Audit Exam #2

30) When an auditor relies upon a different CPA firm to perform part of the audit and chooses to issue a shared opinion, only the auditor's responsibility paragraph should be modified. A) True B) False

B) False

31) Rule 101, Independence, applies to members of the AICPA when performing any professional service. A) True B) False

B) False

31) Under Rule 505, Form of Organization and Name, a CPA firm may not designate itself as "Members of the American Institute of Certified Public Accountants" unless a majority of its owners are members of the Institute. A) True B) False

B) False

32) Statutory laws are laws that have been developed through court decisions rather than through the U.S. Congress and other governmental units. A) True B) False

B) False

32) Under the AICPA's Code of Professional Conduct, CPAs are prohibited from offering audit clients a discount for referring a prospective client even if they are disclosed. A) True B) False

B) False

33) All owners of a CPA firm must be CPAs who are qualified to practice. A) True B) False

B) False

34) Several states have statutes that permit privileged communication between the client and auditor, allowing a CPA to refuse to testify in state and federal courts. A) True B) False

B) False

35) Gross negligence is the existence of extreme or unusual negligence with the intent to deceive. A) True B) False

B) False

4) Audit risk is the risk there will be an audit failure for a given audit engagement. A) True B) False

B) False

4) Section 404(b) of the Sarbanes Oxley Act requires that the auditor of a public company attest to management's report on the efficiency of internal controls over financial reporting. A) True B) False

B) False

2) Which of the following is not one of the four parts of the AICPA's Code of Professional Conduct? A) Principles B) Rules of Conduct C) Interpretations D) Definitions

D) Definitions

15) Which of the following most accurately describes constructive fraud? A) Absence of reasonable care B) Lack of slight care C) Knowledge and intent to deceive D) Extreme or unusual negligence without the intent to deceive

D) Extreme or unusual negligence without the intent to deceive

6) A CPA firm normally uses one or a combination of four defenses when there are legal claims by clients. Which one of the following is generally not a defense? A) Lack of duty B) Nonnegligent performance C) Contributory negligence D) Foreseeable users

D) Foreseeable users

22) A qualified report can take the form of a qualification of both the scope and the opinion or of the opinion alone. A) True B) False

A) True

23) The audit report date is the date the auditor completed audit procedures in the field. A) True B) False

A) True

27) Items that materially affect the comparability of the financial statements generally require disclosure in the footnotes. A) True B) False

A) True

26) The audit report is normally addressed to the company's president or chief executive officer. A) True B) False

B) False

24) The scope paragraph of the auditor's responsibility section of the audit report issued for financial statements of a non-public company should refer to generally accepted auditing standards . A) True B) False

A) True

27) The phrase "generally accepted accounting principles" can be found in the opinion paragraph of a standard unqualified report. A) True B) False

A) True

28) The date of the auditor's report is indicative of the last day of the auditor's responsibility for the review of significant events occurring after the balance sheet date. A) True B) False

A) True

31) When other auditors are involved in the audit and they qualify their portion of the audit, the principal auditor must decide if the amount in question is material to the financial statements as a whole. A) True B) False

A) True

9) Materiality is essential when an auditor considers his/her determination of the appropriate report for a given set of circumstances. A) True B) False

A) True

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

2) The standard unqualified 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.

18) The 1136 Tenants case was a criminal case concerning a CPA's failure to uncover fraud during a financial statement audit. A) True B) False

B) False

20) One result from the Escott et al. v. Bar Chris case was a greater emphasis being placed on audit staff understanding the client's business and industry. A) True B) False

A) True

21) The only parties who can recover from auditors under the Securities Act of 1933 are original purchasers of securities. A) True B) False

A) True

5) Under common law, a foreseen user would be treated the same as: A) A primary beneficiary A known third party Yes Yes B) A primary beneficiary A known third party No No C) A primary beneficiary A known third party Yes No D) A primary beneficiary A known third party No Yes

A) A primary beneficiary A known third party Yes Yes

3) A group typically included as "third parties" in common law is: A) Actual and potential stockholders Employees of client Yes Yes B) Actual and potential stockholders Employees of client No No C) Actual and potential stockholders Employees of client Yes No D) Actual and potential stockholders Employees of client No Yes

A) Actual and potential stockholders Employees of client Yes Yes

4) Under the Securities Exchange Act of 1934, which type of organization is required to submit audited financial statements to the SEC? A) Every company with securities traded on national and over-the-counter exchanges B) Every corporation C) Every company issuing new securities D) Every corporation which is chartered by a state government

A) Every company with securities traded on national and over-the-counter exchanges

15) Although there is confusion caused by the differing views of liability to third parties under common law, the movement is clearly away from the foreseeable user approach. A) True B) False

A) True

15) An advantage of specific rules in the Code of Professional Conduct is the enforceability of minimum behavior and performance standards. A) True B) False

A) True

17) The Credit Alliance approach to the concept of foreseen users states that to be liable to third parties, an auditor (1) must know and intend that the work product would be used by the third-party for a specific purpose, and (2) the knowledge and intent must be evidenced by the auditor's conduct. A) True B) False

A) True

17) The audit committee of a private company need not approve all non-audit services provided by the company's financial statement auditor. A) True B) False

A) True

18) For a public company, the Sarbanes-Oxley Act requires audit committee approval of all non-audit services prior to their performance by the company's external auditor. A) True B) False

A) True

19) Many litigation experts believe that a well written engagement letter significantly reduces the likelihood of adverse legal actions. A) True B) False

A) True

1) Interpretations of Independence Rule 101 prohibit covered members from owning any stock or other direct investment in audit clients. Covered members would include which of the following? A) All partners in the engagement office even if they have no engagement responsibility Individuals on the attest engagement The firm and its employee benefit plans Yes Yes Yes B) All partners in the engagement office even if they have no engagement responsibility Individuals on the attest engagement The firm and its employee benefit plans Yes No No C) All partners in the engagement office even if they have no engagement responsibility Individuals on the attest engagement The firm and its employee benefit plans No Yes Yes D) All partners in the engagement office even if they have no engagement responsibility Individuals on the attest engagement The firm and its employee benefit plans No No No

A) All partners in the engagement office even if they have no engagement responsibility Individuals on the attest engagement The firm and its employee benefit plans Yes Yes Yes

20) Which of the following statements is true? A) Gross negligence may constitute constructive fraud Fraud requires the intent to deceive All fraud should be detected during audit Yes Yes No B) Gross negligence may constitute constructive fraud Fraud requires the intent to deceive All fraud should be detected during audit No Yes No C) Gross negligence may constitute constructive fraud Fraud requires the intent to deceive All fraud should be detected during audit Yes No Yes D) Gross negligence may constitute constructive fraud Fraud requires the intent to deceive All fraud should be detected during audit No No No

A) Gross negligence may constitute constructive fraud Fraud requires the intent to deceive All fraud should be detected during audit Yes Yes No

5) Auditors may be liable to their clients if they are found guilty of: A) Ordinary negligence Gross negligence Yes Yes B) Ordinary negligence Gross negligence No No C) Ordinary negligence Gross negligence Yes No D) Ordinary negligence Gross negligence No Yes

A) Ordinary negligence Gross negligence Yes Yes

15) Which of the following fee arrangements is not a violation of the AICPA's Code of Professional Conduct? A) Basing fees as an expert witness on the amount awarded to the plaintiff, even though the CPA performs a compilation for client use B) Basing consulting fees on a percentage of a bond issue, even though the CPA performs a review of the client's financial statements C) Basing fees for a tax service on the amount of the refund that the client will receive D) Basing consulting fees on a percentage of a bond issue, even though the CPA performs an audit of the client's financial statements

A) Basing fees as an expert witness on the amount awarded to the plaintiff, even though the CPA performs a compilation for client use

18) The partnership of Booth & Haynes, CPAs, has been engaged to examine the financial statements of Paul, Inc., in connection with the registration of Paul's securities with the Securities and Exchange Commission. Under these circumstances, which of the following statements is true? A) Booth & Haynes is assuming much greater third-party liability than it assumes on engagements under common law. B) If its examination is not fraudulent, Booth & Haynes may issue an appropriate disclaimer to the financial statements and thereby avoid liability. C) Booth & Haynes must incorporate if they wish to practice before the SEC. D) Booth & Haynes must be a large interstate firm if they wish to practice before the SEC.

A) Booth & Haynes is assuming much greater third-party liability than it assumes on engagements under common law.

4) Which of the following is an illustration of liability to clients under common law? A) Client sues auditor for not discovering a theft of assets by an employee. B) Bank sues auditor for not discovering that borrower's financial statements are misstated. C) Combined group of stockholders sue auditor for not discovering materially misstated financial statements. D) The federal government prosecutes the auditor for knowingly issuing an incorrect audit report.

A) Client sues auditor for not discovering a theft of assets by an employee.

11) Which one of the following statements is false? A) Confidentiality is broken when an auditor is presented with a subpoena concerning an audit client. B) Information that a CPA obtains from a client is generally not privileged. C) When a CPA firm conducts an AICPA-authorized peer review of the quality controls of another CPA firm, permission of the client is not needed to examine audit documentation. D) A CPA firm which observes substandard audit documentation of another firm during a peer review can initiate a complaint to the AICPA.

A) Confidentiality is broken when an auditor is presented with a subpoena concerning an audit client.

19) Which of the following activities is allowed for a CPA firm's attestation clients? A) Contingent fees fixed by a court B) Commissions for referring a review client to an insurance agency for insurance coverage C) Preparation of tax returns for which fees are based upon client refunds D) Each of the above is allowed.

A) Contingent fees fixed by a court

2) In third-party suits, which of the auditor's defenses contends no implied or expressed contract? A) Lack of duty B) Non-negligent performance C) Contributory negligence D) Absence of causal connections

A) Lack of duty

11) Julie and Lisa are sisters. Julie is a CPA auditing the company where Lisa works. Julie's independence is impaired if: A) Lisa is the controller. B) Lisa owns 25% of the company. C) Lisa is the marketing manager. D) all of the above.

A) Lisa is the controller.

12) Oehlers, CPA, is a staff auditor participating in the engagement of Capital Trust, Inc. Which of the following circumstances impairs Oehlers independence? A) Oehlers' sister is an internal auditor employed by Capital Trust. B) Oehlers' friend, and employee of another local accounting firm, prepares the tax return of Capital Trust's CEO. C) Oehlers and Capital Trust's 401K plan own stock with the same corporation. D) During the period of professional engagement, Capital Trust and Oehlers discussed business over lunch at a first-class restaurant.

A) Oehlers' sister is an internal auditor employed by Capital Trust.

11) The Sarbanes-Oxley Act requires a cooling off period of ________ before a member of an audit team can work for a client in a key management position? A) One year B) Eighteen months C) Three years D) Five years

A) One year

1) Which of the following resulted in a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation? A) Private Securities Litigation Reform Act B) Public Securities Damages and Settlements Act C) Racketeer Influenced and Corrupt Organization Act D) U.S. Securities Claims Reform Act

A) Private Securities Litigation Reform Act

18) Rule 201 - General Standards requires members to comply with certain standards and interpretations. Which of the following is not a standard specifically addressed in Rule 201? A) Professional integrity B) Due professional care C) Planning and supervision D) Sufficient relevant data

A) Professional integrity

10) Four of the six Ethical Principles in the AICPA's Code of Professional Conduct are equally applicable to all members of the AICPA. Which of the following principles applies only to members in public practice? A) Scope and Nature of Services B) Integrity C) Due Care D) The Public Interest

A) Scope and Nature of Services

9) Which of the following would be considered a violation of the AICPA Code of Conduct? A) The CPA makes the audit files available to the client's bank without the permission of the client. B) The CPA firm charges a contingent fee for nonattestation services to a client for whom he does not perform any attestation services. C) The CPA firm takes a prospective client to lunch to discuss auditing services. D) A CPA firm uses the name San Diego Tax Specialists.

A) The CPA makes the audit files available to the client's bank without the permission of the client.

7) While the Foreign Corrupt Practices Act of 1977 remains in effect, its internal control provisions have been largely superseded by which of the following? A) The Sarbanes-Oxley Act of 2002 B) The Racketeer Influenced and Corrupt Organization Act C) The Federal False Statements Statute D) The Federal Mail Fraud Statute

A) The Sarbanes-Oxley Act of 2002

14) According to the profession's ethical standards, an auditor would be considered independent in which of the following instances? A) The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution. B) The auditor is also an attorney who advises the client as its general counsel. C) An employee of the auditor serves as treasurer of a charitable organization that is a client. D) The client owes the auditor fees for two consecutive annual audits.

A) The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution.

21) A CPA's financial interests in nonclients may have an effect on independence if the nonclients are investors in or investees of the client. Which situation would not impair a CPA's independence? A) The client has an immaterial investment in a nonclient investee in which the CPA has an immaterial investment. B) The CPA has a material indirect financial interest in a nonclient in which the client has a material investment. C) The client investor has a nonmaterial investment in the nonclient investee in which the CPA has a material investment. D) The CPA has a joint closely held investment with the client in a nonclient that is material to the client as well as the CPA.

A) The client has an immaterial investment in a nonclient investee in which the CPA has an immaterial investment.

1) Auditing standards in the United States allow an auditor to perform an audit of a U.S. entity in accordance with both generally accepted auditing standards in the U.S. and the ISAs. A) True B) False

A) True

22) Under the Securities Act of 1933, a third party plaintiff does not have the burden of proof that he or she relied on the financial statements or that the auditor was negligent or fraudulent in doing the audit. Rather, the plaintiff need only prove that the audited financial statements contained a material misrepresentation or omission. A) True B) False

A) True

23) A lack of independence will override any other scope limitations and requires a disclaimer of opinion. A) True B) False

A) True

23) The Conceptual Framework for AICPA Independence Standards can be used when making decisions on ethical matters not explicitly addressed in the Code. A) True B) False

A) True

24) Each state also has rules of conduct that are required for licensing by the state. A) True B) False

A) True

24) The same three defenses available to auditors in common lawsuits by third parties nonnegligent performance, lack of duty, and absence of causal connection-are also available for suits under the Securities Exchange Act of 1934. A) True B) False

A) True

25) In the case of a disclaimer due to lack of independence, the entire scope paragraph is excluded from the report. A) True B) False

A) True

26) Under Rule 505, Form of Organization and Name, a CPA firm may use any name as long as it is not misleading. A) True B) False

A) True

28) Under Rule 301, Confidential Client Information, permission is not required from the client to use the audit documentation relating to that client during an AICPA-authorized peer review program with another CPA firm. A) True B) False

A) True

29) The standard of due care to which the auditor is expected to be held is referred to as the prudent person concept. A) True B) False

A) True

3) A rationalization method that can easily result in unethical behavior is the argument that "everybody does it." A) True B) False

A) True

3) One of the main reasons people act unethically is that they choose to act selfishly. A) True B) False

A) True

30) Auditors are allowed to have an indirect financial interest in an audit client, such as ownership of stock in a client's company by the auditor's brother, as long as the amount of the financial interest is immaterial to the brother. A) True B) False

A) True

30) In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions does not extend to another partner's personal assets. A) True B) False

A) True

31) In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions extends to the firm's assets. A) True B) False

A) True

32) Rule 101, Independence, applies to covered members in a position to influence an attest engagement. A) True B) False

A) True

33) The doctrine of joint and several liability is one factor that has contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs. A) True B) False

A) True

8) The final step in the auditor's decision process for audit reports is to write the audit report. A) True B) False

A) True

9) Academic research is underway to study the effectiveness of communications provided by auditors in the audit report. A) True B) False

A) True

AACSB: Ethical understanding and reasoning abilities 28) Rule 101, Independence, prohibits a CPA from performing both audit services and bookkeeping services for the same public company in the same year. A) True B) False

A) True

9) A direct financial interest violates independence in which of the following circumstances? A) When close relatives such as nondependent children, brothers, and sisters have a significant financial interest in the client B) When close relatives such as nondependent children, brothers, and sisters have any financial interest in the client C) When the CPA owns shares in a mutual fund that has an ownership interest in the client D) When close relatives such as brother, sister, or in-laws are employed by the client

A) When close relatives such as nondependent children, brothers, and sisters have a significant financial interest in the client

10) A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered to be impaired with respect to the client? A) Yes, because the stock is a direct financial interest B) Yes, because the stock is an indirect financial interest that is material to the CPA's child C) No, because the CPA does not have a direct financial interest in the client D) No, because the CPA does not have a material indirect financial interest in the client

A) Yes, because the stock is a direct financial interest

14) Fraud occurs when: A) a misstatement is made and there is both knowledge of its falsity and the intent to deceive. B) a misstatement is made and there is knowledge of its falsity but no intent to deceive. C) the auditor lacks even slight care in the performance in performing the audit. D) the auditor has an absence of reasonable care in the performance of the audit.

A) a misstatement is made and there is both knowledge of its falsity and the intent to deceive.

22) Which of the following statements is true? The CPA firm will lose its independence if: A) a staff auditor providing audit services to the client acquires stock in that client. B) a staff tax preparer who provides 15 hours of non-audit services to the client acquires stock in that client. C) an audit manager in an office different than the office providing audit services has a direct, immaterial financial interest in the audit client. D) a covered member has an indirect, immaterial financial interest in an audit client.

A) a staff auditor providing audit services to the client acquires stock in that client.

8) The AICPA's Code of Professional Conduct requires independence for all: A) attestation engagements. B) services performed by accountants in public practice. C) accounting and auditing services performed. D) professional work performed by CPAs.

A) attestation engagements.

12) In determining independence with respect to any audit engagement, the ultimate decision as to whether or not the auditor is independent must be made by the: A) auditor. B) client. C) audit committee. D) public.

A) auditor.

21) The laws that have been developed through court decisions are called: A) common laws. B) criminal laws. C) statutory laws. D) civil laws.

A) common laws.

9) When a member observes the profession's technical and ethical standards and strives to continually improve her competence and quality of services, she is exercising: A) due care. B) integrity. C) independence. D) objectivity.

A) due care.

1) The CPA must not subordinate his or her professional judgment to that of others in any: A) engagement. B) audit engagement. C) engagement excluding tax services. D) engagement where the opinion of a specialist is used.

A) engagement.

13) Under the federal securities acts, one significant result occurring directly due to the Escott et al. v. Bar Chris Construction Corporation case was that SAS was changed to require: A) greater emphasis on subsequent events procedures. B) new standards for unaudited statements. C) a broader definition of third party beneficiaries. D) more companies to file annual reports with the SEC.

A) greater emphasis on subsequent events procedures.

15) Interpretations of the AICPA Code of Professional Conduct are dominated by the concept of: A) independence. B) compliance with standards. C) accounting. D) acts discreditable to the profession.

A) independence.

19) Constructive fraud: A) is also known as recklessness. B) requires an intent to deceive. C) involves collusion with the client. D) is also known as breach of contract.

A) is also known as recklessness.

9) In an action against a CPA in a jurisdiction that follows the Ultramares doctrine, lack of privity is a viable defense provided the plaintiff: A) is the client's creditor who sued the CPA for negligence. B) can prove gross negligence. C) violated the Securities Act of 1933. D) violated the Securities Act of 1934.

A) is the client's creditor who sued the CPA for negligence.

4) The major conclusion of the 1931 Ultramares case was that: A) ordinary negligence is insufficient for liability to third parties. B) third parties must file criminal charges, not civil charges, against the auditor. C) fraud or gross negligence is sufficient for liability to third parties. D) auditors have no liabilities to third parties.

A) ordinary negligence is insufficient for liability to third parties.

9) A major purpose of federal securities regulations is to: A) provide sufficient reliable information to the investing public who purchase securities in the marketplace. B) establish the qualifications for accountants who are members of the profession. C) eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public. D) provide a set of uniform standards and tests for accountants, attorneys, and others who practice before the Securities and Exchange Commission.

A) provide sufficient reliable information to the investing public who purchase securities in the marketplace.

4) The standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as the: A) prudent person concept. B) common law doctrine. C) constructive care concept. D) vigilant person concept.

A) prudent person concept.

13) The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called: A) separate and proportionate liability. B) joint and several liability. C) shared liability. D) unitary liability.

A) separate and proportionate liability.

11) Laws that have been passed by the U.S. Congress and other governmental units are: A) statutory laws. B) judicial laws. C) federal laws. D) common laws.

A) statutory laws.

15) Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 are often referred to as: A) the antifraud provisions. B) the new issues provisions. C) the full employment act for accountants. D) the RICO provisions.

A) the antifraud provisions.

11) The basic legal concept which was affirmed in the 1985 New York case, Credit Alliance, was that: A) the auditor's defense of privity of contract is still valid against third parties. B) the auditor is liable for ordinary negligence to specifically foreseen third parties. C) the auditor is liable for ordinary negligence to reasonably foreseeable third parties. D) the auditor's defense of contributory negligence is no longer valid.

A) the auditor's defense of privity of contract is still valid against third parties.

1) The underlying reason for a code of professional conduct for any profession is: A) the need for public confidence in the quality of service of the profession. B) it provides a safeguard to keep unscrupulous people out. C) it is required by federal legislation. D) it allows licensing agencies to have a yardstick to measure deficient behavior.

A) the need for public confidence in the quality of service of the profession.

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

A) unqualified opinion.

17) An example of auditor legal liability to third parties under common law would be the federal government prosecuting an auditor for knowingly issuing an incorrect audit report. A) True B) False

B) False

16) A public company may obtain internal audit services from their financial statement auditor if it is approved by the company's audit committee. A) True B) False

B) False

16) The AICPA Code of Professional Conduct permits the auditor to perform a wide variety of non-audit services for audit clients. A) True B) False

B) False

16) The restatement of torts approach to the concept of foreseen users states that any users that the auditor should have reasonably been able to foresee as being likely users of financial statements have the same rights as those with privity of contract. A) True B) False

B) False

18) In the AICPA Code of Professional Conduct, ethical rulings are less specific than rules of conduct. A) True B) False

B) False

5) A member in public practice shall neither receive from, nor pay to, a client a commission when the member or member's firm also performs certain services for that client. Are commissions allowed if the CPA performs: A) A compilation that will be used by a third party An audit of prospective financial information Yes Yes B) A compilation that will be used by a third party An audit of prospective financial information No No C) A compilation that will be used by a third party An audit of prospective financial information Yes No D) A compilation that will be used by a third party An audit of prospective financial information No Yes

B) A compilation that will be used by a third party An audit of prospective financial information No No

14) Under the Securities Exchange Act of 1934, most of the litigation against the auditor has been generated because of the auditor's involvement with the: A) 8-K form. B) 10-K form. C) 10-Q form. D) S-1 form.

B) 10-K form.

14) In which of the following circumstances would a CPA be ethically bound to refrain from disclosing any confidential client information? A) The CPA is issued a summons enforceable by a court order which orders the CPA to present confidential information. B) A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information. C) Confidential client information is made available as part of a quality review of the CPA's practice by a peer review team authorized by the AICPA. D) An inquiry by a disciplinary body of a state CPA society requests confidential client information.

B) A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.

7) Which of the following is required for a firm to designate itself "Member of the American Institute of Certified Public Accountants" on its letterhead? A) At least one of the partners must be a member of the AICPA. B) All partners must be members of the AICPA. C) The partners whose names appear in the firm name must be members of the AICPA. D) A majority of the partners must be members of the AICPA.

B) All partners must be members of the AICPA.

9) Which of the following services is not prohibited by the SEC whenever a CPA also audits the company? A) Actuarial services B) Assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K) C) Investment banker services D) Bookkeeping services

B) Assisting the company in preparing certain SEC registration statements (e.g., 10-Q, 10-K)

1) For which of the following professional services must CPAs be independent? A) Management advisory services B) Audits of financial statements C) Preparation of tax returns D) All three of the above

B) Audits of financial statements

14) Companies are required to disclose in their proxy statement or annual filings with the SEC the total amount of audit and non-audit fees paid to the audit firm for the two most recent years. Which of the following is not one of the categories of fees that must be disclosed? A) Tax fees B) Consulting fees C) Audit-related fees D) All other fees

B) Consulting fees

7) Which of the auditor's defenses is ordinarily not available when lawsuits are filed by a third party? A) Absence of causal connections B) Contributory negligence C) Non-negligent performance D) Lack of duty

B) Contributory negligence

17) An advantage of the principles of professional conduct in the Code of Professional Conduct is that they are more easily enforced than are the specific rules of conduct. A) True B) False

B) False

19) Interpretations of rules of conduct in the Code of Professional Conduct are not officially enforceable and practitioners need not justify departure from them. A) True B) False

B) False

20) In the AICPA Code of Professional Conduct, interpretations of rules are more specific than ethical rulings. A) True B) False

B) False

21) In the AICPA Code of Professional Conduct, the second principle of professional conduct, entitled "The Public Interest," applies only to members of the AICPA in public practice and not to members who work as accountants in business, government, or education. A) True B) False

B) False

22) Financial statement users are typically more concerned with an unqualified report with explanatory paragraphs than they are with a disclaimer of opinion. A) True B) False

B) False

22) In the AICPA Code of Professional Conduct, the sixth principle of professional conduct, entitled "Scope and Nature of Services," applies to members of the AICPA who work in public practice, business, government, or education. A) True B) False

B) False

23) Companies with securities traded on national and over-the-counter exchanges are required to submit audited financial statements once every three years to the Securities and Exchange Commission. A) True B) False

B) False

24) Imprisonment for a period of six months or longer will result in automatic expulsion from the AICPA. A) True B) False

B) False

24) When a qualified opinion is issued, an explanatory paragraph is added immediately after the opinion paragraph to explain the nature of the qualification that affects the opinion. A) True B) False

B) False

25) Rule 505, Form of Organization and Name, prohibits CPA firms from practicing as limited liability partnerships. A) True B) False

B) False

25) The United States Supreme Court has ruled that outside professionals such as accountants who don't help run corrupt businesses cannot be sued under the provisions of the Foreign Corrupt Practices Act. A) True B) False

B) False

26) The Sarbanes-Oxley Act requires the CEO and CFO of a public company to certify the annual and quarterly financial statements filed with the PCAOB. A) True B) False

B) False

27) A CPA firm may practice public accounting only in a form of organization permitted by federal law or regulation. A) True B) False

B) False

29) Information obtained by a CPA from a client is legally privileged in federal court. A) True B) False

B) False

29) Under Rule 101, Independence, independence is considered to be impaired if fees remain unpaid for professional services provided more than six months before the date of the current year's report. A) True B) False

B) False

3) Expulsion from the AICPA for failing to follow the rules of conduct is, by itself, sufficient to prevent a CPA from practicing public accounting. A) True B) False

B) False

30) Rule 502, Advertising and Other Forms of Solicitation, prohibits members of the AICPA in public practice from performing comparative advertising. A) True B) False

B) False

5) The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated. A) True B) False

B) False

6) The Private Securities Litigation Reform Act of 1995 capped damage awards against auditors to the amount of the audit fees charged. A) True B) False

B) False

6) The Sarbanes-Oxley Act of 2002 makes destruction of audit documentation punishable by up to 10 years in prison. A) True B) False

B) False

24) Which of the following circumstances impairs an auditor's independence? I. Litigation by a client against an audit firm claiming a deficiency in the previous audit II. Litigation by a client against an audit firm related to tax services III. Litigation by an audit firm against a client claiming management fraud or deceit A) I and II B) I and III C) II and III D) I, II, and III

B) I and III

25) Which of the following circumstances impairs an auditor's independence? I. Litigation by a client against an audit firm claiming a deficiency in the previous audit II. Litigation by a client against an audit firm related to tax services III. Litigation by an audit firm against a client claiming management fraud or deceit A) I and II B) I and III C) II and III D) I, II, and III

B) I and III

1) A financial institution sues the audit firm for failure to discover that a borrower's financial statements are materially misstated. This is an example of which of the following legal liability concepts? A) Liability to clients B) Liability to third parties under common law C) Civil liability under federal securities law D) Criminal liability

B) Liability to third parties under common law

11) Subsequent to the close of Spacely Sprockets fiscal year ending October 31, 2012, 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.

6) Of the four parts of the AICPA's Code of Professional Conduct, which part is enforceable? A) Ethical Rulings B) Rules of Conduct C) Principles D) Interpretations

B) Rules of Conduct

2) Which of the following statements is true when the CPA has been engaged to perform an audit of financial statements? A) The CPA firm is engaged and paid by the client; therefore, the firm has primary responsibility to be an advocate for the client. B) The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit are those who rely on the financial statements. C) Should a situation arise where there is no convincing authoritative standard available, and there is a choice of actions which could impact a client's financial statements, the CPA is free to endorse the choice which is in the investors' interests. D) The CPA firm has primary responsibility to the FASB.

B) The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit are those who rely on the financial statements.

23) Interpretations to the Rules of Conduct permit a CPA firm to do both bookkeeping and auditing for the same private company client if three criteria are met. Which of the following is not one of those criteria? A) The client must accept full responsibility for the financial statements. B) The client is required to file an annual report, including audited financial statements, with the Securities and Exchange Commission. C) The CPA must not assume the role of employee or of manager. D) The CPA must follow applicable auditing standards.

B) The client is required to file an annual report, including audited financial statements, with the Securities and Exchange Commission.

6) CPAs may provide bookkeeping services to their private company audit clients, but there are a number of conditions that must be met if the auditor is to maintain independence. Which of the following conditions is not necessary? A) The CPA must not assume a management role or function. B) The client must hire an external CPA to approve all of the journal entries prepared by the auditor. C) The auditor must comply with GAAS when auditing work prepared by his/her firm. D) The client must accept responsibility for the financial statements.

B) The client must hire an external CPA to approve all of the journal entries prepared by the auditor.

14) The King Surety Company wrote a general fidelity bond covering thefts of assets by the employees of Wilson, Inc. Thereafter, Cooney, an employee of Wilson, embezzled $17,200 of company funds. When the activities were discovered, King paid Wilson the full amount in accordance with the terms of the fidelity bond, and then sought recovery against Wilson's auditors, Lynch & Merritt, CPAs. Which of the following would be Lynch & Merritt's best defense? A) King is not in privity of contract. B) The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards. C) Lynch & Merritt were not guilty either of gross negligence or fraud. D) Lynch & Merritt were not aware of the King-Wilson surety relationship.

B) The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards.

4) The Sarbanes-Oxley Act of 2002 makes it a felony to destroy or create documents to impede or obstruct a federal investigation. Those provisions were adopted following which of the following legal cases? A) United States v. Natelli B) United States v. Andersen C) ESM Government Securities v. Alexander Grant & Co. D) United States v. Simon

B) United States v. Andersen

1) In which case were auditors prosecuted for filing false financial statements for a client with the government? A) United States v. Natelli B) United States v. Simon C) Escott et al. v. Bar Chris D) ESM Government Securities v. Alexander Grant & Co.

B) United States v. Simon

1) Ethics are: A) needed in the professions, but is not needed for society in general. B) a set of moral principles or values. C) not formed by life experiences. D) always incorporated in laws.

B) a set of moral principles or values.

5) Independence is required of a CPA when performing: A) external audits. B) all attestation services. C) all attestation and tax services. D) all professional services.

B) all attestation services.

1) A(n) ________ failure occurs when an auditor issues an erroneous opinion because it failed to comply with requirements of auditing standards. A) business B) audit C) ethics D) process

B) audit

4) 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.

2) If an auditor fails to fulfill a certain requirement in the contract, they may be guilty of: A) contract fraud. B) breach of contract. C) constructive fraud. D) criminal neglect.

B) breach of contract.

4) A CPA firm may charge a contingent fee for: A) an audit. B) consulting services for a client for which they do not perform any attestation services. C) the preparation of an original tax return for a client for which they do not perform any attestation services. D) the preparation of an amended tax return.

B) consulting services for a client for which they do not perform any attestation services.

7) After the auditor determines whether any conditions exist which require a departure from a standard unqualified report, the next step in the decision process for audit reports 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.

10) The members of a client's "audit committee" should be: A) members of management. B) directors who are not a part of company management. C) non-directors and non-managers. D) directors and managers.

B) directors who are not a part of company management.

6) Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom they rely. This would not include: A) employees of the CPA firm. B) employees of the audit client. C) other CPA firms engaged to do part of the audit work. D) specialists employed by the CPA firm to provide technical advice on the audit.

B) employees of the audit client.

10) A common way for a CPA firm to demonstrate a lack of duty to perform is by use of a(n): A) expert witness' testimony. B) engagement letter. C) management representation letter. D) confirmation letter.

B) engagement letter.

6) A broad interpretation of the rights of third-party beneficiaries holds that users that the auditor should have been able to foresee as being likely users of financial statements have the same rights as those with privity of contract. This is known as the concept of: A) foreseen users. B) foreseeable users. C) expected users. D) four-party contracts.

B) foreseeable users.

13) The preferred defense in third party suits is: A) lack of duty to perform. B) nonnegligent performance. C) absence of causal connection. D) client fraud.

B) nonnegligent performance.

4) The Sarbanes-Oxley Act ________ a CPA firm from doing both bookkeeping and auditing services for the same public company client. A) encourages B) prohibits C) allows D) allows on a case-by-case basis

B) prohibits

6) The Foreign Corrupt Practices Act (FCPA) of 1977: A) requires auditors to review and evaluate systems of internal control as a part of an audit. B) requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control. C) requires auditors to review client's internal control system in a manner which is thorough enough to judge whether client meets the requirements of the FCPA. D) requires auditors to file a report with the SEC if client's internal control system is inadequate.

B) requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control.

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.

12) The most significant audit issue that came as a result of the court decision in the Escott et al. v. Bar Chris Construction Corporation case in 1968 was: A) the court's reaffirmation that the burden of proof was on the plaintiff to prove the auditor was negligent. B) the affirmation of the increased auditor's responsibility when performing an S-1 review, a review of events subsequent to the balance sheet, for registration statements. C) the increased auditor responsibility when associated with unaudited financial statements. D) the court's refusal to allow the percentage-of-completion method of accounting for revenues.

B) the affirmation of the increased auditor's responsibility when performing an S-1 review, a review of events subsequent to the balance sheet, for registration statements.

3) In connection with the audit of financial statements, an independent auditor could be responsible for failure to detect a material fraud if: A) statistical sampling techniques were not used on the audit engagement. B) the auditor planned the audit in a negligent manner. C) accountants performing important parts of the work failed to discover a close relationship between the treasurer and the cashier. D) the fraud was perpetrated by one employee who circumvented the existing internal controls.

B) the auditor planned the audit in a negligent manner.

3) Under the Securities Act of 1933, the auditor's responsibility for making sure the financial statements were fairly stated extends to: A) the date of the financial statements. B) the date the registration statement becomes effective. C) the date of the audit report. D) one year beyond the date of the financial statements.

B) the date the registration statement becomes effective.

1) The principal issue in cases involving alleged negligence is usually: A) if an an engagement letter was issued. B) the level of care required. C) if fraud was committed by upper-level management. D) whether the auditor is liable under civil or criminal laws.

B) the level of care required.

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.

3) In most audits, the auditor issues a: A) qualified audit report. B) unqualified audit report. C) scope limited audit report. D) adverse audit report.

B) unqualified audit report.

1) If the board of accountancy in the state in which a CPA firm is licensed has rules that are different than the AICPA's rules, the CPA firm must follow: A) whichever rules are less restrictive. B) whichever rules are more restrictive. C) the rules of the AICPA. D) the rules of the state's board of accountancy.

B) whichever rules are more restrictive.

2) A CPA is subject to criminal liability if the CPA: A) refuses to turn over requested audit documentation to a client. B) performs an audit in a negligent manner. C) is knowingly involved with false financial statements. D) willfully breaches a contract with a client.

C) is knowingly involved with false financial statements.

3) One of the AICPA's Ethical Principles deals with the public interest. It states that members should accept the obligation to act in a way that will: A) Honor the public trust Serve the client's interest Yes Yes B) Honor the public trust Serve the client's interest No No C) Honor the public trust Serve the client's interest Yes No D) Honor the public trust Serve the client's interest No Yes

C) Honor the public trust Serve the client's interest Yes No

2) The increased litigation under the federal securities laws has resulted from: A) The availability of class-action litigation The strict liability standards imposed on CPAs by the securities laws An excess of attorneys Yes Yes Yes B) The availability of class-action litigation The strict liability standards imposed on CPAs by the securities laws An excess of attorneys Yes No No C) The availability of class-action litigation The strict liability standards imposed on CPAs by the securities laws An excess of attorneys Yes Yes No D) The availability of class-action litigation The strict liability standards imposed on CPAs by the securities laws An excess of attorneys No No No

C) The availability of class-action litigation The strict liability standards imposed on CPAs by the securities laws An excess of attorneys Yes Yes No

5) Which of the following is an illustration of liability under the federal securities acts? A) A client sues the auditor for not discovering a theft of assets by an employee. B) A bank sues the auditor for not discovering that the borrower's financial statements are misstated. C) A combined group of stockholders sues the auditor for not discovering materially misstated financial statements. D) The auditor sues a client for not cooperating during the engagement.

C) A combined group of stockholders sues the auditor for not discovering materially misstated financial statements.

11) Which of the following statements about the Securities Act of 1933 is not true? A) A third party that purchased securities described in the registration statement may sue the auditor for material misrepresentations or omissions in the audited financial statements. B) A third party user does not have the burden of proof that he/she relied on the financial statements. C) A third party user has the burden of proof that the auditor was either negligent or fraudulent in doing the audit. D) A third party user does not have the burden of proof that the loss was caused by the misleading statements.

C) A third party user has the burden of proof that the auditor was either negligent or fraudulent in doing the audit.

2) Which of the following auditor's defenses usually means nonreliance on the financial statements by the user? A) Lack of duty B) Nonnegligent performance C) Absence of causal connections D) Contributory negligence

C) Absence of causal connections

1) An adequate system of internal control for SEC registrants was originally required by the: A) Sarbanes-Oxley Act of 2002. B) Securities Act of 1933. C) Foreign Corrupt Practices Act of 1977. D) Securities Act of 1934.

C) Foreign Corrupt Practices Act of 1977.

10) The 2012 news of a massive alleged bribery scheme involving Wal-Mart has brought charges against the company under the: A) Securities Act of 1933. B) Securities Act of 1934. C) Foreign Corrupt Practices Act of 1977. D) Sarbanes-Oxley Act of 2002

C) Foreign Corrupt Practices Act of 1977.

12) As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company's controller. As a matter of common law, to what extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft? A) He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees. B) He would have no liability because privity of contract is lacking. C) He would be liable for losses attributable to his negligence. D) He would be liable only if it could be proven that he was grossly negligent.

C) He would be liable for losses attributable to his negligence.

1) Which of the following is(are) true concerning the Ethical Principles of the Code of Professional Conduct? I. They identify ideal conduct. II. They are general ideals and are not enforceable. A) I only B) II only C) I and II D) Neither I nor II

C) I and II

2) Which of the following would be a violation of the rule requiring "objectivity" by the CPA? I. The auditor accepts management's opinion regarding the collection of accounts receivable without an independent evaluation. II. In preparing a client's tax return, the CPA encourages a client to take a deduction for which there is no support. A) I only B) II only C) I and II D) Neither I nor II

C) I and II

7) Ethical Rulings are: I. explanations relating to broad hypothetical circumstances. II. not enforceable, but one must justify departure. III. explanations relating to specific factual circumstances. A) I and II B) I and III C) II and III D) I, II, and III

C) II and III

5) The independent auditor must issue a qualified opinion when which of the financial(s) are missing? I. Balance Sheet II. Income Statement III. Statement of Cash Flows A) I only B) II only C) III only D) I, II, and III

C) III only

2) ________ means that a person acts according to conscience, regardless of the situation. A) Caring B) Fairness C) Integrity D) Respect

C) Integrity

16) Which of the following most accurately describes fraud? A) Absence of reasonable care B) Lack of slight care C) Knowledge and intent to deceive D) Extreme or unusual negligence without the intent to deceive

C) Knowledge and intent to deceive

15) Which of the following loans would be prohibited between a CPA firm or its members and an audit client? A) Automobile loans B) Loans fully collateralized by cash deposits at the same financial institution C) New home mortgage loans D) Unpaid credit card balances not exceeding $10,000 in total

C) New home mortgage loans

13) Which of the following represents all of the ways a CPA firm can be organized under Rule 505? A) Proprietorships and partnerships B) Proprietorships, partnerships, and professional corporations C) Proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law D) Single proprietorships, partnerships, professional corporations if permitted by state law, or regular corporations

C) Proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law

6) Which of the following statements is true with respect to audit committees? A) Audit committee members should consist of members of the company's management. B) All members of the audit committee must be financial experts. C) The audit committee of a public company is responsible for hiring the auditor. D) Audit committees must have a minimum of ten members.

C) The audit committee of a public company is responsible for hiring the auditor.

2) In some situations, the interpretations of the Rules of Conduct permit former partners to have relationships with a client of the firm without affecting the firm's independence. Which of the following situations would cause a loss of independence? A) The former partner works in the maintenance department of an audit client of his former firm. B) The former partner's grandson works in the warehouse of an audit client of his former firm. C) The former partner was held out as an associate of the firm. D) The former partner purchased 5% of the stock of an audit client of his former firm.

C) The former partner was held out as an associate of the firm.

8) Which of the following is an accurate statement regarding recent actions brought against accountants by clients and third parties? A) Litigants will first seek state remedies because of the availability of class-action litigation. B) Gross negligence by the auditor must be proven under the Securities Acts of 1933 and 1934. C) The greatest growth in CPA liability litigation bas been under the federal securities laws. D) The amount of damages that plaintiffs can receive is greater under common law than under the federal securities laws.

C) The greatest growth in CPA liability litigation bas been under the federal securities laws.

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.

8) An example of a breach of contract would likely include: A) an auditor's refusal to return the client's general ledger book until the client paid last year's audit fees. B) a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan. C) a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative. D) an auditor's claim that the client staff is unqualified.

C) a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative.

8) According to the principle established by the Restatement of Torts case, foreseen users must be members of: A) any potential user group. B) a legally protected class. C) a reasonably limited and identifiable user group. D) a reasonably limited and established user group.

C) a reasonably limited and identifiable user group.

13) A CPA firm should decline an offer to perform consulting services engagement if: A) the proposed engagement is not accounting-related. B) recommendations made by the CPA firm are to be subject to review by the client. C) acceptance would require the CPA firm to make management decisions for an audit client. D) any of the above is true

C) acceptance would require the CPA firm to make management decisions for an audit client.

3) Critical lessons learned after analyzing major criminal cases against auditors include the fact that: A) the partner, but not the audit staff, must be independent. B) transactions with related parties are an indication of fraud. C) an investigation of the integrity of management is an important part of deciding whether to accept a new client. D) accounting principles can be relied on exclusively in deciding if the financial statements are fairly presented.

C) an investigation of the integrity of management is an important part of deciding whether to accept a new client.

9) Privity of contract exists between: A) auditor and the federal government. B) auditor and third parties. C) auditor and client. D) auditor and client attorney.

C) auditor and client.

9) In the auditing environment, failure to meet auditing standards is often: A) an accepted practice. B) a suggestion of negligence. C) conclusive evidence of negligence. D) tantamount to criminal behavior.

C) conclusive evidence of negligence.

23) The legal term for when an auditor issues an audit opinion, knowing that an adequate audit was not performed is a: A) breach of contract. B) tort action for negligence. C) constructive fraud. D) fraud.

C) constructive fraud.

3) Recklessness in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users. This description is the legal term for: A) ordinary negligence. B) gross negligence. C) constructive fraud. D) fraud.

C) constructive fraud.

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 unqualified report. D) decide the materiality for each condition.

C) determine whether any conditions exists requiring a departure from a standard unqualified report.

17) A third-party beneficiary is one which: A) has failed to establish legal standing before the court. B) does not have privity of contract and is unknown to the contracting parties. C) does not have privity of contract, but is known to the contracting parties and intended to benefit under the contract. D) may establish legal standing before the court after a contract has been consummated.

C) does not have privity of contract, but is known to the contracting parties and intended to benefit under the contract.

13) One of the changes in auditing procedure which was brought about as a result of the 1136 Tenants case was that auditors were encouraged to begin using: A) letters of representation. B) confirmation letters. C) engagement letters. D) billet doux letters.

C) engagement letters.

3) When CPAs are able to maintain their actual independence, it is referred to as independence in: A) conduct. B) appearance. C) fact. D) total.

C) fact.

12) 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.

4) According to the Principles section of the Code of Professional Conduct, all members: A) should be independent in fact and in appearance at all times. B) in public practice should be independent in fact and in appearance at all times. C) in public practice should be independent in fact and in appearance when providing auditing and other attestations services. D) in public practice should be independent in fact and in appearance when providing auditing, tax, and other attestation services.

C) in public practice should be independent in fact and in appearance when providing auditing and other attestations services.

16) In a leading securities law and CPA liabilities case, the U.S. Supreme Court ruled in 1976 in Hochfelder v. Ernst & Ernst that before CPAs could be held liable for Rule 10b-5 of the Securities Exchange Act of 1934, what would be required to be shown to the court was the auditor's: A) ordinary negligence. B) gross negligence. C) knowledge and intent to deceive. D) financial gain at the expense of the plaintiff.

C) knowledge and intent to deceive.

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.

7) An example of an "indirect ownership interest in a client" would be ownership of a client's stock by a member's: A) dependent child. B) spouse. C) non-dependent grandfather. D) All of the above are examples of indirect ownership.

C) non-dependent grandfather.

2) The expectation gap: A) exists between the auditor and the SEC. B) exists because auditors guarantee the accuracy of the financial statements. C) often results in unwarranted lawsuits against the auditor. D) is a legal concept supported by the federal courts.

C) often results in unwarranted lawsuits against the auditor.

8) When determining whether independence is impaired because of an ownership interest in a client company, materiality will affect ownership: A) in all circumstances. B) only for direct ownership. C) only for indirect ownership. D) under no circumstances.

C) only for indirect ownership.

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) "Independence" in auditing means: A) maintaining an indirect financial interest. B) not being financially dependent on a client. C) taking an unbiased viewpoint. D) being an advocate for a client.

C) taking an unbiased viewpoint.

17) Under the Securities Act of 1933: A) any party who relies on the company's audited financial statements can recover from the auditors. B) third-party users must prove that the auditor was negligent. C) the burden of proof is on the defendant. D) auditors face potential legal exposure for information contained in the Form 10-Q.

C) the burden of proof is on the defendant.

8) The principal issue to be resolved in cases involving alleged negligence is usually: A) the amount of the damages suffered by plaintiff. B) whether to impose punitive damages on defendant. C) the level of care exercised by the CPA. D) whether defendant was involved in fraud.

C) the level of care exercised by the CPA.

18) If the CPA negligently failed to properly prepare and file a client's tax return, the CPA may be liable for: A) the penalties the client owes the IRS. B) the penalties and interest the client owes. C) the penalties and interest the client owes, plus the tax preparation fee the CPA charged. D) the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid.

C) the penalties and interest the client owes, plus the tax preparation fee the CPA charged.

2) In order to protect themselves from legal liability, it is important that CPAs: A) are organized as sole-proprietors. B) accept client representations. C) understand the client's business. D) use engagement letters, not representation letters.

C) understand the client's business.

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

C) unqualified audit report with an explanatory paragraph.

17) The Code of Conduct rule on independence indicates that materiality must be considered when: A) Evaluating direct investments made by the CPA Evaluating indirect ownership investments Yes Yes B) Evaluating direct investments made by the CPA Evaluating indirect ownership investments No No C) Evaluating direct investments made by the CPA Evaluating indirect ownership investments Yes No D) Evaluating direct investments made by the CPA Evaluating indirect ownership investments No Yes

D) Evaluating direct investments made by the CPA Evaluating indirect ownership investments No Yes

5) The Sarbanes-Oxley Act requires which employees of an accounting firm to rotate off the engagement every five years? A) In-Charge Auditor Lead audit partner Yes Yes B) In-Charge Auditor Lead audit partner No No C) In-Charge Auditor Lead audit partner Yes No D) In-Charge Auditor Lead audit partner No Yes

D) In-Charge Auditor Lead audit partner No Yes

3) When an auditor issues a qualified report due to a scope limitation an explanatory paragraph is normally added. Which, if any, of the following paragraphs are also modified? A) Introductory Scope Opinion Yes Yes Yes B) Introductory Scope Opinion Yes Yes No C) Introductory Scope Opinion No Yes No D) Introductory Scope Opinion No Yes Yes

D) Introductory Scope Opinion No Yes Yes

20) Which of the following is least likely to impair a CPA firm's independence with respect to an audit client in the Oklahoma City office of a national CPA firm? A) A partner in the Oklahoma City office owns an immaterial amount of stock in the client. B) A partner in the Jersey City office owns 25% of the client's stock. C) A partner in the Oklahoma City office, who does not work on the audit engagement, previously served as controller for the audit client. D) A partner in the Chicago office previously served as vice president of finance for the audit client.

D) A partner in the Chicago office previously served as vice president of finance for the audit client.

10) When there is a scope restriction, what type of audit report can be issued? A) Unqualified opinion B) Qualification of scope and opinion C) Disclaimer of opinion D) Any of the above

D) Any of the above

22) Gregory & Hedrick, a medium-sized CPA firm, employed Elise as a staff accountant. Elise was negligent while auditing several of the firm's clients. Under these circumstances, which of the following statements is true? A) Elise would have no personal liability for negligence. B) Gregory & Hedrick is not liable for Elise's negligence because CPAs are generally considered to be independent contractors. C) Gregory & Hedrick would not be liable for Elise's negligence if Elise disobeyed specific instructions in the performance of the audits. D) Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in reviewing Elise's work.

D) Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in reviewing Elise's work.

18) Which of the following instances would impair a CPA's independence when they have been retained as the auditor? I. A charitable organization where the CPA serves as treasurer II. A municipality where the CPA owns $250,000 of the $25 million outstanding bonds of the municipality III. A company that the CPA's investment club owns a 10% investment interest A) I and II B) I and III C) II and III D) I, II, and III

D) I, II, and III

11) The Code of Professional Conduct is established by the membership of the AICPA, and the Interpretations of the Rules of Conduct are prepared by the: A) Financial Accounting Standards Board. B) Securities and Exchange Commission. C) CPA licensing agencies within each state. D) Professional Ethics Executive Committee of the AICPA.

D) Professional Ethics Executive Committee of the AICPA.

5) The Securities and Exchange Commission can impose all but which of the following sanctions? A) Suspend a CPA from auditing SEC clients. B) Prohibit a CPA from accepting new SEC clients for a period of time. C) Require a CPA to participate in continuing-education programs and make changes in their practice. D) Revoke a CPA license

D) Revoke a CPA license

8) Which of the following services are allowed by the SEC whenever a CPA also audits the company? A) Internal audit outsourcing B) Legal services unrelated to the audit C) Appraisal or valuation services D) Services related to assessing the effectiveness of internal control over financial reporting

D) Services related to assessing the effectiveness of internal control over financial reporting

3) The financial interests of a CPA's family members can affect the CPA's independence. Which of the following parties would not be included as a "direct financial interest" of the CPA? A) Spouse B) Dependent child C) Relative supported by the CPA D) Sibling living in the same city as the CPA

D) Sibling living in the same city as the CPA

7) The provisions of the Sarbanes-Oxley Act of 2002 are most likely to allow which of the following non-audit services for audit clients? A) Appraisal or valuation services (e.g., pension, post-employment benefit liabilities) B) Financial information systems design and implementation C) Internal audit outsourcing D) Tax consulting

D) Tax consulting

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

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

16) Which of the following is not defined as an act discreditable in either the Rules or the Interpretations of the AICPA's Code of Professional Conduct? A) The CPA firm's partner in charge failed to file his tax return for the past year. B) The CPA firm discriminates in its hiring practices based on the age of the applicant. C) The CPA retains the client's books and records to enforce past-due payment of the CPA's bill, even after the client has demanded they be returned. D) The CPA firm's partner-in-charge was a passenger in a car driven by his wife. On the way home from the firm's Christmas party, she was charged with "driving while intoxicated."

D) The CPA firm's partner-in-charge was a passenger in a car driven by his wife. On the way home from the firm's Christmas party, she was charged with "driving while intoxicated."

5) Which of the following statements best describes the enforceability of the Interpretations of the Rules of Conduct? A) The Interpretations are not enforceable. B) The Interpretations are enforceable. C) The Interpretations may be enforceable if they have been reviewed and approved by the AICPA's Division of Professional Ethics. D) The Interpretations are not enforceable, but a practitioner must justify departure from them

D) The Interpretations are not enforceable, but a practitioner must justify departure from them

8) CPAs are prohibited from which of the following forms of advertising? A) Self-laudatory advertising B) Celebrity endorsement advertising C) Use of trade names, such as "Awesome Auditors" D) Use of phrases, such as "Guaranteed largest tax refunds in town!"

D) Use of phrases, such as "Guaranteed largest tax refunds in town!"

13) An auditor's independence is considered impaired if the auditor has: A) an immaterial, indirect financial interest in a client. B) an outstanding $8,000 balance on a credit card issued by a client. C) an automobile loan from a client bank, collateralized by the automobile. D) a joint, closely held business investment with the client that is material to the auditor's net worth.

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

10) An individual who is not party to the contract between a CPA and the client, but who is known by both and is intended to receive certain benefits from the contract is known as: A) a third party. B) a common law inheritor. C) a tort. D) a third-party beneficiary.

D) a third-party beneficiary.

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.

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.

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.

4) Interpretations of the rules regarding independence allow an auditor to serve as: A) a director or officer of an audit client. B) an underwriter for the sale of a client's securities. C) a trustee of a client's pension fund. D) an honorary director for a not-for-profit charitable or religious organization.

D) an honorary director for a not-for-profit charitable or religious organization.

16) Under the AICPA independence rules, the auditor: A) is prohibited from performing a company's audit and installing and designing the client's new information system. B) does not need to document the understanding and willingness of the client to perform all management functions associated with the nonaudit service. C) is prohibited from doing any bookkeeping services for the client if performing the audit. D) must follow the more restrictive SEC independence rules when dealing with a public company.

D) must follow the more restrictive SEC independence rules when dealing with a public company.

12) A CPA firm: A) can sell securities to a client for whom they perform an attestation service. B) can receive a commission for a client that they are engaged to perform an attestation service for. C) cannot receive a referral fee for recommending the services of another CPA. D) can receive a commission from a nonattestation client as long as the situation is disclosed.

D) can receive a commission from a nonattestation client as long as the situation is disclosed.

17) Freedom from ________ means the absence of relationships that might interfere with objectivity or integrity. A) independence. B) acts discreditable. C) impartiality. D) conflicts of interest.

D) conflicts of interest.

12) The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called: A) separate and proportionate liability. B) shared liability. C) unitary liability. D) joint and several liability.

D) joint and several liability.

12) Matthews & Co., CPAs, issued an unqualified opinion on Dodgers Corporation. Millennium Bank, which relied on the audited financial statements, granted a loan of $200,00,000 to Dodgers Corporation. Dodgers subsequently defaulted on the loan. To succeed in an action against Matthews & Co., Millennium Bank must prove that the bank was: A) in privity of contract with Dodgers. B) in privity of contract with Millennium. C) free from contributory negligence. D) justified in relying on the financial statements in granting the loan.

D) justified in relying on the financial statements in granting the loan.

6) The AICPA's Code of Professional Conduct states that a CPA should maintain integrity and objectivity. The term "objectivity" in the Code refers to a CPA's ability to: A) choose independently between alternate accounting principles and auditing standards. B) distinguish between accounting practices that are acceptable and those that are not. C) be unyielding in all matters dealing with auditing procedures. D) maintain an impartial attitude on matters that come under the CPA's review.

D) maintain an impartial attitude on matters that come under the CPA's review.

1) In the performance of an audit, a CPA: A) is legally liable for detecting an immaterial client fraud. B) must strictly follow GAAP for privately held clients. C) must exercise constructive professional care in the performance of their audit responsibilities. D) must exercise due professional care in the performance of their audit responsibilities.

D) must exercise due professional care in the performance of their audit responsibilities.

1) A six-step approach is often used to resolve an ethical dilemma. The first step in this process is to: A) identify the alternative actions available. B) identify the ethical issues from the facts. C) determine who will be affected by the outcome of the dilemma. D) obtain the relevant facts.

D) obtain the relevant facts.

7) "Absence of reasonable care that can be expected of a person in a set of circumstances" defines: A) pecuniary negligence. B) gross negligence. C) extreme negligence. D) ordinary negligence.

D) ordinary negligence.

10) Rule 301 of the AICPA's Code of Professional Conduct requires CPAs to maintain the confidentiality of client information. This rule would be violated if a CPA disclosed information without a client's consent as a result of a: A) subpoena or summons. B) peer review. C) complaint filed with the trial board of the Institute. D) request by a client's largest stockholder.

D) request by a client's largest stockholder.

7) Tort actions against CPAs are more common than breach of contract actions because: A) there are more torts than contracts. B) the burden of proof is on the auditor rather than on the person suing. C) the person suing need prove only negligence. D) the amounts recoverable are normally larger.

D) the amounts recoverable are normally larger.

10) Under common law, an individual or company that (1) does not have a contract with an auditor, (2) is known by the auditor in advance of the audit, and (3) will use the auditor's report to make decisions about the client company has: A) no rights unless an auditor is grossly negligent. B) no rights unless an auditor is fraudulent. C) no rights against an auditor. D) the same rights against an auditor as a client.

D) the same rights against an auditor as a client.

11) To succeed in an action against the auditor, the client must be able to show that: A) the auditor was fraudulent. B) the auditor was grossly negligent. C) there was a written contract. D) there is a close causal connection between the auditor's behavior and the damages suffered by the client.

D) there is a close causal connection between the auditor's behavior and the damages suffered by the client.

19) Under the AICPA independence rules, independence can be considered impaired when: A) billed fees remain unpaid for professional services for more than ninety days. B) a client in bankruptcy has unpaid fees for more than one year. C) there is litigation by the client related to the auditor's tax or other nonaudit services. D) when there is a lawsuit by the client claiming deficiencies in the previous year's audit.

D) when there is a lawsuit by the client claiming deficiencies in the previous year's audit.

21) Whenever an auditor issues a qualified report, he or she must use the term "except for " in the opinion paragraph. A) True B) False

A) True

24) A modified unqualified audit report arises when the auditor believes the financials are fairly stated but also believes additional information should be provided. A) True B) False

A) True

To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be: A) 1.Company Controller 2. Shareholders 3. Board of Directors No Yes Yes B) Company Controller Shareholders Board of Directors No No Yes C) Company Controller Shareholders Board of Directors Yes Yes No D) Company Controller Shareholders Board of Directors Yes No No

A) 1.Company Controller 2. Shareholders 3. Board of Directors No Yes Yes

19) Indicate which changes would require an explanatory paragraph in the audit report. A) Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable Change from LIFO to FIFO Yes Yes B) Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable Change from LIFO to FIFO No No C) Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable Change from LIFO to FIFO Yes No D) Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable Change from LIFO to FIFO No Yes

A) Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable Change from LIFO to FIFO Yes Yes

21) Indicate which changes would require an explanatory paragraph in the audit report. A) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern Change from FIFO to LIFO Yes Yes B) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern Change from FIFO to LIFO No No C) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern Change from FIFO to LIFO Yes No D) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern Change from FIFO to LIFO No Yes

A) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern Change from FIFO to LIFO Yes Yes

10) The introductory paragraph of the standard audit report for a non-public 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

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.

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.

10) A pervasive exception is one that affects different parts of the financial statements. A) True B) False

A) True

11) An item with a "psychic" effect (e.g., where the item maintains an increasing earnings trend) is a qualitative factor that may affect the auditors decision regarding materiality. A) True B) False

A) True

19) An audit provides a high level of assurance, but is not a guarantee that a material misstatement will exist in the financial statements. A) True B) False

A) True

20) AICPA auditing standards provide uniform wording for the auditor's report to enable users of the financial statements to understand the audit report. A) True B) False

A) True

20) Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction. A) True B) False

A) True

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.

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."

2) The standard unqualified 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

1) Examples of unqualified opinions which contain modified wording (without adding an explanatory paragraph) include: A) the use of other auditors. B) material uncertainties. 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.

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.

20) Indicate which changes would require an explanatory paragraph in the audit report. A) Change in the estimated life of an asset Variation in the format of the financial statements Yes Yes B) Change in the estimated life of an asset Variation in the format of the financial statements No No C) Change in the estimated life of an asset Variation in the format of the financial statements Yes No D) Change in the estimated life of an asset Variation in the format of the financial statements No Yes

B) Change in the estimated life of an asset Variation in the format of the financial statements No No

19) A qualified audit report is issued when all auditing conditions have been met, no significant misstatements have been discovered, and it is the auditor's opinion that the financial statements are fairly stated in accordance with GAAP. A) True B) False

B) False

21) Users of the financial statements rely on the auditor's report because of the absolute assurance the report provides. A) True B) False

B) False

22) The introductory paragraph of the auditor's report states that the auditor is responsible for the preparation, presentation and opinion on financial statements. A) True B) False

B) False

23) When an auditor discovers a highly material GAAP violation in the financial statements and the client refuses to correct it, the auditor should issue a disclaimer of opinion. A) True B) False

B) False

25) An auditor should issue a qualified opinion with an explanatory paragraph whenever there is a material uncertainty affecting the financial statements. A) True B) False

B) False

25) Changes in accounting estimates requires the auditor to issue a modified unqualified audit report with a consistency paragraph inserted after the opinion paragraph. A) True B) False

B) False

25) In the scope paragraph of the audit report issued for financial statements of a non-public company, the auditor expresses an opinion about the internal controls of the company. A) True B) False

B) False

26) The only modified unqualified opinion that does not include an explanatory paragraph is when other auditors are involved. In this case only the introductory paragraph is modified. A) True B) False

B) False

28) Changes in an estimate, such as a change in the estimated useful life of an asset for depreciation purposes, affect consistency but not comparability, and therefore require an explanatory paragraph in the audit report. A) True B) False

B) False

29) Changes in reporting entities, such as the inclusion of an additional company in combined financial statements, affect comparability but not consistency, and therefore do not require an explanatory paragraph in the audit report. A) True B) False

B) False

29) The phrase "auditing standards generally accepted in the United States of America" can be found in the opinion paragraph of a standard, unqualified audit report for a non-public company. A) True B) False

B) False

30) The phrase "Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material error" is included in the auditor's opinion section of an audit report. A) True B) False

B) False

5) Auditors of public company financial statements must issue separate reports on internal control over financial reporting. A) True B) False

B) False

AACSB: Reflective thinking skills 24) Client imposed restrictions on the audit always require a disclaimer of opinion. A) True B) False

B) False

11) Which of the following statements are true for the audit report of a non-public 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

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.

7) Which of the following is not explicitly stated in the standard unqualified 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.

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.

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.

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.

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.

1) The explanatory paragraph for a qualified opinion would: A) precede the scope paragraph. B) follow the scope paragraph. C) follow the opinion paragraph. D) either precede or follow the opinion paragraph depending on the materiality.

B) follow the scope paragraph.

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.

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.

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 audit report for a non-public 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.

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.

22) Indicate which changes would require an explanatory paragraph in the audit report. A) A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion. The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion. Yes Yes B) A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion. The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion. No No C) A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion. The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion. Yes No D) A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion. The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion. No Yes

C) A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion. The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion. Yes No

3) An auditor can express a qualified opinion due to a: A) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence Yes No No B) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence No Yes No C) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence Yes No Yes D) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence Yes Yes Yes

C) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence Yes No Yes

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.

13) If the balance sheet of a private company is dated December 31, 2011, the audit report is dated February 8, 2012, and both are released on February 15, 2012, this indicates that the auditor has searched for subsequent events that occurred up to: A) December 31, 2011. B) January 1, 2012. C) February 8, 2012. D) February 15, 2012.

C) February 8, 2012.

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 unqualified opinion 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.

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.

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.

8) The standard unqualified audit report for a non-public 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.

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.

14) The appropriate audit report date for a standard nonqualified audit report for a non-public entity should be the: A) date the financial statements are given to the Board of Directors. B) date of the financial statements. C) 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) date the auditor completed the auditing procedures in the field.

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.

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.

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.

10) William Gregory, CPA, is the principal auditor for a multi-national 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 off consolidated assets and revenue that they audited.

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

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.

12) The auditor's responsibility section of the standard 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.

4) An auditor determines the financial statements include at least a material departure from GAAP. Which type of opinion may be issued? A) Disclaimer Qualified Adverse Yes No No B) Disclaimer Qualified Adverse No Yes No C) Disclaimer Qualified Adverse Yes No Yes D) Disclaimer Qualified Adverse No Yes Yes

D) Disclaimer Qualified Adverse No Yes Yes

The standard audit report for non-public entities refers to GAAS and GAAP in which sections? A) 1. GAAS 2. GAAP Auditor's responsibility Auditor's responsibility B) GAAS GAAP Auditor's responsibility Introductory paragraph C) GAAS GAAP Management's responsibility and Opinion paragraph Management's responsibility and Introductory paragraph D) GAAS GAAP Auditor's responsibility Management's responsibility and Opinion paragraph

D) GAAS GAAP Auditor's responsibility Management's responsibility and Opinion paragraph

2) An auditor who issues a qualified opinion because sufficient appropriate evidence was not obtained should describe the limitations in an explanatory paragraph. The auditor should also modify the: A) Scope paragraph Opinion paragraph Notes to the financial statements Yes No Yes B) Scope paragraph Opinion paragraph Notes to the financial statements No Yes Yes C) Scope paragraph Opinion paragraph Notes to the financial statements No Yes No D) Scope paragraph Opinion paragraph Notes to the financial statements Yes Yes No

D) Scope paragraph Opinion paragraph Notes to the financial statements Yes Yes No

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) 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

6) When a client fails to follow GAAP, the audit report can be unqualified, 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.

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) In which of the following situations would the auditor most likely issue an unqualified report? A) The client valued ending inventory by using the replacement cost method. B) The client valued ending inventory by using the Next-In-First-Out (NIFO) method. C) The client valued ending inventory at selling price rather than historical cost. D) The client valued ending inventory by using the First-In-First-Out (FIFO) method, but showed the replacement cost of inventory in the Notes to the Financial Statements.

D) The client valued ending inventory by using the First-In-First-Out (FIFO) method, but showed the replacement cost of inventory in the Notes to the Financial Statements.

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.

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 explanatory paragraph that appears before the opinion paragraph. C) the opinion paragraph. D) an explanatory paragraph after the opinion paragraph.

D) an explanatory paragraph after the opinion paragraph.

AACSB: Reflective thinking skills 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.

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.

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) The auditor's responsibility section of the standard unqualified 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.

10) A client has changed their method of valuing inventory from FIFO to LIFO and the change has a material effect on the financial statements. If the auditor does not concur with the appropriateness of the change, the auditor should issue a(n): A) disclaimer. B) adverse opinion. C) unqualified opinion. D) qualified opinion.

D) qualified opinion.

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.

5) The audit report date on a standard unqualified 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 client or 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 unqualified 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.