation of federal income tax laws

12) Which of the following modifications of the auditor's report does not include an explanatory paragraph? A) A qualified report is due to a GAAP departure. B) The report includes an emphasis of a matter. C) There is a very material scope limitation. D) A principal auditor accepts the work of an other auditor.

D) A principal auditor accepts the work of an other auditor.

5) ________ is one of the Big Four international CPA firms. A) Deloitte B) KPMG C) Ernst & Young D) All of the above are classified as Big Four international CPA firms.

D) All of the above are classified as Big Four international CPA firms.

6) When a client fails to follow GAAP, the audit report can be unmodified, qualified, or adverse depending on the materiality. What factors affect materiality that an auditor should consider? A) the dollar amount in comparison to a base B) if the misstatement can be measured C) the nature of the item D) All the above are factors an auditor should consider regarding materiality.

D) All the above are factors an auditor should consider regarding materiality.

14) Which of the following statements is usually true? A) Materiality is easy to quantify. B) Fraudulent financial statements are often easy for the auditor to detect, especially when there is collusion among management. C) Reasonable assurance is a low level of assurance that the financial statements are free from material misstatement. D) An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.

D) An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.

2) Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements? A) The auditor commonly examines a sample, rather than the entire population of transactions. B) Accounting presentations contain complex estimates which involve uncertainty. C) Fraudulently prepared financial statements are often difficult to detect. D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

1) In the audit of historical financial statements, management asserts that the financial statements are fairly stated in accordance with what standards? A) regulatory accounting principles B) applicable international accounting standards C) applicable U.S. accounting standards D) B and C

D) B and C

6) Which of the following statements is not true? A) Balance-related audit objectives are applied to ending account balances. B) Transaction-related audit objectives are applied to classes of transactions. C) Balance-related audit objectives are applied to the ending balance in balance sheet accounts. D) Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.

D) Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.

7) Which of the following is true with regards to the various auditing standards? A) Statements on Auditing Standards (SASs) are issued by the PCAOB. B) The ASB Clarity Project was intended to make the U.S. auditing standards easier to read, understand, and apply. C) The ASB redrafted existing AICPA auditing standards to align them with respective ISAs. D) Both B and C are correct.

D) Both B and C are correct.

7) Which one of the following is not true regarding the American Institute of Certified Public Accountants peer review requirement? A) A CPA firm must develop and adhere to quality control standards. B) Peer reviews are mandatory. C) A CPA firm will lose AICPA eligibility if a peer review is not performed. D) Firms required to be registered with and inspected by the PCAOB are exempt.

D) Firms required to be registered with and inspected by the PCAOB are exempt.

2) Which type of auditor audits the financial information prepared by various federal government agencies before it is submitted to Congress? A) internal auditor B) revenue agent C) independent auditor D) GAO auditor

D) GAO auditor

2) Which of the following statements is not correct? A) There are many ways an auditor can accumulate evidence to meet overall audit objectives. B) Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility. C) It is appropriate to minimize the cost of accumulating evidence. D) Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects.

D) Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects.

13) No reference is made in the auditor's report to other auditors who perform a portion of the audit when I. The other auditor audited an immaterial portion of the audit. II. The other auditor is well known or closely supervised by the principle auditor. III. The principle auditor has thoroughly reviewed the work of the other auditor. A) I and II B) I and III C) II and III D) I, II and III

D) I, II and III

6) In which situation would the auditor be choosing between "except for" qualified opinion and an adverse opinion? A) The auditor lacks independence. B) A client-imposed scope limitation C) A circumstance-imposed scope limitation D) Lack of full disclosure within the footnotes

D) Lack of full disclosure within the footnotes

15) Which of the following statements is true? I. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty. II. The auditor is required to issue a disclaimer of opinion in the event of a going concern problem. A) I only B) II only C) I and II D) Neither I nor II

D) Neither I nor II

1) The organization that is responsible for providing oversight for auditors of public companies is called the A) Auditing Standards Board. B) American Institute of Certified Public Accountants. C) Public Oversight Board. D) Public Company Accounting Oversight Board.

D) Public Company Accounting Oversight Board.

2) Members of the Public Company Accounting Oversight Board are appointed and overseen by the A) U.S. Congress. B) American Institute of Certified Public Accountants. C) Auditing Standards Board. D) Securities and Exchange Commission.

D) Securities and Exchange Commission.

2) Which of the following is not a characteristic of a small firm? A) Most small firms have fewer than 25 professionals. B) Small firms perform audits on small and not-for-profit businesses. C) Tax services are more important than auditing services to the small firm. D) Small firms are prohibited by the SEC from auditing publicly traded companies.

D) Small firms are prohibited by the SEC from auditing publicly traded companies.

5) In describing the cycle approach to segmenting an audit, which of the following statements is not true? A) All general ledger accounts and journals are included at least once. B) Some journals and general ledger accounts are included in more than one cycle. C) The "capital acquisition and repayment" cycle is closely related to the "acquisition of goods and services and payment" cycle. D) The "inventory and warehousing" cycle may be audited at any time during the engagement since it is unrelated to the other cycles.

D) The "inventory and warehousing" cycle may be audited at any time during the engagement since it is unrelated to the other cycles.

6) Which of the following is a true statement regarding auditing standards? A) Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for U.S. public companies. B) PCAOB auditing standards are applicable to entities outside the U.S. C) There are no similarities between PCAOB standards and International Standards on Auditing. D) The Auditing Standards Board has revised most of its standards to converge with the international standards.

D) The Auditing Standards Board has revised most of its standards to converge with the international standards.

13) Which of the following is an accurate statement regarding principles and auditing standards? A) The principles underlying an audit give specific guidance to an auditor when a problem arises in an audit. B) The principles underlying an audit state that the only objective of an audit is to provide financial statement users with an opinion. C) All auditing standards issued by the PCAOB are given two classification numbers. D) The SAS number identifies the order in which it was issued in relation to other SASs.

D) The SAS number identifies the order in which it was issued in relation to other SASs.

3) Which of the following is a correct statement regarding the SEC? A) The Securities Act of 1934 requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval. B) All public companies must file monthly statements with the SEC. C) The Form 10-K must be filed within 30 days after the close of the fiscal year. D) The SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission.

D) The SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission.

8) Which of the following is an accurate statement regarding the various types of other assurance services? A) Assurance services must be about the reliability of another party's assertion about compliance with specified criteria. B) Other assurance services must meet the definition of an attestation service. C) The primary purpose of a management consulting engagement is to improve the quality of information. D) The market for other forms of assurance services is open to non-CPA competitors.

D) The market for other forms of assurance services is open to non-CPA competitors.

1) Which of the following is a correct statement regarding the standard unmodified opinion audit report? A) The format of the audit report for public and nonpublic entities are identical. B) The auditor's responsibility paragraph includes a statement that the auditors are responsible for selecting the appropriate accounting principles. C) The audit report includes the name of the lead partner on the audit. D) The scope paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed.

D) The scope paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed.

10) When analyzing the various types of opinions that the auditor can issue, A) an adverse opinion must contain the phrase "except for" in the opinion paragraph. B) an adverse opinion can only be issued when there is a lack of knowledge by the auditor. C) a disclaimer of opinion can be issued for material or immaterial misstatements. D) a qualified opinion report can be used only when the auditor concludes that the overall financial statements are fairly stated.

D) a qualified opinion report can be used only when the auditor concludes that the overall financial statements are fairly stated.

9) When a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in A) the scope paragraph. B) an introductory paragraph. C) the opinion paragraph. D) a separate paragraph.

D) a separate paragraph.

8) When dealing with materiality and scope limitation conditions, A) a disclaimer of opinion must be issued. B) it is easier to evaluate the materiality of potential misstatements resulting from a scope limitation than for failure to follow GAAP. C) scope limitations imposed by the client are always considered material. D) a unqualified opinion may still be issued depending on the materiality of the scope limitation.

D) a unqualified opinion may still be issued depending on the materiality of the scope limitation.

1) What category of audit report will be issued if the auditor concludes that the financial statements are not fairly presented? A) disclaimer B) qualified C) standard unmodified opinion D) adverse

D) adverse

20) When the auditor becomes aware of or suspects noncompliance with laws and regulations A) the auditor should evaluate the effects of the noncompliance on other aspects of the audit. B) the auditor should discuss the matter with management at a level above those suspected of the noncompliance. C) the auditor should obtain additional information to evaluate the possible effects on the financial statements. D) all of the above

D) all of the above

3) Which of the following can be used as a criteria for evaluating information being audited? A) International Financial Reporting Standards (IFRS) B) Generally Accepted Accounting Principles (GAAP) C) Internal Revenue Code (IRC) D) all of the above

D) all of the above

4) More than one modification should be included in the audit report when A) the auditor is not independent and the auditor knows that the company has not followed generally accepted accounting principles. B) there is substantial doubt about the going concern of the company and information about the causes of the uncertainties is not adequately disclosed in the footnotes. C) there is a scope limitation and there is substantial doubt about the company's ability to continue as a going concern. D) all of the above

D) all of the above

5) When the client fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the footnotes, A) it is the auditor's responsibility to present the information in the audit report. B) the auditor should issue a qualified or an adverse opinion. C) the qualification is put in an added paragraph preceding the opinion. D) all of the above

D) all of the above

5) Which of the following are changes that affect the comparability of financial statements but not the consistency and therefore, do not have to be included in the auditor's report? A) error corrections not involving principles B) changes in accounting estimates C) variations in the format and presentation of financial information D) all of the above

D) all of the above

9) When a pervasive scope limitation exists, A) a disclaimer of opinion rather than a qualified opinion is generally required. B) the auditor's responsibility paragraph is modified to indicate that the auditor was not able to obtain sufficient appropriate evidence to express an audit opinion. C) sections of the auditor's responsibility paragraph are eliminated to avoid stating anything that might lead readers to believe that other parts of the financial statements might be fairly stated. D) all of the above

D) all of the above

2) Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes A) net income. B) total assets. C) working capital. D) all of the above.

D) all of the above.

23) When there is a lack of consistent application in accounting principles A) the nature and impact of the change should be adequately disclosed. B) the auditor should discuss the nature of the change and point the reader to the footnote that discusses the change. C) the materiality of the change is evaluated based on the current year effect of the change. D) all of the above.

D) all of the above.

3) External users of the financial statements A) value the auditor's report because of the auditor's independence from the client. B) look to the auditor's report as an indication of the statements' reliability. C) use the audited information on the assumption that it is reasonably complete, accurate, and unbiased. D) all of the above.

D) all of the above.

7) In a financial statement audit, the auditor A) gathers evidence to determine whether the statements contain material errors or other misstatements. B) must have a thorough understanding of the entity and its environment. C) determines whether the financial statements are stated in accordance with specified criteria. D) all of the above.

D) all of the above.

11) A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor's report on the financial statements of the year of the change should include A) no reference to consistency. B) a reference to a prior period adjustment in the opinion paragraph. C) an explanatory paragraph that justifies the change and explains the impact of the change on reported net income. D) an explanatory paragraph explaining the change.

D) an explanatory paragraph explaining the change.

10) When there is a scope restriction, what type of audit report can be issued? A) unmodified opinion B) qualification of scope and opinion C) disclaimer of opinion D) any of the above

D) any of the above

8) For departures from GAAP or scope restrictions, the auditor must decide if the potential effect on the financial statements is A) immaterial. B) material. C) highly material. D) any of the above.

D) any of the above.

4) 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 expertise in the accumulation and interpretation of audit evidence.

D) auditor's expertise in the accumulation and interpretation of audit evidence.

12) If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct, A) bankruptcies could no longer occur. B) bankruptcies would be reduced to a very small number. C) audits would be much easier to complete. D) audits would not be economically practical.

D) audits would not be economically practical.

3) An audit of historical financial statements most commonly includes the A) balance sheet, statement of retained earnings, and the statement of cash flows. B) income statement, the statement of cash flows, and the statement of net working capital. C) statement of cash flows, balance sheet, and the statement of retained earnings. D) balance sheet, income statement, statement of cash flows, and the statement of changes in stockholders' equity.

D) balance sheet, income statement, statement of cash flows, and the statement of changes in stockholders' equity.

2) The possibility that a business may not be able to repay a bank loan because of an economic downturn is referred to as A) materiality risk. B) information risk. C) interest rate risk. D) business risk.

D) business risk.

2) If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the A) completeness assertion. B) existence assertion. C) cutoff assertion. D) classification assertion.

D) classification assertion.

2) The term audit objective refers to all of the following except for A) transaction-related audit objectives. B) presentation and disclosure-related audit objectives. C) balance-related audit objectives. D) cycle-related audit objectives.

D) cycle-related audit objectives.

1) The starting point to effective professional judgment begins with A) gathering the facts. B) identifying alternatives. C) identifying relevant literature. D) identifying and defining the issue.

D) identifying and defining the issue.

8) If the auditor lacks independence, a disclaimer of opinion must be issued A) if the client requests it. B) only if it is highly material. C) only if it is material but not pervasive. D) in all cases.

D) in all cases.

4) A questioning mindset A) means the auditor must prove every statement that management makes to them. B) means the auditor should approach the audit with a "do not trust anyone" mental outlook. C) assures that the auditor will only accept honest clients. D) means the auditor should approach the audit with a "trust but verify" mental outlook.

D) means the auditor should approach the audit with a "trust but verify" mental outlook.

4) The purpose of establishing quality control policies and procedures to accept or continue a client relationship is to A) provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities. B) monitor the risk factors concerning misstatements that arise from the misappropriation of assets. C) document objective criteria for the CPA firm's peer review. D) minimize the likelihood of associating with a client whose management may lack integrity.

D) minimize the likelihood of associating with a client whose management may lack integrity.

4) The auditor's responsibility section of the standard unmodified opinion audit report states that the audit is designed to A) discover all errors and/or irregularities. B) discover material errors and/or irregularities. C) conform to generally accepted accounting principles. D) obtain reasonable assurance whether the statements are free of material misstatement.

D) obtain reasonable assurance whether the statements are free of material misstatement.

17) When the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to A) inform the reader that disclosure is not adequate, and to issue an adverse opinion. B) inform the reader that disclosure is not adequate, and to issue a qualified opinion. C) present the information in the audit report and issue an unqualified or qualified opinion. D) present the information in the audit report and to issue a qualified or an adverse opinion.

D) present the information in the audit report and to issue a qualified or an adverse opinion.

9) The principles underlying an audit A) contain the procedures that must be followed during an audit. B) carry the same authority as AICPA auditing standards. C) only apply to the audits of public companies D) provide structure for the clarified Codification.

D) provide structure for the clarified Codification.

9) If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued a(n) A) adverse opinion. B) disclaimer of opinion. C) unqualified opinion. D) qualified opinion.

D) qualified opinion.

3) Auditors accumulate evidence to A) defend themselves in the event of a lawsuit. B) determine if the financial statements are correct. C) satisfy the requirements of the Securities Acts of 1933 and 1934. D) reach a conclusion about the fairness of the financial statements.

D) reach a conclusion about the fairness of the financial statements

8) Which of the following management assertions is not associated with classes of transactions and events? A) occurrence B) classification C) accuracy D) rights and obligations

D) rights and obligations

2) The American Institute of Certified Public Accountants (AICPA) A) is responsible for issuing licenses to new CPAs. B) restricts its membership to CPAs who are independent auditors. C) sets auditing standards for both public and private companies. D) sets rules of conduct that CPAs are required to meet.

D) sets rules of conduct that CPAs are required to meet.

6) Direct, written communication with the client's customers to identify whether a receivable exists is an example of a(n) A) substantive test of transactions. B) test of controls. C) analytical procedure. D) test of details of balances.

D) test of details of balances.

7) When assessing the risk of material misstatements in the financial statements, A) inadequate internal control procedures will mitigate client business risk. B) GAAS specifies in detail how much and what types of evidence the auditor needs to obtain. C) company management is responsible for determining materiality levels. D) the auditor must have an understanding of the client's business and industry.

D) the auditor must have an understanding of the client's business and industry.

5) After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on A) generally accepted auditing standards. B) the AICPA's Code of Professional Conduct. C) generally accepted accounting principles. D) the auditor's professional judgment.

D) the auditor's professional judgment.

1) A correct relationship among the auditor, the client, and the external users is A) management of a public company hires the independent auditor. B) the audit committee of a private company hires the independent auditor. C) the client provides capital to the external users. D) the external users can rely upon the auditor's report to reduce information risk.

D) the external users can rely upon the auditor's report to reduce information risk.

5) The audit report date on a standard unmodified opinion audit report indicates A) the last day of the fiscal period. B) the date on which the financial statements were filed with the Securities and Exchange Commission. C) the last date on which users may institute a lawsuit against either the client or the auditor. D) the last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements.

D) the last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements.

2) An adverse opinion is issued when the auditor believes A) some parts of the financial statements are materially misstated or misleading. B) the financial statements would be found to be materially misstated if an investigation were performed. C) the auditor is not independent. D) the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

D) the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

1) As a result of management's refusal to permit the auditor to physically examine inventory, the auditor must depart from the unmodified opinion audit report because A) the financial statements have not been prepared in accordance with GAAP. B) the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control. C) the financial statements have not been audited in accordance with GAAS. D) the scope of the audit has been restricted.

D) the scope of the audit has been restricted.

5) ________ are referred to as U.S. generally accepted auditing standards (GAAS). A) AICPA auditing standards B) SEC auditing standards C) PCAOB auditing standards D) Sarbanes-Oxley standards

A) AICPA auditing standards

1) Statements on Standards for Accounting and Review Services (SSARS) are issued by the A) Accounting and Review Services Committee. B) Professional Ethics Executive Committee. C) Securities and Exchange Commission. D) Financial Accounting Standards Board.

A) Accounting and Review Services Committee.

3) Which of the following statements is the most correct regarding errors and fraud? A) An error is unintentional, whereas fraud is intentional. B) Frauds occur more often than errors in financial statements. C) Errors are always fraud and frauds are always errors. D) Auditors have more responsibility for finding fraud than errors.

A) An error is unintentional, whereas fraud is intentional.

3) ________ is the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value. A) Anchoring B) Availability C) Overconfidence D) Confirmation

A) Anchoring

4) Which of the following does not describe a size category for a CPA firm? A) Big Four national firms B) Big Four international firms C) local firms D) national and regional firms

A) Big Four national firms

2) The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the A) Form S-1. B) Form 8-K. C) Form 10-K. D) Form 10-Q.

A) Form S-1.

24) Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements? A) Generally, the auditor is under no obligation to notify parties other than personnel within the client's organization. B) Generally, the auditor is under an obligation to inform the PCAOB. C) Generally, the auditor is obligated to disclose the relevant facts in the auditor's report. D) Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act.

A) Generally, the auditor is under no obligation to notify parties other than personnel within the client's organization.

10) The introductory paragraph of the standard unmodified opinion audit report for a nonpublic company performs which functions? I. It states the CPA has performed an audit. II. It lists the financial statements being audited. III. It states the financial statements are the responsibility of the auditor. A) I and II B) I and III C) II and III D) I, II and III

A) I and II

5) Which of the following audits can be regarded as generally being a compliance audit? A) IRS agents' examinations of taxpayer returns B) GAO auditor's evaluation of the computer operations of governmental units C) an internal auditor's review of a company's payroll authorization procedures D) a CPA firm's audit of a public company

A) IRS agents' examinations of taxpayer returns

17) Which of the following is false concerning the principal CPA firm's alternatives when issuing a report when another CPA firm performs part of the audit? A) Issue a joint report signed by both CPA firms. B) Make no reference to the other CPA firm in the audit report, and issue the standard unqualified opinion. C) Make reference to the other auditor in the report by using modified wording (a shared opinion or report). D) A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor.

A) Issue a joint report signed by both CPA firms.

4) ________ deals with potential overstatement and ________ deals with understatements (unrecorded transactions). A) Occurrence; completeness B) Completeness; occurrence C) Accuracy; classification D) Classification; accuracy

A) Occurrence; completeness

2) Which of the following is an accurate statement about professional skepticism? A) Professional skepticism involves a critical assessment of the evidence. B) Professional skepticism is easy to implement in practice. C) It is easy for auditors to understand that their clients may try to deceive them throughout the audit process. D) Professional skepticism is only necessary for the audits of public companies.

A) Professional skepticism involves a critical assessment of the evidence.

6) ________ is the self-confidence to resist persuasion and to challenge assumptions or conclusions. A) Self-esteem B) Interpersonal understanding C) Suspension of judgment D) Autonomy

A) Self-esteem

7) ________ are used as evidence to provide assurance about an account balance. A) Substantive analytical procedures B) Tests of transactions C) Audit risks D) Tests of details of balances

A) Substantive analytical procedures

6) Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern? A) The entity is suing a competitor for a minor patent infringement. B) The entity has lost a major customer. C) The entity has significant recurring operating losses. D) The entity has working capital deficiencies.

A) The entity is suing a competitor for a minor patent infringement.

1) Why does the auditor divide the financial statements into smaller segments? A) Using the cycle approach makes the audit more manageable. B) Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces. C) The cycle approach is used because auditing standards require it. D) All of the above are correct.

A) Using the cycle approach makes the audit more manageable.

5) The Statements on Auditing Standards issued by the Auditing Standards Board A) are regarded as authoritative literature. B) mandate the amount of evidence that must be obtained. C) must be followed in all situations. D) are optional guidelines which an auditor may choose to follow or not follow when conducting an audit.

A) are regarded as authoritative literature.

16) The most common case in which conditions beyond the client's and auditor's control cause a scope restriction in an engagement is when the A) auditor is not appointed until after the client's year-end. B) client won't allow the auditor to confirm receivables for fear of offending its customers. C) auditor doesn't have enough staff to satisfactorily audit all of the client's foreign subsidiaries. D) client is going through Chapter 11 bankruptcy.

A) auditor is not appointed until after the client's year-end.

3) Three common types of attestation services are A) audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting. B) audits of historical financial information, verifications of historical financial information, and attestations regarding internal controls. C) reviews of historical financial information, verifications of future financial information, and attestations regarding internal controls. D) audits of historical financial information, reviews of controls related to investments, and verifications of historical financial information.

A) audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting.

3) The most important general ledger account included in and affecting several cycles is the A) cash account. B) inventory account. C) income tax expense and liability accounts. D) retained earnings account.

A) cash account.

3) When auditing accounting data, auditors focus on A) determining whether recorded information properly reflects the economic events that occurred during the accounting period. B) determining if fraud has occurred. C) determining if taxable income has been calculated correctly. D) analyzing the financial information to be sure that it complies with government requirements.

A) determining whether recorded information properly reflects the economic events that occurred during the accounting period.

4) Management assertions are A) directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS. B) stated in the footnotes to the financial statements. C) explicitly expressed representations about the financial statements. D) provided to the auditor in the assertions letter, but are not disclosed on the financial statements.

A) directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS.

1) The legal right to perform audits is granted to a CPA firm by regulation of A) each state. B) the Financial Accounting Standards Board (FASB). C) the American Institute of Certified Public Accountants (AICPA). D) the Auditing Standards Board.

A) each state.

10) The AICPA principles underlying an audit are organized around four principles. Which of the following is not one of those principles? A) fairness B) responsibilities C) reporting D) performance

A) fairness

1) The auditor's best defense when material misstatements are not uncovered is to have conducted the audit A) in accordance with generally accepted auditing standards. B) as effectively as reasonably possible. C) in a timely manner. D) only after an adequate investigation of the management team.

A) in accordance with generally accepted auditing standards.

2) Auditing standards require that the audit report must be titled and that the title must A) include the word "independent." B) indicate if the auditor is a CPA. C) indicate if the auditor is a proprietorship, partnership, or corporation. D) indicate the type of audit opinion issued.

A) include the word "independent."

1) Quality control for a CPA firm A) includes the organizational structure of the firm and the procedures it establishes. B) is tailored to each specific audit engagement. C) is a guarantee that auditing standards are followed. D) is required only for firms auditing SEC companies.

A) includes the organizational structure of the firm and the procedures it establishes.

4) The classification balance-related audit objective A) involves determining if items included on a client's listing are included in the correct general leger accounts. B) is the counterpart to the management assertion of completeness. C) involves determining if items included on a client's listing are disclosed properly in the financial statements. D) involves tying in the account balances to the general ledger.

A) involves determining if items included on a client's listing are included in the correct general leger accounts.

2) The standard unmodified audit report A) is sometimes called a clean opinion. B) can be issued only with an explanatory paragraph. C) can be issued if only a balance sheet and income statement are included in the financial statements. D) is sometimes called a disclaimer report.

A) is sometimes called a clean opinion.

4) Which of the following is not one of the steps used to develop audit objectives? A) know the proper type of audit opinion to issue B) divide the financial statements into cycles C) know the management assertions about the financial statements D) know the specific audit objectives for classes of transactions

A) know the proper type of audit opinion to issue

8) The concept of reasonable assurance indicates that the auditor is A) not a guarantor of the correctness of the financial statements. B) not responsible for the fairness of the financial statements. C) responsible only for issuing an opinion on the financial statements. D) responsible for finding all misstatements.

A) not a guarantor of the correctness of the financial statements.

4) When an auditor believes that an illegal act may have occurred, the auditor should first A) obtain an understanding of the nature and circumstances of the act. B) consult with legal counsel or others knowledgeable about the illegal act. C) discuss the matter with the audit committee. D) withdraw from the engagement.

A) obtain an understanding of the nature and circumstances of the act.

2) An examination of part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit? A) operational audit B) compliance audit C) financial statement audit D) production audit

A) operational audit

3) The Public Company Accounting Oversight Board A) performs inspections of the quality controls of firms that audit public companies. B) establishes auditing standards that must be followed by CPAs on all audits. C) oversees auditors of private companies. D) performs all of the above functions.

A) performs inspections of the quality controls of firms that audit public companies.

7) An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors of fraud and therefore should A) plan and perform the engagement with an attitude of professional skepticism. B) not rely on internal controls that are designed to prevent or detect errors or fraud. C) design audit tests to detect unrecorded transactions. D) extend the work to audit the majority of the recorded transactions and records of an entity

A) plan and perform the engagement with an attitude of professional skepticism.

6) Which of the following is not an essential component of quality control? A) policies and procedures to ensure that firm personnel are actively engaged in marketing strategies B) policies and procedures to ensure that the work performed by firm personnel meet applicable professional standards C) policies to ensure that personnel maintain their independence in fact and in appearance D) policies that ensure that monitoring activities are effectively applied

A) policies and procedures to ensure that firm personnel are actively engaged in marketing strategies

11) An auditor has a duty to A) provide reasonable assurance that material misstatements will be detected. B) be a guarantor of the fairness in the statements. C) be equally responsible with management for the preparation of the financial statements. D) be an insurer of the fairness in the statements.

A) provide reasonable assurance that material misstatements will be detected.

4) Which of the following services provides the lowest level of assurance on a financial statement? A) review B) audit C) Neither service provides assurance on financial statements. D) Each service provides the same level of assurance on financial statements.

A) review

13) When dealing with laws and regulations that do not have a direct effect on the financial statements, the auditor A) should inquire of management about whether the entity is in compliance with such laws and regulations. B) has no responsibility to determine if any violations of these laws has occurred. C) must report all violations, including inconsequential violations, to the audit committee. D) should perform the same procedures as for violations having a direct effect on the financial statements.

A) should inquire of management about whether the entity is in compliance with such laws and regulations.

1) When accounting principles are not consistently applied, and the materiality level is immaterial, the auditor will issue a(n) A) standard unmodified opinion. B) unmodified opinion with an explanatory paragraph. C) adverse opinion. D) disclaimer opinion.

A) standard unmodified opinion.

1) Historically, auditing standards have been organized into three categories, including A) standards of field work. B) purpose of an audit. C) responsibilities of the auditor. D) proper planning and supervision.

A) standards of field work.

4) With respect to the SEC, A) the attitude of the SEC is generally considered in any major change proposed by the FASB. B) the SEC is the sole agency responsible for setting generally accepted accounting principles. C) the SEC requirements of greatest interest to CPAs are set forth in the their enforcement regulations. D) the SEC has the power to establish rules for all CPAs.

A) the attitude of the SEC is generally considered in any major change proposed by the FASB.

1) The objective of an audit of the financial statements is an expression of an opinion on A) the fairness of the financial statements in all material respects. B) the accuracy of the financial statements. C) the accuracy of the annual report. D) the accuracy of the balance sheet and income statement.

A) the fairness of the financial statements in all material respects.

In evaluating these considerations A) the first is more important than the second. B) the second is more important than the first. C) they are equally important. D) it is impossible to prioritize them.

A) the first is more important than the second.

6) An auditor need not abide by a particular auditing standard if the auditor believes that A) the issue in question is immaterial in amount. B) more expertise is needed to fulfill the requirement. C) the requirement of the standard has not been addressed by the PCAOB. D) fraud is involved.

A) the issue in question is immaterial in amount.

4) Under PCAOB standards A) the standard unmodified opinion audit report is referred to as an unqualified opinion audit report. B) the scope paragraph states that the financial statements are the responsibility of management. C) internal controls of a public company must be audited every five years. D) the scope paragraph is the same as the scope paragraph for private companies.

A) the standard unmodified opinion audit report is referred to as an unqualified opinion audit report.

1) Examples of unmodified opinions which contain modified wording (without adding an explanatory paragraph) include A) the use of other auditors. B) the lack of consistent application of generally accepted accounting principles. C) substantial doubt about the audited company (or the entity) continuing as a going concern. D) lack of consistent application of GAAP.

A) the use of other auditors.

6) The cycle approach to auditing A) ties to the way transactions are recorded in journals and then summarized in the general ledger and financial statements. B) cannot combine transactions recorded in different journals with the general ledger balances that result from those transactions. C) is the only way of segmenting an audit. D) assumes that each account has two or more cycles associated with it.

A) ties to the way transactions are recorded in journals and then summarized in the general ledger and financial statements.

3) When comparing misstatements with a measurement base, the auditor must consider the pervasiveness of the misstatement. Of the following examples, the most pervasive misstatement is a(n) A) understatement of inventory. B) understatement of retained earnings caused by a miscalculation of dividends payable. C) misclassification of notes payable as a long-term liability when it should be current. D) misclassification of salary expense as a selling expense.

A) understatement of inventory.

9) The highest level of materiality exists when A) users are likely to make incorrect decisions if they rely on the overall financial statements. B) there has been a departure from GAAP. C) amounts are material but do not overshadow the financial statements as a whole. D) a scope limitation has been imposed.

A) users are likely to make incorrect decisions if they rely on the overall financial statements.

19) If there is collusion among management, the chance a normal audit would uncover such acts is A) very low. B) very high. C) zero. D) none of the above.

A) very low.

1) The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the A) Form S-1. B) Form 8-K. C) Form 10-K. D) Form 10-Q.

B) Form 8-K.

11) Which of the following statements about Generally Accepted Audit Standards are true? I. They serve as broad guidelines to auditors for conducting an audit engagement. II. They are sufficiently specific to provide any meaningful guide to practitioners. III. They represent a framework upon which the AICPA can provide interpretations. A) I and II B) I and III C) II and III D) I, II and III

B) I and III

5) A qualified opinion can be issued for which of the following? I. When a limitation on the scope of the audit has occurred II. When the auditor lacks independence III. When generally accepted accounting principles have not been used A) I and II B) I and III C) II and III D) I, II and III

B) I and III

11) Which of the following statements are true for the standard unmodified opinion audit report of a nonpublic entity? I. The introductory paragraph states that management is responsible for the preparation and content of the financial statements. II. The scope paragraph states that the auditor evaluates the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management. A) I only B) II only C) I and II D) Neither I nor II

B) II only

3) Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients. Which of the following is true for auditors of publicly traded companies? I. They are restricted from providing consulting services to privately held companies. II. There is no restriction on providing consulting services to non-audit clients. A) I only B) II only C) I and II D) Neither I nor II

B) II only

1) ________ risk reflects the possibility that the information upon which the business decision was made was inaccurate. A) Client acceptance B) Information C) Business D) Control

B) Information