AC 473 Final Exam

Which of the following procedures would be most likely to assist an auditor in identifying litigation, claims, and assessments? -Inspect checks included with the client's cut-off bank statement. -Obtain a letter of representations from the client's underwriter of securities. -Apply ratio analysis on the current-year's liability accounts. -Read the file of correspondence from taxing authorities.

Read the file of correspondence from taxing authorities.

In auditing contingent liabilities, which of the following procedures would an auditor be most likely to perform? -Confirm the details of outstanding purchase orders. -Apply analytical procedures to accounts payable. -Read the minutes of the board of directors' meetings. -Perform tests of controls on the cash disbursement activities.

Read the minutes of the board of director's meeting.

Which of the following statements, extracted from a client's lawyer's letter concerning litigation, claims, and assessments, would be most likely to cause the auditor to request clarification? -"We believe that the possible liability to the company is nominal in amount." -"We believe that the action can be settled for less than the damages claimed." -"We believe that the plaintiff's case against the company is without merit." -"We believe that the company will be able to defend this action successfully."

"We believe that the action can be settled for less than the damages claimed."

In which of the following situations would a CPA's independence be considered impaired according to the Code of Professional Conduct? 1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers. 2. The CPA has a direct financial interest in an audit entity, but the interest is maintained in a blind trust. 3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA. -1 and 3. -1, 2, and 3. -1 and 2. -2 and 3.

2 and 3

An audited entity company has not paid its 2015 audit fees. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2016 audit, the 2015 audit fees must be paid before the: -2016 report is issued. -2016 fieldwork is started. -2015 report is issued. -2017 fieldwork is started.

2016 report is issued

For which of the following events would an auditor issue a report that does not include any reference to consistency? -A change in the method of accounting for inventories. -A change from an accounting principle that is not generally accepted to one that is generally accepted. -A change in the service life used to calculate depreciation expense. -A change in accounting principle without reasonable justification from management.

A change in the service life used to calculate depreciation expense.

Auditing standards primarily encourage which of the following conversations between the auditor and another party about financial reporting? -A conversation with those charged with governance to discuss matters pertaining to financial reporting. -A conversation in which those charged with governance report on management's views on matters pertaining to financial reporting. -A conversation with only management to discuss matters pertaining to financial reporting. -A conversation with the head of the entity's internal audit department and those charged with governance to discuss matters pertaining to financial reporting.

A conversation with those charged with governance to discuss matters pertaining to financial reporting.

When reporting on comparative financial statements for a private company, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year's financial statements? -A change in accounting principle causes the auditor to make a consistency modification in the current year's audit report. -A scope limitation caused a qualified opinion on the prior year's financial statements, but the current year's opinion is properly unmodified. -The prior year's financial statements are restated following the purchase of another company in the current year. -A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those statements have been properly restated.

A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those statements have been properly restated.

The refusal of a client's attorney to provide information requested in an inquiry letter generally is considered -Grounds for an adverse opinion. -A limitation on the scope of the audit. -Reason to withdraw from the engagement. -Equivalent to a significant deficiency.

A limitation on the scope of the audit

Which of the following legal situations would be considered to impair the auditor's independence? -Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services. -Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services. -An expressed intention by the present management to commence litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be filed. -Actual litigation by the auditor against the present management, alleging management fraud or deceit.

Actual litigation by the auditor against the present management, alleging management fraud or deceit.

What is the primary reason that Congress passed the Securities Litigation Uniform Standards Act of 1998? -To overturn the Private Securities Litigation Reform Act of 1995. -As a result of concerns that plaintiff attorneys could get around the Private Securities Litigation Reform Act of 1995 by filing class action lawsuits involving nationally traded securities in state courts. -To provide for joint and several liability rather than proportionate liability. -To ensure that all publicly-held companies receive similar audits.

As a result of concerns that plaintiff attorneys could get around the Private Securities Litigation Reform Act of 1995 by filing class action lawsuits involving nationally traded securities in state courts.

The date of the management representation letter should coincide with the date of the -Balance sheet. -Latest interim financial information. -Auditor's report. -Latest related party transaction.

Auditor's report

Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n): -federal court that has issued a valid subpoena. -CPA firm that has been engaged to audit a former audit entity. -authorized quality control review board. -disciplinary body created under state statute.

CPA firm that has been engaged to audit a former audit entity

The primary source of information to be reported about litigation, claims, and assessments is the -Client's lawyer. -Court records. -Client's management. -Independent auditor.

Client's management

Which of the following statements would most likely be included among the written client representations obtained by the auditor? -Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. -Management acknowledges responsibility for illegal actions committed by employees. -Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion. -Management acknowledges that there are no material weaknesses in the internal control.

Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.

Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments? -Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed. -Confirm directly with the client's lawyer that all claims have been recorded in the financial statements. -Inquire about and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments. -Obtain from management a description and evaluation of litigation, claims, and assessments existing at the balance sheet date.

Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.

Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation, claims, and assessments? -Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments. -Obtain from management a description and evaluation of litigation, claims, and assessments that existed at the balance sheet date. -Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are likely to be asserted and must be disclosed. -Confirm directly with the entity's lawyer that all claims have been recorded in the financial statements.

Confirm directly with the entity's lawyer that all claims have been recorded in the financial statements.

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? -Inspecting title documents to verify whether any assets are pledged as collateral. -Confirming with third parties the details of arrangements to maintain financial support. -Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation. -Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

Confirming with third parties the details of arrangements to maintain financial support

When an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to -Prepare prospective financial information to verify whether management's plans can be effectively implemented. -Project future conditions and events for a period of time not to exceed one year following the date of the financial statements. -Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements. -Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

Consider the adequacy of disclosure about the entity's possible inability to continue as going concern.

A CPA's failure to file a tax return is -considered acceptable by the AICPA Code of Professional Conduct. -ill-advised because it would impair the CPA's independence with respect to attest clients. -considered discreditable to the profession. -a violation of generally accepted auditing standards.

Considered discreditable to the profession.

Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance? -A requirement for a profession is to establish ethical standards that primarily stress responsibility to entities and colleagues. -Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary. -Ethical standards that emphasize excellence in performance over material rewards establish individual reputations for competence and character. -Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.

Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary.

Which of the following is a provision of the Foreign Corrupt Practices Act? -The auditor's detection of illegal acts committed by officials of the auditor's publicly held client in conjunction with foreign officials should be reported to the Enforcement Division of the Securities and Exchange Commission. -It is a criminal offense for an auditor to fail to detect and report a bribe paid by an American business entity to a foreign official for the purpose of obtaining business. -Every publicly held company must devise, document, and maintain a system of internal accounting controls sufficient to provide reasonable assurance that internal control objectives are met. -If the auditor of a publicly held company concludes that the effects on the financial statements of a bribe given to a foreign official are not reasonably estimated, the auditor's report should be modified.

Every publicly help company must devise, document, and maintain a system of internal accounting controls sufficient to provide reasonable assurance that internal control objectives are met.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditor's report? Examine relevant internal audit reports issued during the subsequent period. Confirm bank accounts established after year-end. Inquire of the entity's legal counsel concerning litigation, claims, and assessments arising after year-end. Review a fire insurance settlement during the subsequent period.

Examine relevant internal audit reports issued during the subsequent period.

Under the SEC's rules regarding independence, which of the following must an entity disclose? -Only fees for the external audit. -Only fees for systems implementation and design and nonaudit services performed by the audit firm. -Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm. -Only fees for internal and external audit services provided by the audit firm.

Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm.

In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client's financial statements? -Unreasonable justification for a change in accounting principle. -Inability of the auditor to obtain sufficient competent evidence. -Departure from generally accepted accounting principles. -Inadequate disclosure of accounting policies.

Inability of the auditor to obtain sufficient competent evidence.

Of which of the following matters is a management representation letter required to contain specific representations? -Length of a material contract with a new customer. -Information concerning fraud by the CFO. -Reason for a significant increase in revenue over the prior year. -The competency and objectivity of the internal audit department.

Information concerning fraud by the CFO.

Which of the following procedures would an auditor ordinarily perform during the review of subsequent events? -Review the cut-off bank statements for the period after the year end. -Inquire with the client's legal counsel concerning litigation. -Investigate significant deficiencies in internal control previously communicated to the client. -Analyze related party transactions to discover possible irregularities.

Inquire with the client's legal counsel concerning litigation.

Which of the following procedures would an auditor be most likely to perform to obtain evidence about the occurrence of subsequent events? -Confirming a sample of material accounts receivable established after year end. -Comparing the financial statements being reported on with those of the prior period. -Investigating personnel changes in the accounting department occurring after year end. -Inquiring as to whether any unusual adjustments were made after year end.

Inquiring as to whether any unusual adjustments were made after year end.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? -Recomputing a sample of large-dollar transactions occurring after year end for arithmetic accuracy. -Investigating changes in stockholders' equity occurring after year end. -Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year end. -Confirming bank accounts established after year end.

Inquiring of the entity's legal counsel concerning litigation, claims, assessments arising after year end.

Which of the following procedures would an auditor be most likely to perform in obtaining evidence about subsequent events? -Determine that changes in employee pay rates after year end were properly authorized. -Recompute depreciation charges for plant assets sold after year end. -Inquire about payroll checks that were recorded before year end but cashed after year end. -Investigate changes in long-term debt occurring after year end.

Investigate changes in long-term debt occurring after year end

An auditor issued an audit report that was dual dated for a subsequent event occurring after the audit report date but before release of the auditor's report. The auditor's responsibility for events occurring subsequent to the audit report date was -Limited to include only events occurring up to the date of the last subsequent event referenced. -Limited to the specific event referenced. -Extended to subsequent events occurring through the date of release of the report. -Extended to include all events occurring since the audit report date.

Limited to the specific event referenced.

Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit? -Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud. -Management plans to expand into international operations during the next few years. -Management believes the financial statements are accurately stated in accordance with generally accepted auditing standards (GAAS). -Management believes the company is the premier company in its industry regarding service to customers.

Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.

Which of the following management roles would typically be acknowledged in a management representation letter? -Management has the responsibility for the design of controls to detect fraud. -Management communicates its views on ethical behavior to its employees. -Management's knowledge of fraud is communicated to the audit committee. -Management's compensation is contingent upon operating results.

Management has the responsibility for design of controls to detect fraud.

"There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a -report on internal control. -special report. -management representation letter. -letter for underwriters.

Management representation letter

"We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage most likely is from a(n) -Client engagement letter. -Report on compliance with laws and regulations. -Management representations letter. -Attestation report on an internal control structure.

Management representations letter

An auditor should consider which of the following when evaluating the ability of a company to continue as a going concern? -Audit fees. -Future assurance services. -Management's plans for disposal of assets. -A lawsuit for which judgment is NOT anticipated for 18 months.

Management's plans for disposal of assets

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the -Ability to expand operations into new product lines in the future. -Feasibility of plans to purchase leased equipment at less than market value. -Marketability of assets that management plans to sell. -Committed arrangements to convert preferred stock to long-term debt.

Marketability of assets that management plans to sell

Which of the following subsequent events will be least likely to result in an adjustment to the financial statements? -Culmination of events affecting the realization of accounts receivable owned as of the balance sheet date. -Culmination of events affecting the realization of inventories owned as of the balance sheet date. -Material changes in the settlement of liabilities that were estimated as of the balance sheet date. -Material changes in the quoted market prices of listed investment securities since the balance sheet date.

Material changes in the quoted market prices of listed investment securities since the balance sheet date.

The scope of an audit is not restricted when an attorney's response to an auditor, as a result of a client's letter of audit inquiry, limits the response to -Matters to which the attorney has given substantive attention in the form of legal representation. -An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity. -The attorney's opinion of the entity's historical experience in recent similar litigation. -The probable outcome of asserted claims and pending or threatened litigation.

Matter to which the attorney has given substantive attention in the form of legal representation.

Dart Corporation engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was included in Dart's registration statement. Hansen purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. If Hansen succeeds in the Section 11 suit against Dart, Hansen will be entitled to: -monetary damages comparable to the loss suffered. -damages of three times the original public offering price. -damages, but only if the shares were resold before the suit was started. -rescind the transaction.

Monetary damages comparable to the loss suffered.

Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements? -New convertible bonds are issued to expand the company's product line. -A loss is reported on uncollectible accounts of an acknowledged distressed customer. -A fixed asset used in operations is sold at a substantial profit. -Negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter.

New convertible bonds issued to expand the company's product line.

An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the -Control environment factors that affect the organizational structure. -Correlation of detection risk and inherent risk. -Effectiveness of the entity's internal control activities. -Possible effects on the entity's financial statements.

Possible effects on the entity's financial statements

How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors' liability to purchasers of securities beyond that of common law? -Purchasers have to prove either fraud or gross negligence as a basis for recovery. -Auditors are held to a standard of care described as "professional skepticism." -Privity with purchasers is not a necessary element of proof. -Purchasers have to prove only that a loss was caused by reliance on audited financial statements.

Privity with purchasers is not necessary element of proof

During the audit of Moon Co., the auditor disagrees with management's estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh more heavily for the auditor in this instance? -Accounts Receivable as stated by Moon Co. might turn out to be fully collectible. -The interests of Moon Co., the auditor, and the public should be weighed equally in the decision. -Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information. -Moon management has the right to make company estimates.

Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information

According to the ethical standards of the profession, which of the following acts is generally prohibited? -Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client. -Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society. -Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent. -Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.

Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.

Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? -Review compliance with the terms of debt agreements. -Consider management's plans to reduce or delay expenditures. -Review management's plans to dispose of assets. -Evaluate management's plans to borrow money or restructure debt.

Review compliance with the terms of debt agreements

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? -Confirmation of accounts receivable from principal customers. -Reconciliation of interest expense with debt outstanding. -Confirmation of bank balances. -Review of compliance with terms of debt agreements.

Review of compliance with terms of debt agreements

All of the following nonaudit services are identified by the SEC as generally impairing an auditor's independence except: -information systems design and implementation. -human resource services. -management functions. -some specific tax services. -all of the above are seen by the SEC as impairing independence.

Some specific tax services

After an audit report containing an unqualified opinion on a nonpublic entity's financial statements is issued, the auditor learns that the entity has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor should -determine whether the information is reliable and, if it is determined to be reliable, request that revised financial statements be issued. -notify the entity that the auditor's report may no longer be associated with the financial statements. -describe the effects of this subsequently discovered information in communications with persons known to be relying on the financial statements. -take no action because the auditor has no obligation to make any further inquiries.

Take no action because the auditor has no obligation to make any further inquiries.

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements? -The CPA is liable only to third parties in privity of contract with the CPA. -The CPA is liable only to known users of the financial statements. -The CPA probably is liable to any person who suffered a loss as a result of the fraud. -The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.

The CPA probably is liable to any person who suffered a loss as a result of the fraud.

A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties should reach an understanding on the limits of materiality for this purpose? -The auditor and the client's management. -The client's audit committee and the lawyer. -The client's management and the lawyer. -The lawyer and the auditor.

The auditor and the client's management

In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter/other-matter) paragraph? -The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor's opinion. -The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements. -The auditor wishes to emphasize that the entity had significant related-party transactions. -The entity issues financial statements that present financial position and results of operations but omits the statement of cash flows.

The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor's opinion.

Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders that contains financial statements and the auditor's report? -The auditor should extend the examination to the extent necessary to verify the "other information." -The auditor must modify the auditor's report to state that the other information "is unaudited" or "is not covered by the auditor's report." -The auditor has no obligation to read the "other information." -The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially inconsistent with the financial statements.

The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially inconsistent with the financial statements.

Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report? -The cost-to-benefit ratio of performing additional procedures to better determine the impact of the newly discovered facts. -The potential impact on financial statements and associated audit reports for the previous five years. -The client's willingness to pay additional fees for the additional procedures to be performed. -The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.

The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.

Which of the following matters would an auditor most likely include in a management representations letter? -Communications with the audit committee concerning weaknesses in internal control structure. -The completeness and availability of minutes of stockholders' and directors' meetings. -Plans to acquire or merge with other entities in the subsequent year. -Management's acknowledgment of its responsibility for the detection of all employee fraud.

The completeness and availability of minutes of stockholder's and director's meetings.

Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor's report would be most likely to cause the auditor to make further inquiries about the financial statements? -The discovery of information regarding a contingency that existed before the financial statements were issued. -The final resolution of a lawsuit explained in a separate paragraph of the auditor's report. -A technological development in the industry that could affect the entity's future ability to continue as a going concern. -The entity's sale of a subsidiary that accounts for 30 percent of the entity's consolidated sales.

The discovery of information regarding a contingency that existed before the financial statements were issued.

One purpose of a management representation letter is to reduce -Audit risk to an aggregate level of misstatement that could be considered material. -An auditor's responsibility to detect material misstatements only to the extent that the letter is relied upon. -The possibility of a misunderstanding concerning management's responsibility for the financial statements. -The scope of an auditor's procedures concerning related party transactions and subsequent events.

The possibility of a misunderstanding concerning management's responsibility for the financial statements

An auditor is reporting on comparative financial statements for three years. Which of the following statements is correct regarding written representations from management? -The representation letter needs to address the prior-year's financial statements not covered in the report. -The representation letter needs to address only the most current year covered in the report. -The representation letter needs to address only the two most recent years covered in the report. -The representation letter needs to address all of the years being covered in the report.

The representation letter need to address all of the years being covered in the report.

Which of the following is not a provision of the Sarbanes-Oxley Act? -Broad investigative and disciplinary authority over registered public accounting firms is granted to the Public Company Accounting Oversight Board. -The statute of limitations for actions under Section 10(b) and Rule 10b-5 was reduced to one year from the discovery of fraud and five years after the fraud occurred. -It is a criminal offense to take any harmful action in retaliation against anyone who voluntarily comes forward to report a suspected accounting or securities fraud. -A requirement to retain audit workpapers for at least five years.

The statute of limitations for actions under Section 10(b) and Rule 10b-5 was reduced to one year from the discovery of fraud and five years after the fraud occurred.

Which of the following best describes whether a CPA has met the required standard of care in auditing an entity's financial statements? -Whether the audit was conducted to investigate and discover all acts of fraud. -Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances. -Whether the statements conform to generally accepted accounting principles. -Whether the client's expectations are met with regard to the accuracy of audited financial statements.

Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances.

Rick, an independent CPA, must make an ethical judgment related to the audit of an entity. If he primarily focuses on whether his decision might yield unfair advantages for some at the expense of others, he is using: -a justice-based perspective. -a rights-based approach. -a utilitarian perspective. -rule-based AICPA guidelines.

a justice-based perspective

Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion on Tech's financial statements would most likely result from: -the entity's lack of experience with such litigation. -a lack of sufficient evidence. -an inability to estimate the amount of loss. -a lack of insurance coverage for possible losses from such litigation.

a lack of sufficient evidence

Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either: -a qualified opinion or an adverse opinion. -a qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph. -an unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph. -a qualified opinion or a disclaimer of opinion.

a qualified opinion or a disclaimer of opinion.

One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through: -a system of quality control. -continuing professional education. -a system of peer review. -compliance with generally accepted reporting standards.

a system of quality control

When an auditor is asked to express an opinion on an entity's rent and royalty revenues, he or she may: -accept the engagement, provided the auditor's opinion is expressed in a special report. -accept the engagement, provided distribution of the auditor's report is limited to the entity's management. -not accept the engagement because to do so would be tantamount to agreeing to issue a piecemeal opinion. -not accept the engagement unless also engaged to audit the full financial statements of the entity.

accept the engagement, provided the auditor's opinion is expressed in a special report.

The profession's ethical standards would most likely be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the -CPA would not be independent. -fee was a competitive bid. -actual fee would be substantially higher. -actual fee would be substantially lower than the fees charged by other CPAs for comparable services.

actual fee would be substantially

An auditor should request that an audited entity send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide: a description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcome. an objective appraisal of management's policies and procedures adopted for identifying and evaluating legal matters. the opinion of a specialist as to whether loss contingencies are possible, probable, or remote. corroboration of the information furnished by management concerning litigation, claims, and assessments.

corroboration of the information furnished by management concerning litigation, claims, and assessments.

Under the Private Securities Litigation Reform Act, Baker, CPA, reported certain uncorrected illegal acts to Supermart's board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the illegal acts had a material effect on Supermart's financial statements. Supermart failed to take appropriate remedial action, and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to: -resign from the audit engagement within 10 business days. -withhold an audit opinion until Supermart takes appropriate remedial action. -notify the stockholders that the financial statements are materially misstated. -deliver a report concerning the illegal acts to the SEC within one business day.

deliver a report concerning the illegal acts to the SEC within one business day.

Jenna Corporation approved a merger plan with Cord Corporation. One of the determining factors in approving the merger was the financial statements of Cord, which had been audited by Frank & Company, CPAs. Jenna had engaged Frank to audit Cord's financial statements. While performing the audit, Frank failed to discover fraud that later caused Jenna to suffer substantial losses. For Frank to be liable under common-law negligence, Jenna at a minimum must prove that Frank: -failed to exercise due care. -acted with scienter. -was grossly negligent. -knew of the fraud.

failed to exercise due care

To which of the following matters would an auditor not apply materiality limits when obtaining specific written representations from management? -Disclosure of compensating balance arrangements involving restrictions on cash balances. -Information concerning related party transactions and related amounts receivable or payable. -The absence of errors and unrecorded transactions in the financial statements. -Fraud involving employees with significant roles in the internal control structure.

fraud involving employees with significant roles in the internal control structure.

Comparative financial statements for a public company include the prior year's statements, which were audited by a predecessor auditor. The predecessor's report is not presented along with the comparative financial statements. If the predecessor's report was unqualified, the successor should: -indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion. -request that the predecessor auditor reissue the prior year's report. -obtain a letter of representations from the predecessor concerning any matters that might affect the successor's opinion. -express an opinion on the current year's statements alone and make no reference to the prior year's statements.

indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion.

An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph: -is considered an "except for" qualification of the opinion. -necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." -is appropriate and would not negate the unmodified opinion. -violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.

is appropriate and would not negate the unmodified opinion.

Which of the following is the best defense a CPA firm can assert in a suit for common law fraud based on its unqualified opinion on materially false financial statements? -Contributory negligence on the part of the client. -A disclaimer contained in the engagement letter. -Lack of privity. -Lack of scienter.

lack of scienter

An auditor would be most likely to identify a contingent liability by obtaining a(n): -accounts payable confirmation. -bank confirmation of the entity's cash balance. -list of subsequent cash receipts. -letter from the entity's general legal counsel.

letter from the entity's general legal counsel

An auditor issued an audit report that was dual dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditor's responsibility for events occurring subsequent to the date on which the auditor has obtained sufficient appropriate audit evidence was: extended to include all events occurring since the date on which the auditor has obtained sufficient appropriate audit evidence. limited to the specific event referenced. extended to subsequent events occurring through the date of issuance of the report. limited to events occurring up to the date of the last subsequent event referenced

limited to the specific event referenced

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to -enable the CPA firm to attest to the reliability of the client. -satisfy the CPA firm's duty to the public concerning the acceptance of new clients. -minimize the likelihood of association with clients whose management lacks integrity. -anticipate before performing any fieldwork whether an unqualified opinion can be expressed.

minimize the likelihood of association with clients whose management lacks integrity

Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under Section 11, which of the following must be proven by a purchaser of the security? -The CPA committed fraud and the purchaser relied on the financial statements. -The purchaser relied on the financial statements, but not that the CPA committed fraud. -The CPA committed fraud, but not that the purchaser relied on the financial statements. -Neither that the CPA committed fraud, nor that the purchaser relied on the financial statements.

neither that the cpa committed fraud, nor that the purchaser relied on the financial statements

Brown & Company, CPAs, issued an unqualified opinion on the financial statements of its client King Corporation. Based on the strength of King's financial statements, Safe Bank loaned King $500,000. King Corporation and Safe Bank are both located in a state that follows the Ultramares doctrine. Brown was unaware that Safe would receive a copy of the financial statements or that they would be used by King in obtaining a loan. King defaulted on the loan. If Safe commences an action for ordinary negligence against Brown, and Brown believes it will be able to prove that it conducted the audit in conformity with GAAS, Brown will: -be liable to Safe, because the statute of frauds has been satisfied. -be liable to Safe, because Safe relied on the financial statements. -not be liable to Safe, because there is a conclusive legal presumption that following GAAS is the equivalent of acting reasonably and with due care. -not be liable to Safe, because there was a lack of privity of contract.

not be liable to Safe, because there was a lack of privity of contract

Subsequent to issuing a report on audited financial statements, a CPA discovers that the accounts receivable confirmation process omitted a number of accounts that are material, in the aggregate. Which of the following actions should the CPA take immediately? -Bring the matter to the attention of the board of directors or audit committee. -Withdraw the auditor's report from those persons currently relying on it. -Perform alternative procedures to verify account balances. -Discuss the potential financial statement adjustments with client management.

perform alternative procedures to verify account balances

In connection with the element of engagement performance, a CPA firm's system of quality control should ordinarily include procedures covering all of the following except: -engagement performance. -performance evaluation. -review responsibilities. -supervision responsibilities.

performance evaluation

Management's responses to inquiries can be corroborated by each of the following, except -Visits to the entity's premises and plant facilities. -Inspection of documents and internal control manuals. -Preparation of the summary of unadjusted differences. -Observation of entity activities and operations.

preparation of the summary of unadjusted differences.

Final analytical procedures are generally intended to: -test transactions to corroborate management's financial statement assertions. -gather evidence concerning account balances that have not yet been investigated. -gather evidence concerning account balances that have not yet been investigated. -provide the auditor with a final, overall evaluation of the relationships among financial statement balances.

provide the auditor with a final, overall evaluation of the relationships among financial statement balances.

A violation of the profession's ethical standards is least likely to occur when a CPA: -receives a percentage of the amounts invested by the CPA's audit entities in a tax shelter with the entities' knowledge and approval. -forms an association—not a legally binding partnership—with two other sole practitioners and calls the association "Adams, Betts & Associates." -purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period. -has a public accounting practice and is president and sole stockholder of a corporation that engages in data processing services for the public. The CPA often refers his attest entities to the data processing company.

purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period.

A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis: -read the financial statements of the current period. -read the financial statements of the past five years. -obtain a letter of representations from the current-year, successor auditor. -read the financial statements of the current period and obtain a letter of representation from the current-year, successor auditor.

read the financial statements of the current period and obtain a letter of representation from the current-year, successor auditor.

When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make no reference to the predecessor auditor. reference to the predecessor auditor only if the predecessor auditor expressed a qualified opinion. reference to the predecessor auditor only if the predecessor auditor expressed an unqualified opinion. reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.

reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may -Require adjustments to the financial statements as of the year end. -Have been recorded based on preliminary accounting estimates. -Require disclosure to keep the financial statements from being misleading. -Have been recorded based on year-end tests for asset obsolescence.

require disclosure to keep the financial statements from being misleading

In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a -charitable organization in which an employee of the CPA serves as treasurer. -municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality. -restaurant where the CPA dines frequently. -company in which the CPA's private investment club owns a one-tenth interest.

restaurant where the CPA dines frequently.

The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and a: -complete list of all the different kinds of crimes that would be considered as acts discreditable to the profession. -list of violations that would cause the automatic suspension of a CPA's license. -description of a CPA's procedures for responding to an inquiry from a trial board. -set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain.

set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain.

When reporting on financial statements prepared on the basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that: -states that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles. -justifies the use of the income tax basis of accounting. -refers to the authoritative pronouncements that explain the income tax basis of accounting being used. -emphasizes that the financial statements have not been examined in accordance with generally accepted auditing standards.

states that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.

Dart Corporation engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was included in Dart's registration statement. Hansen purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. In a suit against Jay and Dart under the Section 11 liability provisions of the Securities Act of 1933, Hansen must prove that: -the unqualified opinion contained in the registration statement was relied on by Hansen. -jay knew of the misstatements. -jay was negligent. -the misstatements contained in Dart's financial statements were material.

the misstatements contained in Dart's financial statements were material

In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose -the name of the other CPA and the type of report issued by the other CPA. -the portion of the financial statements examined by the other CPA. -the nature of Frazier's review of the other CPA's work. -in a footnote the portions of the financial statements that were covered by the examinations of both auditors.

the portion of the financial statements examined by the other CPA.

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if -The results of alternative procedures that were performed compensate for the omission. -The auditor's assessed level of detection risk is low. -The omission is documented in a communication with the audit committee. -No individual investment is material to the financial statements taken as a whole.

the results of alternative procedures that were performed compensate for the omission

King, CPA, was engaged to audit the financial statements of Chang Company, a private company, after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King's financial statement audit report most likely contained a(n): -qualified opinion. -disclaimer of opinion. -unmodified opinion. -unmodified opinion with an emphasis-of-matter paragraph.

unmodified opinion

A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. The client's financial statements contain no material misstatements and the auditor concurs with this change. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n): -consistency modification. -explanatory paragraph. -"except for" qualified opinion. -unqualified opinion.

unqualified opinion

Cable Corporation orally engaged Drake & Company, CPAs, to audit its financial statements. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss. If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not: -sign an engagement letter. -have privity of contract with Cable. -violate generally accepted auditing standards in performing the audit. -perform the audit recklessly or with an intent to deceive.

violate GAAS in performing the audit

Which of the following matters should an auditor communicate to those charged with governance? Significant Audit Adjustments Management's Consultations with Other Accountants -No No -No Yes -Yes No -Yes Yes

yes yes

What is an auditor's primary method to corroborate information on litigation, claims, and assessments? -Examining legal invoices sent by the client's attorney. -Verifying attorney-client privilege through interviews. -Reviewing the response from the client's lawyer to a letter of audit inquiry. -Reviewing the written representation letter obtained from management.

Reviewing the response from the client's lawyer to a letter of audit inquiry.

Fritz Corporation, whose shares are publicly traded, engaged Hay Associates, CPAs, to audit its financial statements. Hay gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Hay's opinion was included in Fritz's Form 10-K filed with the Securities and Exchange Commission. Samson purchased shares and suffered a loss when the stock declined in value after the misstatements became known. In a suit against Hay under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Samson must prove all of the following except that: -hay acted with intent to deceive. -samson was a foreseen user of the financial statements. -the stock purchase involved a national securities exchange. -samson suffered a loss as a result of reliance on the financial statements.

Samson was a foreseen user of the financial statements

When audited financial statements are presented in a document containing other information, the auditor has an obligation to perform auditing procedures to corroborate the other information. is required to issue an "except for" qualified opinion if the other information has a material misstatement of fact. should read the other information to consider whether it is inconsistent with the audited financial statements. has no responsibility for the other information because it is not part of the basic financial statements.

Should read the other information to consider whether it is inconsistent with the audited financial statements.

Which of the following items should an auditor communicate to those charged with governance in a publicly traded company? -Significant audit adjustments recorded by the company and management's consultation with other accountants about significant accounting matters. -Significant audit adjustments recorded by the company but not management's consultation with other accountants about significant accounting matters. -Management's consultation with other accountants about significant accounting matters but not significant audit adjustments recorded by the company. -Neither significant audit adjustments recorded by the company nor management's consultation with other accountants about significant accounting matters.

Significant audit adjustments recorded by the company and management's consultation with other accountants about significant accounting matters.