Auditing Final Exam (Midterm 1 Extra + Midterm 2 10%+ Chapters 7,8,9,17)

Which of the following situations would lead a CPA to conclude that a potential audit engagement should not be accepted?

It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

Three stages involved in a financial statement audit include: (1) Plan the audit, (2) Obtain an understanding of the client and its environment and (3) Assess the risks of misstatement and design further audit procedures. Ordinarily the sequence in which these steps occur is:

(1), (2), (3)

When erroneous data are detected by computer program controls, data may be excluded from processing and printed on an exception report. The exception report should probably be reviewed and followed up by the:

Data Control Group.

What effect on sample size does increasing the allowable risk of incorrect acceptance have for a substantive test?

Decrease

Which of the following would be least likely to be considered an objective of internal control?

Detecting Management Fraud

The risk that the audit procedures will not discover material misstatements is referred to as:

Detection risk.

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule should be understood to preclude a CPA from responding to an inquiry made by:

A CPA-shareholder of the client corporation.

Which of the following is least likely to result in an additional paragraph being added to an audit report?

A decision not to confirm accounts receivable

In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence?

A price for a similar asset obtained from an active market.

The auditors' primary objective in selecting a sample of items from an audit population is to obtain:

A representative Sample

An audit provides reasonable assurance of detecting which of the following types of material illegal acts?

Direct Effect Without a Direct Effect A.Yes Yes B.Yes No C.No Yes D.No No Option B

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by:

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

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in: a. An emphasis-of-matter paragraph to the auditors' report. b. A footnote to the financial statements. c. The body of the financial statements. d. The "summary of significant accounting policies" section of the financial statements.

A. An emphasis-of-matter paragraph to the auditors' report.

In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is:

A. Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.

William CPA LLP requested permission from a prospective client to communicate with the predecessor auditor. The prospective client's refusal to permit this will bear directly on William's decision concerning the:

Acceptance of the engagement.

The auditors would most likely be concerned with which of the following controls in a distributed data processing system?

Access Controls.

Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly. . ." This is: A. An unmodified opinion. B. A disclaimer of opinion. C. An "except for" opinion. D. An improper type of reporting.

An improper type of reporting.

Independence is required of a CPA performing:

Attestation services, but not other professional services.

Sampling that reaches a conclusion about a population in terms of a rate of occurrence is:

Attributes Sampling

The increased presence of user operated computers in the workplace has resulted in an increasing number of persons having access to the system. A control that is often used to prevent unauthorized access to sensitive programs is:

Authentication Procedures

Which of the following is an advantage of generalized audit software packages?

B) They can be used for audits of clients that use differing computing equipment and file formats.

An audit report for a public client indicates that the audit was performed in accordance with: a. Generally accepted auditing standards (United States). b. Standards of the Public Company Accounting Oversight Board (United States). c. Generally accepted accounting principles (United States). d. Generally accepted accounting principles (Public Company Accounting Oversight Board).

B. Standards of the Public Company Accounting Oversight Board (United States)

Which of the following statistical sampling techniques is least desirable for use by the auditors?

Block Selection

An auditor will use the computer test data method in order to gain assurances with respect to the:

C) Controls contained within a program.

The risk that a company's financial statements will materially depart from generally accepted accounting principles is referred to as:

Information Risk

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified Adverse A. Yes Yes B. Yes No C. No Yes D. No No

C. No Yes.

A material departure from generally accepted accounting principles will result in auditor consideration of:

C. Whether to issue an adverse opinion rather than a qualified opinion.

Which of the following is not considered to be an analytical procedure?

Comparisons of financial statement amounts with source documents.

Which of the following is an element of sampling risk?

Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement

When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should:

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

Assume that a client was involved in a $1,000,000 fraud and that the CPA's percentage of responsibility established at 25%, while the company itself was responsible for the other 75%. Under which approach to liability is the CPA most likely to avoid liability entirely?

Contributory negligence.

Which of the following is not a type of auditors' opinion?

Conventional

Which of the following is not a major component of an information system?

Data

In accessing sampling risk, the risk of incorrect rejection and the risk of accessing control risk too high relate to the:

Efficiency of the Audit

An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the Restatement of Torts approach to liability, the auditor is generally liable to the bank which subsequently grants the loan for:

Either ordinary or gross negligence.

An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the foreseeable third party approach, the auditor is generally liable to the bank which subsequently grants the loan for:

Either ordinary or gross negligence.

The review of a company's financial statements by a CPA firm:

Is substantially less in scope of procedures than an audit.

An audit should be designed to obtain reasonable assurance of detecting material misstatements due to:

Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts and others.

What type of transactions ordinarily have high inherent risk because they involve management judgments or assumptions in formulating accounting balances?

Estimation.

Attestation risk is limited to a low level in which of the following engagement(s)?

Examinations, but not reviews.

The process of working from financial statement figures back to detailed documents most directly addresses the financial statement assertion of:

Existence.

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?

Extreme degree of competition within the industry.

Operational auditing is primarily oriented toward:

Future improvements to accomplish the goals of management.

An audit report for a public client indicates that the financial statements were prepared in conformity with:

Generally accepted accounting principles (U.S)

If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on:

Gross negligence.

Which of the following situations would raise an auditor's concern about the risk of fraudulent financial reporting?

Inability to generate positive cash flows from operations, while reporting large increases in earnings.

An attestation engagement:

Includes a report on subject matter, or on an assertion about subject matter.

Auditors are periodically punished for holding an investment in a client. This violates which ethical rule?

Independence

Jennifer Nelson, CPA, has posted the general ledger and has maintained the financial records of Quinn Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries without consulting Quinn's management. Which of the following best summarize the AICPA and SEC views as to the following question: Is audit independence impaired?

Item AICPA SEC A. Yes Yes B. Yes No C. No Yes D. No NO Option A

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with:

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

LAN is the abbreviation for

Local Area Network

When an auditor is planning an audit, the auditor should:

Make preliminary judgments about materiality levels for audit purposes.

An entity's ongoing monitoring activities often include:

Management review of weekly performance reports

Under common law, when performing an audit, a CPA:

Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances.

The permanent file section of the working papers that is retained for each audit client most likely contains:

Narrative descriptions of the transaction cycles and controls.

In addition to proving a loss, which of the following must be proven by a third party suing a CPA under Section 11 of the 1933 Securities Act? Misleading Financial Statements Reliance on financial statements A. Yes Yes B. Yes No C. No Yes D. No No

Option B

Under which act (or acts) must a client prove that a CPA has performed an audit with due diligence to establish that CPA's liability? SecuritiesAct of 1933 Securities ExchangeAct of 1934 A.Yes Yes B.Yes No C.No Yes D.No No

Option D

An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n):

Peer Review Engagement.

Which of the following is not a broad category of threat to auditor independence?

Positive work relationship.

Applying substantive tests to the details of asset and liability accounts as of an interim date, rather than as of the balance sheet date:

Potentially increases the risk that errors which exist at the balance sheet date will not be detected.

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control?

Preparing Bank Reconciliations

Historically, which of the following has the AICPA been most concerned with providing?

Professional standards for CPAs.

Passage of the Sarbanes-Oxley Act led to the establishment of the:

Public Company Accounting Oversight Board.

By definition, proper professional skepticism on an audit requires:

Questioning Mind Subjective assessment of audit evidence A. No No B. No Yes C. Yes No D. Yes Yes Option C

Which of the following is not an assertion relating to classes of transactions?

Reliability.

If noncompliance with a law is discovered during the audit of a publicly held company, the auditors should first:

Report the act to those in charge of governance within the client's organization.

When a company has changed auditors, according to the Professional Standards:

The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management.

What is a potential successor auditor's responsibility for communicating with the predecessor auditors when dealing with a prospective new client?

The successor auditors should obtain permission from the prospective client to contact the predecessor auditors.

A material departure from generally accepted accounting principles will result in auditor consideration of:

Whether to issue an adverse opinion rather than a qualified opinion.

Adams Corporation approved a plan of merger with Sten Corporation One of the determining factors in approving the merger was the strong financial statements of Sten which were audited by Schaefer & Company CPAs. Adams had engaged Schaefer to audit Sten's financial statements. While performing the audit, Schaefer failed to discover certain instances of fraud which have subsequently caused Adams to suffer substantial losses. In order for Schaefer to be liable under common law, Adams, at a minimum, must prove that Schaefer:

Was ordinarily negligent.

Which of the following is not a financial statement assertion relating to account balances?

Responsibilities.

Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates?

Review management's process for development.

The right to practice as a CPA is given by which of the following organizations?

State Boards of Accountancy.

An auditor may compensate for a weakness in internal control by increasing the extent of:

Substantive Test of Details

Which of the following is not a basic procedure used in an audit?

Substantive tests of detailed evidence.

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should:

Test controls for all significant accounts.

Fleming and Company CPAs, issued an unqualified opinion on the 20X3 financial statements of Walton Corporation Late in 20X4, Walton determined that its controller had embezzled over $2,000,000. Fleming was unaware of the embezzlement. Walton has decided to sue Fleming to recover the $2,000,000. The suit is based upon Fleming's failure to discover the missing money while performing the audit. Which of the following is Fleming's best defense?

That the audit was performed in accordance with GAAS.

Discovery sampling is particularly effective when:

The auditors are looking for critical deviations that are not expected to be frequent in number.

In which of the following circumstances is it least likely that tests of controls will be performed?

The expected deviation rate exceeds the tolerable deviation rate.

Which of the following is accurate regarding tolerable misstatement?

Tolerable Misstatement is directly related to materiality.

A CPA audited the financial statements of Zing Company. The CPA performed the audit with ordinary negligence and missed extremely material fraud. Wimmer, one of numerous suppliers to Zing, is upset because Wimmer had extended Zing a high credit limit based on the financial statements that were later found to be incorrect. Which of the following statements is the most correct relating to CPA common law liability?

Under the Ultramares approach to third party liability, it is extremely doubtful that Wimmer can recover.

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

Use less predictable audit procedures.

An accounts payable program posted a payable to a vendor not included in the online vendor master file. A control that would prevent this error is a:

Validity Check

Which of the following statements is correct?

Working papers prepared by the auditor solely for the engagement need not be returned to the client. CPA working papers that include copies of client's records are not available to third parties under any circumstances. CPA working papers are the joint property of the CPA and the client. Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received. Answer: Working papers prepared by the auditor solely for the engagement need not be returned to the client.