AUDIT 401
22) Which of the following types of employees must be independent of an audit client? A) A partner in the office that performs the engagement. B) Senior auditors assigned to the office that performs the audit. C) Managers assigned to an office that does not participate in the engagement. D) All firm professionals, regardless of their position.
A) A partner in the office that performs the engagement.
Question 4: The following is a list of circumstances that might be faced by a public accounting firm. Select the rule violated of the AICPA Code of Professional Conduct in the second column. If no rule is violated select "no violation" (this may be used once, more than once, or not at all). Rules may be used either once, or not at all. A) Acts discreditable. B) Accounting principles. C) Integrity and objectivity. D) Compliance with standards. E) Independence. F) Contingent fees. G) No violation. 01) The dependent-son of a partner in a CPA firm owns ten shares of stock in an audit client. 02) In preparing a tax return, a CPA takes a deduction at the client's request that the CPA believes is not justified. 03) A CPA robs a bank. 04) A CPA owns 100 shares in a consulting client for which the firm provides no attest services. 05) A CPA charges an audit fee that depends on the amount of credit the client obtains. 06) A CPA advertises in a local newspaper. 07) A client knowingly issues financial statements that inappropriately and materially depart from a FASB standard. 08) A CPA and the president of an audit client both have an immaterial joint investment in another company. The CPA firm provides no services for the other company. 09) A CPA discloses information about a client because the information was subpoenaed. 10) A CPA does not follow generally accepted auditing standards in the audit of a nonpublic US company.
01) E Independence. 02) C Integrity and objectivity. 03) A Acts discreditable. 04) G No violation. 05) F Contingent fees. 06) G No violation. 07) B Accounting principles. 08) B Accounting principles. 09) G No violation. 10) D Compliance with standards.
A plaintiff may elect to bring a lawsuit against auditors under applicable statutes-including the Securities Act of 1933 and the Securities Exchange Act of 1934-and under common law. For each circumstance, indicate the most likely source of CPA liability by placing the appropriate letter in the third column. A. The Securities Act of 1933 B. The Securities Exchange Act of 1934 C. Common Law Circumstance Source of Liability 1 A CPA's client is filing suit for negligence in performing an audit. 2 A stockholder of a publicly-held company who purchased the stock from another investor is filing suit for losses sustained on the stock. 3 A bank that lent money to a company is filing suit for misleading financial statements that were audited by the CPA. 4 An investor is filing suit for losses sustained in the purchase of publicly-traded bonds that were bought from the company upon initial registration. 5 A stockholder who purchased stock of a public company in an initial public offering is filing a suit for losses sustained in the purchase of the stock. 6 A CPA's client is filing suit for losses sustained for errors in a tax return prepared by the CPA. 7 A supplier who prepared credit to the CPA's publicly-held client is filing suit for losses sustained when the client could not pay the account. 8 An investor who purchased a corporate bond from another investor on the New York Stock Exchange is filing suit to recover losses.
1. C 2. B 3. C 4. A 5. A 6. C 7. C 8. B
A summary of findings rather than assurance is most likely to be included in a(n): A) Agreed-upon procedures report. B) Compilation report. C) Examination report. D) Review report.
A) Agreed-upon procedures report.
A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPA firm's revenues come from this client. Which statement is most likely to be true? A) Appearance of independence may be lacking. B) The small CPA firm does not have the proficiency to perform a larger audit. C) The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit. D) The auditor should provide an "emphasis of a matter paragraph" to his/her audit report adequately disclosing this information and then it may issue an unqualified opinion.
A) Appearance of independence may be lacking.
The financial statements of a United States public company are most likely to follow: A) Generally accepted accounting principles. B) International Standards of Auditing. C) Public Company Accounting Oversight Board Principles. D) Quality control standards.
A) Generally accepted accounting principles.
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): A) Peer Review Engagement. B) Quality Control Engagement. C) Quality Assurance Engagement. D) Attestation Engagement.
A) Peer Review Engagement.
Which of the following acts by a CPA would not necessarily be considered an act discreditable to the profession under the AICPA Code of Professional Conduct? A) Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so. B) Engaging in discriminatory employment practices. C) Robbing a convenience store. D) Knowingly signing a false tax return.
A) Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so.
Which of the following is considered a type of threat to compliance with the Rules of the Code of Professional Conduct? A) Self-interest. B) Illegitimate skepticism. C) Lack of management participation. D) Irrevocability.
A) Self-interest.
Fleming and Co., CPAs, issued an unqualified opinion on the 20X3 financial statements of Walton Corp. 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. Waltons 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? A) That the audit was performed in accordance with GAAS. A) That the audit was performed in accordance with GAAS. B) Fleming had no knowledge of the embezzlement. C) The financial statements were presented in conformity with GAAP. D) The controller was Walton's agent and as such had designed the controls which facilitated the embezzlement.
A) That the audit was performed in accordance with GAAS.
The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who: A) Unknowingly violates the 1934 Securities Exchange Act. B) Knowingly or unknowingly violates the 1934 Securities Exchange Act. C) Unknowingly violates the 1933 Securities Act. D) Knowingly or unknowingly violates the 1933 Securities Act.
A) Unknowingly violates the 1934 Securities Exchange Act.
An investor reading the financial statements of The Sundby Corporation observes that the statements are accompanied by an unmodified auditors' report. From this, the investor may conclude that: A. Any disputes over significant accounting issues have been settled to the auditors' satisfaction. B. The auditors are satisfied that Sundby is operationally efficient. C. The auditors have ascertained that Sundby's financial statements have been prepared accurately. D. Informative disclosures in the financial statements but not necessarily in the footnotes are to be regarded as reasonably adequate.
A. Any disputes over significant accounting issues have been settled to the auditors' satisfaction.
Indicate whether you agree or disagree with the following statements concerning a financial statement audit conducted in accordance with generally accepted auditing standards. statement audit conducted in accordance with generally accepted auditing standards. Statement A. Public companies are ordinarily audited by a CPA firm, with engagement review by the General Accounting Office. B. Audits provide absolute assurance of detecting material misstatements and reasonable assurance of detecting immaterial misstatements. C. For audit purposes, professional skepticism includes a questioning mind and a critical assessment of audit evidence and should be maintained throughout the planning and performance of an audit. D. The Auditing Standards Board issues accounting principles for nonpublic company audits, while the Public Company Accounting Oversight Board issues accounting principles for public company audits. E. Auditors have a higher responsibility for detecting noncompliance with laws affecting financial statement amounts and disclosures than they do for other laws. F. When an auditing standard uses the word "should," this indicates that the auditor must in all cases follow it if the requirement is relevant to the company being audited. G. At one point, the Public Company Oversight Board adopted the AICPA auditing standards in existence as its interim auditing standards. H. International auditing standards are developed by the International Auditing and Assurance Standards Board.
A. Disagree B. Disagree C. Agree D. Disagree E. Agree F. Disagree G. Agree H. Agree
The review of a company's financial statements by a CPA firm A. Is substantially less in scope of procedures than an audit. B. Requires detailed analysis of the major accounts. C. Is of similar scope as an audit and adds similar credibility to the statements. D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements.
A. Is substantially less in scope of procedures than an audit.
The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the: A. Management fails to take appropriate corrective action. B. Illegal act has material financial statement implications. C. Illegal act has received widespread publicity. D. Auditors cannot reasonably estimate the effect of the illegal act on the financial statements.
A. Management fails to take appropriate corrective action.
The AICPA allows an auditor to perform which of the following services for an audit client? A. Performance of bookkeeping services for the client. B. Authorization of transactions for the client. C. Preparation of client source documents. D. Preparation and posting of journal entries without the client's approval.
A. Performance of bookkeeping services for the client.
Historically, which of the following has the AICPA been most concerned with providing? A. Professional standards for CPAs. B. Professional guidance for regulating financial markets. C. Standards guiding the conduct of internal auditors. D. Staff support to Congress.
A. Professional standards for CPAs.
An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on: Financial Statements Internal Control A. Yes Yes B. Yes No C. No Yes D. No No
A. Yes Yes
Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to: Fraudulent Financial Reporting Misappropriation of Assets A. Yes Yes B. Yes No C. No Yes D. No No
A. Yes Yes
The Public Company Accounting Oversight Board may conduct investigations and disciplinary proceedings of: Registered Public Accounting Firms Registered Public Accounting Firm Employees A. Yes Yes B. Yes No C. No Yes D. No No
A. Yes Yes
Wilson Company is audited by the Denver office of Anderson CPAs. Which of the following individuals would be least likely to be considered a "covered member" by the independence standard? A) Staff assistant on the audit. B) A staff assistant who prepares Wilson Company's tax returns. C) A tax partner in Denver who performs no attest services for Wilson Company or for any other clients. D) The partner in charge of Anderson CPAs (she does no work on the Wilson Company Audit).
B) A staff assistant who prepares Wilson Company's tax returns.
Independence is required of a CPA performing: A) Audits, but not any other professional services. B) Attestation services, but not other professional services. C) Attestation and tax services, but not other professional services. D) All professional services.
B) Attestation services, but not other professional services.
A principle that may reduce or entirely eliminate auditor liability to a client is: A) Client constructive negligence. B) Client contributory negligence. C) Auditor ordinary negligence. D) Auditor gross negligence.
B) Client contributory negligence.
An act passed by Congress aimed at promoting financial stability improving accountability and transparency in the financial system: A) Better governance Act. B) Dodd-Frank Act. C) Public Company Accounting Oversight Board Act. D) Sarbanes-Oxley Act.
B) Dodd-Frank Act.
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: A) Ordinary negligence. B) Gross negligence. C) Strict liability. D) Criminal deceit.
B) Gross negligence.
Passage of the Sarbanes-Oxley Act led to the establishment of the: A) Auditing Standards Board. B) Public Company Accounting Oversight Board. C) Public Accountancy Review Board. D) Securities and Exchange Commission.
B) Public Company Accounting Oversight Board.
In which of the following circumstances would a covered member be considered independent when performing the audit of the financial statements of a new client for the year ended December 31, 20X3? A. The covered member resigned on January 17, 20X3 from the board of directors of the client, prior to accepting the new audit engagement. B. The covered member continues to hold an immaterial indirect financial interest in the client. C. The covered member continues to serve as a trustee for the client's pension plan and has the authority to make investment decisions. D. The covered member's spouse owns an immaterial amount of shares of common stock in the client.
B. The covered member continues to hold an immaterial indirect financial interest in the client.
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
B. Yes No
If the AICPA Code of Professional Conduct does not specifically address a threat to auditor independence, the auditor should: A) Conclude that the threat is not significant unless proven so. B) Conclude that the threat results in a lack of independence unless it can be shown that no impairment of independence occurs. C) Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all the relevant information. D) Consult the Statements on Auditing Standards for guidance.
C) Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all the relevant information.
Assume that a client has encountered a $800,000 fraud and that the CPA's percentage of responsibility established at 20%, while the company itself was responsible for the other 80%. Under which approach to liability is the CPA most likely to avoid liability entirely? A) Absolute negligence. B) Comparative negligence. C) Contributory negligence. D) Joint Negligence.
C) Contributory negligence.
An audit should be designed to obtain reasonable assurance of detecting material misstatements due to: A) Errors. B) Errors and fraud. C) Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts and others. D) Errors, fraud and noncompliance with all laws.
C) Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts and others
Competence as a certified public accountant includes all of the following except: A) Having the technical qualifications to perform an engagement. B) Possessing the ability to supervise and to evaluate the quality of staff work. C) Guaranteeing the accuracy of the work performed. D) Consulting others if additional technical information is needed.
C) Guaranteeing the accuracy of the work performed.
Which of the following is not a service included in the attestation subject matter standard? A) Compliance attestation. B) Financial forecasts and projections. C) Historical financial statement examination. D) Service organization controls.
C) Historical financial statement examination.
Which of the following is one of the elements of AICPA quality control? A) Assurance of proper levels of association. B) Due professional care. C) Human Resources. D) Supervision.
C) Human Resources.
The body that issues international pronouncements providing auditing procedural and reporting guidance is the: A) International Federation of Auditors. B) Multinational Reporting Commission. C) International Auditing and Assurance Standards Board. D) AICPA Auditing Standards Board.
C) International Auditing and Assurance Standards Board.
Which of the following is explicitly included as a part of the description of management's responsibility in a nonpublic company unmodified audit report? A) Management is responsible for making a judgment on which misstatements are material vs. immaterial. B) Management is responsible for providing auditors with all relevant evidence. C) Management is responsible for the maintenance of internal control. D) Management is responsible for listing all illegal acts with a direct effect on financial statement amounts and disclosures.
C) Management is responsible for the maintenance of internal control.
A CPA firm establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is: A) To enable the auditor to attest to the integrity or reliability of a client. B) To comply with the quality control standards established by regulatory bodies. C) To minimize the likelihood of association with clients whose managements lack integrity. D) To lessen the exposure to litigation resulting from failure to detect fraud in client financial statements.
C) To minimize the likelihood of association with clients whose managements lack integrity.
A requirement to design recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm is an example of a quality control procedure in the area of: A. Acceptance and continuance of client relationships and specific engagements. B. Engagement performance. C. Human resources. D. Relevant ethical requirements.
C. Human resources.
An unconditional responsibility to follow an AICPA professional standard exists when the professional standard uses the term(s): Must Should A. Yes Yes B. Yes No C. No Yes D. No No
C. No Yes
Authoritative GAAP Sources include: FASB Remediation Statements FASB Codification A. Yes Yes B. Yes No C. No Yes D. No No
C. No Yes
While performing an audit of a public company, the auditors discovered material illegal acts and resigned due to the client's refusal to disclose them. The auditors' reason for resignation should be disclosed through: CPA Direct The Process of Communication Filing With Shareholders a Form 8-K A. Yes Yes B. Yes No C. No Yes D. No No
C. No Yes
In which type of court case is proving "due diligence" essential to the auditors' defense? A) Court cases brought under the Securities Exchange Act of 1934. B) Court cases brought by clients under common law. C) Court cases brought by third parties under common law. D) Court cases brought under the Securities Act of 1933
D) Court cases brought under the Securities Act of 1933
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: A) Lack of due diligence. B) Lack of good faith. C) Gross negligence, but not ordinary negligence. D) Either ordinary or gross negligence.
D) Either ordinary or gross negligence.
Which of the following is most likely to violate the AICPA Code of Professional Conduct? A) Accepting audit fees fixed by a public authority. B) Submitting a competitive bid to a potential audit client. C) Performing professional services relating to judicial proceedings. D) Issuing the current year audit report when fees for the past year audit remain uncollected.
D) Issuing the current year audit report when fees for the past year audit remain uncollected.
) Inquiries and analytical procedures ordinarily form the basis for which type of engagement? A) Agreed-upon procedures. B) Audit. C) Examination. D) Review.
D) Review.
A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? A) The investor has not proven CPA negligence. B) The investor did not rely upon the financial statement. C) The CPA detected the misstatement after the audit report date. D) The audit work was adequate to support the CPA's opinion.
D) The audit work was adequate to support the CPA's opinion.
The AICPA Conceptual Framework for Independence requires that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of nonindependence exists? A. AICPA ethics examiner. B. Peer. C. PCAOB inspector. D. Reasonably informed third party.
D. Reasonably informed third party.
A CPA may receive a commission for recommending a particular computer system to an audit client. True/ False
False
A peer review is generally performed by employees of the AICPA. True/ False
False
An annual peer review is a requirement of the AICPA. True/ False
False
An audit should be designed to obtain reasonable assurance of detecting non-compliance with all laws. True/ False
False
CPAs can advertise the fees only for their nonattest services. True/ False
False
CPAs may not advertise as to any special expertise other than in accounting, auditing, and tax True/ False
False
If the auditors discover illegal acts by a client, they ordinarily must immediately resign from the engagement. True/ False
False
Staff assistants in CPA firms generally are responsible for planning and coordinating audit engagements. True/ False
False
The American Institute of Certified Public Accountants has been the primary source for ethical rules for internal auditors. True/ False
False
The American Institute of Certified Public Accountants has the primary authority to establish accounting standards. True/ False
False
The communications between CPAs and their clients are privileged under federal law. True/ False
False
Which of the following attributes is more essential for an auditor than of management? A) Integrity. B) Competence. C) Independence. D) Keeping informed on current professional developments.
Independence
Which of the following is not correct relating to the Sarbanes-Oxley Act? A) It toughens penalties for corporate fraud. B) It restricts the types of consulting CPAs may perform for audit clients. C) It applies to both public and nonpublic audit clients. D) It eliminates a significant portion of the accounting profession's system of self-regulation.
It applies to both public and nonpublic audit clients.
Many small companies elect to have their financial statements reviewed by a CPA firm, rather than incur the cost of an audit. True/False
True
The AICPA Statements on Attestation Standards do not supersede the AICPA Statements on Auditing Standards. True/ False
True
The SEC does not pass on the merits of the securities that are registered with the agency. True/ False
True
The pronouncements of the International Auditing and Assurance Standards Board do not override the national auditing standards of its members, even when financial statements are issued by a multinational company. True/ False
True
The Sarbanes-Oxley Act of 2002 placed significant restrictions on the types of consulting that may be performed by auditors for their public company audit clients. a. List four types of services that are prohibited by the Act. b. List three types of general consulting activities that would impair the auditors' independence based on the AICPA Code of Professional Conduct.
a. Services prohibited by the Act include (4 required): • Bookkeeping or other services related to the accounting records or financial statements. • Financial information systems design and implementation. • Appraisal, valuation, and actuarial services. • Internal audit outsourcing services, management functions, or human resources. • Various investment services. • Legal services and expert services unrelated to auditing. b. Consulting functions that the AICPA Code of Professional Conduct indicate impair independence include (3 required): • Authorizing, executing, or consummating a transaction. • Preparing source documents. • Having custody of client assets. • Supervising client employees in their normal recurring activities. • Determining which recommendation should be implemented. • Reporting to the board of directors on behalf of management. • Serving as a client's stock transfer or escrow agent, registrar, or its general counsel.
