Audit Chapter 1-5

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When auditor does not rely on ICFR to produce appropriate financial information..

more audit time and effort is spent on substantive activities than usual

An opinion is not rendered on..

interim reviews

ICFR

internal control over financial reporting

Bailey CPA, audited Lincoln Corporation. The shareholders sued both Lincoln and Bailey for securities fraud under the Federal Securities Exchange Act of 1934. The court determined that there was securities fraud and that Lincoln was 80% at fault and Bailey was 20% at fault due to her negligence in the audit. Both Lincoln and Bailey are solvent and the damages were determined to be $2 million. What is the maximum liability of Bailey? $0 $400,000 $1,000,000 $2,000,000

$400,000. (2,000,000 x .20)

Security

(investment contract) is any transaction in which a person (1) invests (2) in a common enterprise (3) reasonably expecting profits (4) derived primarily or substantially form others managerial or entrepreneurial efforts. broadly defined to include stocks - which term includes mutual fund shares - and also such things as notes, evidences of indebtedness, certificates of participation in any profit-sharing agreement, certificates of deposit

Business Judgment rule

1) Decision is well informed 2) no conflict of interest 3) reasonable Directors owe fiduciary duty to corporation and shareholders. Defensive tactics must be in best interest of Corporation and shareholders not to protect the board's interests and jobs Defensive tactics must be reasonable in relation to threat.

Interim reports are filed with the SEC using form..

10Q

The AICPA outlines ___ management assertions

The PCAOB outlines ___ management assertions

17. [LO 1] Who issues standards for audits of non-public companies? (a) The AICPA. (b) The SEC. (c) The PCAOB. (d) All of the above.

21. [LO3] A RFP is an important source of information that is: (a) provided by a potential client about its proposal process and audit engagement. (b) provided by an auditor about how its professional competencies match the needs of the audit engagement. (c) used only for audits of public companies. (d) used only when a company needs to change auditors.

25. [LO3] When a potential client has announced its intention to "go public," the auditor's client acceptance decision is likely to depend upon: (a) the results of background checks performed on individuals in key financial management positions. (b) whether a formal RFP was used. (c) whether the predecessor auditor was appropriately independent. (d) characteristics of the shareholders who will purchase the public shares.

27. [LO 3] Assessing the design effectiveness of the internal control system involves: (a) determining if the controls are appropriate. (b) determining if the controls operate as designed. (c) determining who is responsible for internal control. (d) All of the above.

27. [LO3] Earnings management pertains to: (a) accounting manipulations for the purpose of presenting the company in a biased manner. (b) conservative accounting treatments included in the financial disclosures. (c) the company's ability to limit production, if needed. (d) assigning responsibility for new accounting requirements.

30. [LO 3] If the auditor initially considers the internal control environment risky, but later during the audit concludes it to be adequate as a result of substantive procedures, the auditor: (a) should reflect the new assessment in its report on ICFR. (b) should increase substantive testing. (c) should issue a new opinion on the financial statements. (d) should issue a new opinion on the ICFR.

32. [LO3] Which of the following factors pertaining to a client's accounting function is most significant in the client acceptance or continuance decision? (a) Effectiveness of internal controls. (b) Use of a commercial accounting software program. (c) Frequency of performance evaluations for accounting personnel. (d) Frequency of updating the general ledger.

35. [LO 2] Which of the following is an assertion? a. A statement made by management regarding the collectability of accounts receivable. b. The audit firm's estimation of the client's inventory obsolescence. c. The statement by management regarding the appointment of auditors. d. The statement by management that the firm will close its branch office because of snow.

35. [LO2] There are many different concepts of "what is right" presented in your textbook. The concept that supports the progressive income tax in the United States is: A. right is whatever creates the greatest good. B. right is the decision made by a governing entity. C. right is the decision made by the group of people affected. D. right is whatever the law requires.

36. [LO3] By communicating with the predecessor auditor, an incoming auditor may gain valuable information pertaining to: (a) potential problem areas as indicated in the predecessor's work papers. (b) the updated status of a pending lawsuit. (c) the results of the current year budget variance analysis. (d) the audit tests that must be performed on a recurring basis.

37. [LO2] Moral development theory suggest that the criteria a person uses to make decisions depends on his or her level of moral development. Which of the following is NOT one of the levels? A. Pre-development level. B. Pre-conventional level. C. Post-conventional level. D. Conventional level.

37. [LO3] Communications between an incoming auditor and predecessor auditor: (a) require advanced approval from the client company. (b) are required to be documented in an engagement letter. (c) must be documented in a RFP if going concern issues exist. (d) are limited whenever the potential client is a public company.

38. [LO 4] Which of the following assertions do NOT address classes of transactions and events for the period under audit: (a) rights and obligations. (b) completeness. (c) cut-off. (d) None of the above.

41. [LO2] Ethical orientation related to the ethic of rights would NOT include which of the following? A. Individuals as interdependent. B. Importance of rights of others. C. Independence as strength. D. Importance of autonomy.

43. [LO 3] Referring to the facts in #42 above, Mary Ellen will likely prevail if her firm can show: a. GAAS was followed. b. GAAP was interpreted correctly. c. The audit testing reflected the risks known at the time. d. All of the above.

44. [LO4] Items documented in an engagement letter about which the auditor and client establish an understanding include: (a) management's responsibility for ensuring that the company complies with applicable laws and regulations. (b) management's responsibility for providing reasonable assurance about whether the financial statements are free of material misstatement. (c) the auditor's responsibility for maintaining effective ICFR throughout the audit engagement. (d) the auditor's responsibility for signing a management representation letter at the conclusion of the audit engagement.

47. [LO 3] Which of the following individuals could be a member of the Audit Committee? a. A member of the company's Board of Directors. b. A member of the PCAOB. c. An audit partner of the CPA firm who performs the annual audit. d. None of the above.

47. [LO4] The first section of an engagement letter addresses the terms of the services and related report, including the auditor's performance of a(n): (a) integrated audit of the financial statements and ICFR. (b) integrated audit of the financial statements and income tax returns. (c) integrated audit of the information contained in each Form 10-Q filed during the year. (d) review of the company's monthly financial information to be filed with the SEC

47. [LO4] The moral intensity criteria that cause a decision maker to realize that a situation has moral components include: A. consequences are very large or significant. B. identify alternative courses of action. C. ethical issues need to be identified. D. the consequences are not likely to happen.

48. [LO 3] Joint and severally liable means that: a. Each defendant is liable for the whole judgment if the other party cannot pay. b. Each defendant is liable for only his portion of the judgment. c. Each defendant is liable for the compensatory, but not punitive judgment. d. None of the above.

48. [LO 4] Which of the following source of evidence would be the most reliable: (a) a written confirmation sent by a bank directly to the auditor. (b) a written confirmation sent by a debtor to the client. (c) a written document produced electronically by a client with good internal controls. (d) a written document in the form of a fax sent by a debtor to the client indicating acceptance of a special offer.

49. [LO4] The engagement letter states that auditors are responsible for informing the client's audit committee about certain matters related to the conduct of the audit, including any: (a) serious difficulties encountered in performing the audit. (b) disagreements among audit team members pertaining to conclusions reached during the audit. (c) revisions made in the nature of audit tests performed as a result of information discovered during the course of the audit. (d) changes in the company's operational procedures during the year.

50. [LO 3] Punitive damages are: a. Added to compensatory damages in setting total damages. b. Only assessed in cases where the auditor is guilty of fraud. c. Assessed at the discretion of the jury. d. All of the above.

52. [LO 3] A defense against a charge of fraud is that: a. The auditor did not knowingly or intentionally perform the act. b. The auditor performed the audit in accordance with GAAS. c. The auditor relied on the work of third parties and is not subject to fraud charges. d. All of the above.

52. [LO 4] Which of the following is a current responsibility of the AICPA? a. Writing and grading the CPA exam that is used by the states. b. Issuing CPA certificates. c. Setting international audit standards for nonpublic companies. d. Writing the code of conduct that is adopted by all of the states.

52. [LO5] The level of the AICPA Code that is intended to be the enforceable guide of conduct is: A. Rules of Conduct. B. Rulings by the Professional Ethics Executive Committees. C. Interpretations of the Rules of Conduct. D. Principles of Professional Conduct.

56. [App. B] The New York Stock Exchange requirements regarding composition of the audit committee include each of the following except: (a) the audit committee must have at least three members who are financially sophisticated, and one of those members must be independent. (b) the audit committee must have at least three members who are independent, and one of those members must be financially sophisticated. (c) each member of the audit committee must not have participated in the preparation of the financial statements of the issuer at any time during the past three years. (d) each member of the audit committee must have the ability to read and understand fundamental financial statements.

57. [App. B] The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees is known for making recommendations to audit committees concerning: (a) composition of the committee, communication requirements, and oversight responsibilities. (b) qualifications of the committee, timing of their terms, and specific corrections in ICFR systems. (c) SEC filing deadlines, stock exchange requirements, and qualifications of membership. (d) liquidity of the capital markets, types of SEC affiliations and reporting forms, and compensation requirements.

57. [LO 5] Which of the following could cause an auditor to refuse to submit a proposal for a prospective audit client: (a) a senior sales V.P.'s 10 year-old conviction for tax evasion. (b) a board of directors comprised of management's close friends. (c) a reputation for high employee turnover. (d) None of the above.

57. [LO5] An entity that, as part of its normal business operations, makes loans or extends credit to the general public, is referred to as a: A. financial institution. B. savings and loan. C. federal reserve bank. D. FDIC.

59. [App.] To which of the following would AICPA attest standards not apply? a. SSARs. b. Elder care. c. Loans under TALF. d. Internal control for a nonpublic company.

60. [App. B] Auditors of public companies are required by SOX to communicate certain matters to the client company's audit committee, including: (a) significant audit findings and adjustments made to the financial statements. (b) identification of the auditor who will sign the SOX 302 certification. (c) identification of the auditor who will sign the management representation letter. (d) an explanation about whether the auditor chose to follow PCAOB or AICPA standards during the engagement.

62. [LO 5] Detection risk is: (a) the possibility that a misstatement will be missed when audit steps are performed. (b) the possibility that accounts receivable will be uncollected. (c) the possibility that inventory will not be sold. (d) Both b and c.

62. [LO5] Which of the following is acceptable under the AICPA Rules of Conduct? A. Using the name of a past owner in the firm name of a successor organization. B. Receive a commission from one client for recommending the products or services of another client. C. A firm may advertise itself as "Members of the American Institute of Certified Public Accountants", as long as at least one of its CPA owners is a member. D. Perform any professional services for a contingent fee for a client for whom the member performs an audit or review of the financial statements.

65. [LO 7] GAAS refers to: (a) ten auditing standards grouped into three sections. (b) those auditing standards that apply only to audits of public companies. (c) accounting principles generally accepted. (d) None of the above.

67. [LO 4] Section 105(c)(4) of SOX: a. Gives the PCAOB the authority to assess penalties against public accounting firms or individual auditors. b. Requires the PCAOB to inspect public accounting firms that audit public companies. c. Gives the PCAOB the power to issue subpoenas. d. All of the above.

67. [LO5] A covered member (i.e., the auditor) will not be independent from the client if he or she: A. has, or is going to get, an immaterial indirect financial interest in a client. B. has, or is going to get, a direct financial interest in a client. C. has a joint investment with a client. D. has a loan to or from a client, an officer of a client, or any individual owning more than 10 percent of a client.

69. [LO 4] SOX: a. Essentially makes the audit of public companies a regulated industry. b. Provides auditors less protection from lawsuits. c. Re-establishes auditors as primarily responsible for detecting fraud in the financial statements. d. All of the above.

69. [LO 7] The reporting standards addresses: (a) an expression of an opinion. (b) independence. (c) supervision. (d) understanding of internal control.

70. [LO 7] Which of the following would be a violation of the general auditing standards: (a) the auditor accepts an engagement from a firm for whom his brother-in-law works as the controller. (b) the auditor hires marketing majors because it cannot afford accounting graduates but trains them thoroughly. (c) the auditor allows second-year staff to supervise beginning staff. (d) All of the above are violations.

71. [LO 4] If Fraud on the Market Theory prevails, then which of the following is likely to occur: a. More findings of negligence on the part of juries. b. Greater punitive damages awarded by juries. c. Increased audit fees to cover increased costs of litigation. d. Both a and c.

A set of criteria used to determine measurement, recognition, representation, and disclosure of all material items appearing in the financial statements is referred to as a(n) A. Financial reporting framework. B. Public Company Accounting Oversight Board Criteria. C. Quality control presentation standard. D. Special purpose audit standard.

An audit opinion that states that the financial statements are not fairly presented is referred to as a(n) A. Adverse opinion. B. Limited assurance opinion. C. Negative opinion. D. Unqualified opinion.

An investor reading the financial statements of The Fairbury 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 Fairbury is operationally efficient. C. The auditors have ascertained that Fairbury's financial statements are free from error. D. Informative disclosures in the financial statements but not necessarily in the footnotes are to be regarded as reasonably adequate.

Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to: A. Fraudulent Financial Reporting and Misappropriation of Assets B. Fraudulent Financial Reporting C. Misappropriation of Assets D. Neither

Financial statements are prepared following a(an) A. Applicable financial reporting framework. B. Appropriate subject matter. C. Generally accepted auditing standards. D. Set of quality control standards.

Inventory has a ____ inherent risk related to existence

low

The AICPA has authority/regulates firms auditing..

non-public US companies

Generally accepted auditing standards established by the AICPA through April of 2003: A. Were accepted as interim standards by the Public Company Accounting Oversight Board. B. Provide accounting guidance for nonpublic companies. C. Were also adopted as international auditing standards at that date. D. Are now developed by the Securities and Exchange Commission.

Of the following, which are current types of peer reviews? A. System Reviews and Engagement Reviews B. System Reviews C. Engagement Reviews D. Neither

Ordinarily, a public company audit report must be addressed to: A. Board of Directors and Shareholders B. Board of Directors C. Shareholders D. Neither

The Public Company Accounting Oversight Board has authority to establish which of the following relating to public companies? A. Attestation Standards and Independence Standards B. Attestation Standards C. Independence Standards D. Neither

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.

The auditors' report for a nonpublic company should indicate: A. That the audit was made in accordance with auditing standards generally accepted in the United States of America. B. Any weakness in internal control observed by the auditors. C. That accounting principles have been consistently applied. D. That no illegal acts have been identified.

The public company audit report is most likely to have a section with the title of: A. Critical Audit Matters. B. Management Responsibilities. C. Shareholder Responsibilities. D. Type of Conclusion.

Which of the following is not an element of quality control? A. Documentation. B. Engagement performance. C. Monitoring. D. Relevant ethical requirements.

Which of the following is not included as a part of the description of the auditor's responsibility in a nonpublic company unmodified report? A. The audit was performed in accordance with generally accepted accounting principles. B. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. C. The procedures selected depend on the auditor's judgment. D. An audit includes evaluating the appropriateness of accounting policies used.

Which of the following is not included as a part of the description of the auditor's responsibility in a nonpublic company unmodified report? A. The audit was performed in accordance with generally accepted accounting principles. Correct B. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. C. The procedures selected depend on the auditor's judgment. D. An audit includes evaluating the appropriateness of accounting policies used.

Which of the following is accurate with respect to litigation involving CPAs? Answer A CPA will not be found liable for an audit unless the CPA has audited all affiliates of that company. A CPA may not successfully assert as a defense that the CPA had no motive to be part of a fraud. A CPA may be exposed to criminal as well as civil liability. A CPA is primarily responsible, while the client is secondarily responsible for the notes in an annual report filed with the SEC.

A CPA may be exposed to criminal as well as civil liability.

Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement. Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence? A loss sustained by a client in a suit brought under common law. A loss sustained by initial purchasers of stock in a suit brought under the Securities Act of 1933. A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent. A loss sustained by a bank named as a third-party beneficiary in the engagement letter in a suit brought under common law.

A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent.

Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement. Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence? Answer A loss sustained by a bank named as a third-party beneficiary in the engagement letter in a suit brought under common law. A loss sustained by initial purchasers of stock in a suit brought under the Securities Act of 1933. A loss sustained by a client in a suit brought under common law. A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent.

A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent.

The AICPA Conceptual Framework for Independence Standards suggests that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-independence exists? A) Reasonably informed third party. B) AICPA ethics examiner. C) PCAOB inspector. D) Peer.

A) Reasonably informed third party.

When an accountant is not independent, the accountant is precluded from issuing a: A) Review report. B) Compilation report. C) Management advisory report. D) Tax planning report.

A) Review report.

Which of the following statements is correct? A) Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid. B) CPA working papers are the joint property of the CPA and the client. C) CPA working papers that include copies of client's records are not available to third parties under any circumstances. D) Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received.

A) Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid.

Dealer

one who sells or trades securities on a full or part-time basis.

28. In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence? A. A price for a similar asset obtained from an active market. B. An appraisal obtained discounting future cash flows. C. Management's judgment of the cost to purchase an equivalent asset. D. The historical cost of the asset.

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

18. Which of the following is not considered to be an analytical procedure? A. Comparisons of financial statement amounts with source documents. B. Comparisons of financial statement amounts with nonfinancial data. C. Comparisons of financial statement amounts with budgeted amounts. D. Comparisons of financial statement amounts with comparable prior year amounts.

A. Comparisons of financial statement amounts with source documents.

52. When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations: A. Complement, but do not replace, substantive procedures designed to support the assertion. B. Constitute sufficient evidence to support the assertion when considered in combination with a moderate assessed level of control risk. C. Are generally sufficient audit evidence to support the assertion regardless of the assessed level of control risk. D. Replace the assessed level of control risk as evidence to support the assertions.

A. Complement, but do not replace, substantive procedures designed to support the assertion.

39. Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? A. Confirmation of amounts. B. Review of management's process of development. C. Independent development of an estimate. D. Review of subsequent events.

A. Confirmation of amounts.

50. The date of the management representation letter should coincide with the: A. Date of the auditor's report. B. Balance sheet date. C. Date of the latest subsequent event referred to in the notes to the financial statements. D. Date of the engagement agreement.

A. Date of the auditor's report.

70. What type of transactions ordinarily have high inherent risk because they involve management judgments or assumptions in formulating accounting balances? A. Estimation. B. Nonroutine. C. Qualified. D. Routine.

A. Estimation.

51. An example of an analytical procedure is the comparison of: A. Financial information with similar information regarding the industry in which the entity operates. B. Recorded amounts of major disbursements with appropriate invoices. C. Results of a statistical sample with the expected characteristics of the actual population. D. EDP generated data with similar data generated by a manual accounting system.

A. Financial information with similar information regarding the industry in which the entity operates.

27. Which of the following best describes the problem with the use of published industry averages for analytical procedures? A. Lack of comparability. B. Lack of sufficiency. C. Lack of accuracy. D. Lack of availability.

A. Lack of comparability.

13. Financial statement assertions are established for classes of transactions: Account Balances Disclosures A. Yes Yes B. Yes No C. No Yes D. No No A. Option A B. Option B C. Option C D. Option D

A. Option A

49. Which of the following would not necessarily be considered a related party transaction? A. Payment of a bonus to the president. B. Purchases from another corporation that is controlled by the corporation's chief stockholder. C. Loan from the corporation to a major stockholder. D. Sale of land to the corporation by the spouse of a director.

A. Payment of a bonus to the president.

47. Failure to detect material dollar errors in the financial statements is a risk which the auditors primarily mitigate by: A. Performing substantive procedures. B. Performing tests of controls. C. Assessing control risk. D. Obtaining a client representation letter.

A. Performing substantive procedures.

67. Based on the previous information, which of the following preliminary conclusions can the auditor use as a basis for further investigations? A. Sales per store are directly related to the size of the store. B. Sale clerks are less productive in larger size stores. C. Gross margin is directly related to the size of the store. D. Average square feet of store correlates with the number of stores in the district.

A. Sales per store are directly related to the size of the store.

33. Which of the following is generally true about the sufficiency of audit evidence? A. The amount of evidence that is sufficient varies directly with the acceptable risk of material misstatement. B. The amount of evidence concerning a particular account varies inversely with the materiality of the account. C. The amount of evidence concerning a particular account varies inversely with the inherent risk of the account. D. When evidence is appropriate with respect to an account it is also sufficient.

A. The amount of evidence that is sufficient varies directly with the acceptable risk of material misstatement.

Management assertions indicate that..

management is communicating through the information included in the financials

54. Which of the following statements is generally correct about audit evidence? A. The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. B. To be appropriate, audit evidence must be sufficient. C. Accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on financial statements. D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.

A. The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.

63. In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit? A. The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation. B. The working papers are subject to the privileged communication rule which, in a majority of jurisdictions, prevents third-party access to the working papers. C. The working papers are the property of the client after the client pays the fee. D. The working papers must be retained by the CPA firm for a period of ten years.

A. The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation.

38. An auditor is performing an analytical procedure that involves developing common-size financial statements. This technique is referred to as: A. Vertical analysis. B. Horizontal analysis. C. Cross-sectional analysis. D. Comparison analysis.

A. Vertical analysis.

26. A CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so: A. Violates professional standards. B. Is acceptable, but should only be done when cost justified. C. Is acceptable, but only for non-public clients. D. Is acceptable and desirable under all conditions.

A. Violates professional standards.

43. A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final mount that will appear in the financial statement, is referred to as a: A. Working trial balance. B. Lead schedule. C. Summarizing schedule. D. Supporting schedule.

A. Working trial balance.

CPA standards and testing are the authority of the...

AICPA

The ___ designs and administers the CPA exam

AICPA

_____ assurance is not attainable

Absolute

A summary of findings rather than assurance is most likely to be included in a(n):

Agreed-upon procedures report.

Regulation A (Partial Exemption)

Allows simplified form of registration. Offering statement in stead of registration statement. Includes offering circular rather than prospectus Sales may not exceed $5 million in 12-month period

Underwriter

An intermediary who sells an issuer's securities to the general public or to dealers

Tender Offers

An offer to all shareholders to purchase stock for a specific price for a specified period of time. Any party making a tender offer to purchase 5% or more of the shares of a class of securities registered under the 1934 act must file a report with the SEC. Report must include background of purchaser, source of funds and purpose of buying.

Stakeholders

Anyone who affects or is affected by decisions made within a firm

the audit committee is responsible for..

oversight of the audit function

When an audit is made in accordance with generally accepted auditing standards, the independent auditors must:

perform analytical procedures.

A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan. In a suit by the bank issuing the loan the CPA's best defense would be that the: Answer Audit complied with generally accepted auditing standards. Client was aware of the misstatements. Bank was not the CPA's client. Bank's identity was known to the CPA prior to completion of the audit.

Audit complied with generally accepted auditing standards.

A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan. In a suit by the bank issuing the loan, the CPA's best defense would be that the: Bank's identity was known to the CPA prior to completion of the audit. Bank was not the CPA's client. Audit complied with generally accepted auditing standards. Client was aware of the misstatements.

Audit complied with generally accepted auditing standards.

Auditor is responsible for..

Audit report

The Statements on Auditing Standards have been issued by the:

Auditing Standards Board.

17. [LO1,2] An auditor's professional competence depends upon each of the following except: (a) knowledge. (b) a reputation for issuing unqualified audit opinions. (c) the availability of professional staff and other resources necessary for the audit engagement. (d) the requisite training and proficiency necessary for the audit engagement.

20. [LO 2] If an entity's financial records do not contain sufficient evidentiary matter the auditor must: (a) issue a qualified opinion. (b) decline the audit. (c) perform the audit and obtain the evidence itself. (d) None of the above.

22. [LO3] Which of the following would be least likely to preclude an audit firm from proposing on a potential client due to independence concerns? (a) A recently-promoted partner in the audit firm holds a financial interest in the potential client company. (b) Someone who resigned from the audit firm three years ago is now the Chief Accounting Officer at the potential client company. (c) The audit firm provides internal audit outsourcing and certain nonaudit services to the client company. (d) The audit firm's pension plan holds securities of the potential client company

24. [LO 1] Who is responsible for the design and operation of ICFR? a. The auditor. b. The company's management. c. Both a and b. d. None of the above.

26. [LO 3] Assessing the design effectiveness of the internal control system involves: (a) reviewing the controls that are missing. (b) reviewing the controls present. (c) deciding if those controls are operating as intended. (d) All of the above.

29. [LO 1] Audit risk involves the risk that: a. The financial statements contain a misstatement. b. The ICFR fails to report material internal control weaknesses and the audit report also fails to mention this fact. c. The client lied to management. d. All of the above.

31. [LO 2] Tort law addresses: a. Situations in which negligence occurs b. Situations in which a party suffers a loss and wants to collect damages. c. Situations in which a party suffers a loss and wants to collect punitive damages. d. None of the above.

31. [LO3] Related party transactions are: (a) quite rare, and are therefore a reason for auditors to avoid new client relationships due to the increased risk. (b) required to be disclosed in the financial statements. (c) assumed to be arms-length transactions unless they are disclosed in the financial statements. (d) considered to be a warning sign of going concern issues.

32. [LO 2] The audit engagement team: a. is chosen by the client. b. is some combination of partners, managers, seniors and associates. c. is a mix of CPA firm and client employees. d. None of the above.

32. [LO1] Which of the following relates to what an auditor does? A. Relies on all information provided by the client. B. Performs a service and announces its opinion. C. Prepares the financial statements for a company. D. Advocates for the client.

34. [LO3] In which publicly-filed document is an auditor most likely to find information about a potential client's financial trends? (a) Form 8K. (b) Management discussion and analysis section of the Form 10K. (c) Proxy statements. (d) Engagement letter.

36. [LO 2] Which of the following would not be considered audit evidence? a. Invoices received by the company and retained on the company's IT system in electronic form. b. The electronic work paper program package used by the auditor to produce the electronic work papers. c. Hard copy minutes of the Board of Directors and Audit Committee meetings. d. Electronic images of the front and back of checks that the company has written.

36. [LO2] The war in Iraq would be contrary to the: A. right is the decision made by a single ruler with ultimate authority. B. right is whatever preserves the life of even one person. C. right is whatever the law requires. D. right is whatever creates the greatest good.

38. [LO2] Individuals at this level of moral development make decisions in a self-centered way. A. Pre-development level. B. Pre-conventional level. C. Conventional level. D. Post-conventional level.

38. [LO3] Whenever a company refuses to allow business professionals to communicate openly with an auditor, the auditor should be concerned about the likelihood that: (a) a RFP was not formalized. (b) information exists that the company wants to withhold. (c) management is centralized. (d) the company is experiencing rapid growth.

40. [LO4] An engagement letter for an audit: (a) provides recommendations to management about improvements in its system of ICFR. (b) distinguishes management's responsibilities throughout the audit process from the auditor's. (c) specifies the high risk areas that will be the focus of the audit engagement. (d) specifies the type of audit opinion that will be issued.

41. [LO 2] Which body regulates the audits of nonpublic companies in the United States? a. PCAOB b. AICPA c. IFRS d. SEC

42. [LO 3] Mary Ellen Dillon is an audit partner with a large public accounting firm. Recently, one of her long-standing clients suddenly filed for bankruptcy protection. Mary Ellen's firm had previously issued an unqualified opinion on the client's financial statements. As a result, Mary Ellen's firm is being sued for negligence. Mary Ellen's best defense would be: a. To challenge standing on the part of the defendant. b. To cite the professional standards and maintain that the firm met the "prudent person" standard. c. To cite the client's responsibility for the financial statements. d. All of the above.

43. [LO 2] Shareholders use audit reports to monitor management performance. An example of an item that an audit report does NOT provide is: a. Reasonable assurance on reported information that might be used to provide justification for management's performance-based compensation. b. Access to foreign markets. c. An indication of whether or not a company has major problems in its internal control over financial reporting. d. Feedback on any ICFR material weaknesses that management may choose to use to improve operational or financial efficiency.

43. [LO3] Which of the following is NOT a characteristic of a profession? A. Specific body of knowledge for which the group has expertise. B. Graduate degree from a recognized university. C. Controls standards for entry and continued membership. D. Recognizable individual characteristics or traits.

44. [LO 2] Auditors consider internal control during the audit of a nonpublic company: a. For all the same purposes as on an audit of a public company. b. To identify areas of risk and help to plan the financial statement audit. c. To help to plan the financial statement audit and issue an opinion on effectiveness. d. Only if they are sure it will be helpful when performing the financial statement audit.

44. [LO3] Which of the following is a personal characteristic associated with person who is considered a professional? A. Specific body of knowledge. B. Possess technical expertise and behave with integrity. C. Self-discipline and self-regulation. D. Recognizable individual characteristics.

45. [LO 3] The value of an integrated audit a. Is limited to its effects on the capital markets since integrated audits are conducted only for publicly traded companies. b. Extends to various groups and probably is different for the different people and entities. c. Is exactly the same as the value generated by a financial statement audit of a nonpublic company. d. None of the above are correct.

45. [LO4] An audit engagement letter sets forth the auditor's responsibility for confirming its responsibility to provide written communications to the client company for each of the following items except: Communication provided to: Subject matter: (a) Management and the shareholders All internal control deficiencies identified during the audit and not previously communicated. (b) Shareholders All adjustments required to correct the financial statements (c) Management and the audit committee All significant deficiencies and material weaknesses in ICFR identified during the audit. (d) Board of directors The auditor's overall conclusions concerning the effectiveness of financial oversight and ICFR.

48. [LO4] Situations for which, even for a single individual using their own personal beliefs, there is no clear cut right or wrong ethical answer are referred to as: A. ethical decisions. B. moral dilemmas. C. moral intensity. D. ethical standards.

52. [LO4] The absence of sufficiently documented evidence to support management's assessment of the operating effectiveness of ICFR is a(n): (a) material weakness that would require the auditor to withdraw from the audit engagement. (b) internal control deficiency that could preclude the issuance of an unqualified audit report. (c) matter of concern only to the company's audit committee, predecessor auditors, and internal auditors. (d) example of the effective operation of the company's document retention policy.

54. [LO4] An engagement letter states that a company should maintain documentation sufficient to support its assessment of ICFR for a period of: (a) ten years from the date of the audit report. (b) seven years from the date of the audit report. (c) five years from the date of the financial statements. (d) three years from the date of the financial statements.

54. [LO5] The rule of independence would relate to which of the following accounting professionals? A. Internal auditor. B. CPA performing an audit. C. Controller preparing the firm's financial statements. D. Tax accountant.

55. [LO4] The engagement letter includes provisions for the electronic filing of the client company's financial reports with the SEC. These provisions include consents which will authorize the: (a) use of the audit firm's logo on each page of the filing. (b) use of the audit firm's name in the electronic submission. (c) retention of audit evidence for a period of 10 years following the audit engagement. (d) dissemination of the audit report to the auditor's other clients.

56. [LO 4] A registration statement is a: a. Document filed by the auditor with the SEC for new securities being offered. b. Document filed by a client with the SEC for new securities being offered. c. Can be filed by either the client or auditor. d. None of the above.

56. [LO 5] Forensic auditors: a. Investigate only fraud. b. Look for specific and detailed information. c. Perform engagements that can result in a standard, clean audit report. d. May not be CPAs.

56. [LO5] A covered member, as described by the AICPA Professional Standards, would include all of the following, except: A. an individual on the attest engagement team. B. the client. C. the firm, including the firm's employee benefit plans. D. an individual in a position to influence the audit engagement.

58. [App. B] Which of the following is not an attribute of a financial expert? (a) An understanding of internal controls and procedures for financial reporting. (b) An affiliation with the company or its subsidiaries. (c) Education and experience as a financial officer, accountant, or auditor. (d) An understanding of GAAP.

58. [LO 4] The Barchris case set precedent in that: a. The auditor was found guilty of fraud. b. The auditor is responsible for reporting material differences that arise between the audit report date and the registration statement date. c. The auditor is responsible for all differences that arise between the audit report date and the registration statement date. d. All of the above.

58. [LO 5] Engagement risk is defined as: (a) the risk that the client will not pay you on time. (b) the risk that being associated with the client will not be good for the accounting firm. (c) the risk that the client will not reappoint the auditor after the first year. (d) All of the above.

59. [LO 5] The engagement letter: (a) must be generated before any audit work is performed. (b) cannot be generated until the audit firm communicates with the audit committee, in writing, about independence. (c) includes the names of staff and managers working on the engagement. (d) All of the above.

60. [LO 4] Scienter means: a. The auditor exercised poor professional judgment. b. The auditor knowingly sought to deceive the plaintiff. c. The auditor failed to exercise due professional care. d. All of the above.

61. [LO 5] Control risk is: (a) the risk that inventory will not be sold. (b) the risk that the internal controls will not disclose material errors. (c) the risk that the economy will sink into recession. (d) the risk that accounts receivable will be uncollected.

61. [LO5] Rule 201, General Standards, of the AICPA Rules of Conduct, includes all of the following, except: A. professional competence. B. independence. C. due professional care. D. planning and supervision.

62. [App.] Which of the following is NOT a "Big Four" firm? a. PwC. b. Grant-Thornton. c. Deloitte & Touche. d. Ernst & Young

62. [LO 4] The SEC rules of practice: a. Involve criminal complaints against auditors. b. Can result in sanctions and penalties against auditors. c. Can be appealed to Congress. d. All of the above.

63. [LO 6] Non public companies: (a) do not have to be audited. (b) are not required to have an audit of their ICFR. (c) follow different standards than public companies. (d) present little, if any, risk to auditors.

65. [LO5] Which of the following statements is false related to the PCAOB? A. The PCAOB has the authority to prose and adopt rules and standards. B. The PCAOB is a for profit entity. C. The PCAOB rules are more overarching in that they statement the requirement to follow PCAOB standards. D. THE PCAOB was structured by the SEC in response to the Sarbanes-Oxley Act.

66. [LO 7] The three sections or groups of audit standards are: (a) field work, general, and final. (b) field work, reporting, and general. (c) field work, testing, and internal control review. (d) field work, general, and overall.

66. [LO5] According to the AICPA Interpretations of Rule 101, independence: During the period of the professional engagement, auditor independence is NOT considered to be impaired if the auditor: A. had or was committed to acquire any direct or material indirect financial interest in the client. B. had a joint closely held investment that was immaterial to the covered member. C. was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire any direct or material indirect financial interest in a client. D. except as specifically permitted, had any loan to or from the client.

68. [LO 4] Section 105(c) of SOX: a. Assesses penalties against public companies. b. Assesses penalties against audit firms found to be in violation of SOX by the PCAOB. c. Provides for the suspension of an audit firm's license. d. All of the above.

70. [LO5] Section 206 of the Sarbanes-Oxley Act states that: A. an auditor who worked on a company's audit engagement and goes to work for the client will not impact the firm's independence. B. if a person leaves the audit firm and goes to work for the client as a CEO, CFO, controller, or equivalent position, the audit firm will not be independent with respect to the client for one year. C. an auditor with the firm, who has not worked on the company's audit engagement, and goes to work for the client will impact the firm's independence. D. if a person leaves the audit firm and goes to work for the client as a CEO, CFO, controller, or equivalent position, the audit firm will not be independent with respect to the client for three years.

A requirement that working papers be reviewed by the supervisor, and any deficiencies be discussed with the preparer 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.

An attestation engagement: A. Has as its primary source of standards the assurance standards. B. Includes a report on subject matter, or on an assertion about subject matter. C. Includes search and verification procedures for all major accounts. D. Is ordinarily an examination, review or compilation engagement.

An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatements, and a critical assessment of audit evidence is referred to as: A. Reasonable assurance. B. Professional skepticism. C. Audit neutralism. D. Auditing mindset.

An audit provides reasonable assurance of detecting which of the following types of material illegal acts? A. Direct Effect and Without a Direct Effect B. Direct Effect C. Without a Direct Effect D. Neither

An unconditional responsibility to follow an AICPA professional standard exists when the professional standard uses the term(s): A. Must and Should B. Must C. Should D. Neither

By definition, proper professional skepticism on an audit requires: A. Questioning mind and Subjective assessment of audit evidence B. Questioning mind C. Subjective assessment of audit evidence D. Neither

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the: A. Partner assigned to the audit engagement. B. Management of the company. C. Auditor in charge of the fieldwork. D. Securities and Exchange Commission.

When a Statement on Auditing Standards uses the word "should" relating to a requirement, it means that the auditor: A. Must fulfill the responsibilities under all circumstances. B. Must comply with requirements unless the auditor demonstrates and documents that alternative actions are sufficient to achieve the objectives of the standards. C. Should consider whether to follow the advice based on the exercise of professional judgment in the circumstances. D. May choose to change responsibilities relating to various professional standards that remain under consideration.

When the auditors express an opinion on financial statements, their responsibilities extend to: A. The underlying wisdom of their client's management decisions. B. Whether the results of their client's operating decisions are fairly presented in the financial statements. C. Active participation in the implementation of the advice given to their client. D. An ongoing responsibility for their client's solvency.

Which of the following best describes a portion of the auditors' responsibility regarding noncompliance with laws by clients? A. The auditors have a responsibility to discover all material noncompliance. B. If audit procedures reveal noncompliance, the auditors should take appropriate actions. C. If the auditors suspect noncompliance, they should conduct a legal audit of the company. D. The auditors' responsibility for the detection of all noncompliance is the same as their responsibility regarding material misstatements due to errors and fraud.

Which of the following best describes what is meant by generally accepted auditing standards? A. Acts to be performed by the auditors. B. Measures of the quality of the auditors' performance. C. Procedures to be used to gather evidence to support financial statements. D. Audit objectives generally determined on audit engagements.

Which of the following is accurate, as indicated in the principles underlying an audit? A. Management is expected to provide the auditors with all needed evidence prior to the beginning of audit work. B. An auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement. C. Auditors are responsible for having appropriate competence to perform the audit without the assistance of outside specialists. D. Management is responsible for preparing accurate financial statement amounts, while auditors are responsible for auditing those amounts and for preparing note disclosures related to those amounts.

Which of the following is not a type of auditors' opinion? A. Adverse. B. Conventional. C. Qualified. D. Unmodified.

Which of the following is not an element of quality control? A. Monitoring. B. Independence. C. Human resources. D. Engagement performance.

Which of the following is not an underlying premise of an audit? A. Management must provide the auditor with all information relevant to the preparation and fair presentation of the financial statements. B. Management and the auditors have responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework. C. Where appropriate, the auditor may obtain information from those charged with governance. D. The auditors should be provided unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence.

Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of professional conduct and to establish a mechanism for enforcing observation of the code? A) A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues. B) A distinguishing mark of a profession is its acceptance of responsibility to the public. C) An essential means of self-protection for the profession is the establishment of flexible ethical standards by the professions. D) A requirement of most state laws calls for the profession to establish a code of ethics.

B) A distinguishing mark of a profession is its acceptance of responsibility to the public.

Pickens and Perkins, CPAs, decide to incorporate their practice of accountancy. According to the AICPA Code of Professional Conduct, shares in the corporation can be issued: A) Only to persons qualified to practice as CPAs and members of their immediate families. B) Only to persons qualified to practice public accounting. C) Only to employees and officers of the firm. D) To the general public.

B) Only to persons qualified to practice public accounting.

Competence as a certified public accountant includes all of the following except: A) Possessing the ability to supervise and to evaluate the quality of staff work. B) Warranting the infallibility of the work performed. C) Consulting others if additional technical information is needed. D) Having the technical qualifications to perform an engagement.

B) Warranting the infallibility of the work performed.

22. The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable? A. 5%. C. 42.7%. D. 60%.

B. 12.5%.

40. The audit time budget is an example of: A. A supporting schedule. B. An administrative working paper. C. A lead schedule. D. A corroborative working paper.

B. An administrative working paper.

Main difference between public and private company audit

private company audit results in only opinion on financials

Exemptions from Registration from SEC

private offerings to a limited number of persons or institutions; offerings of limited size; intrastate offerings; and securities of municipal, state, and federal governments.

20. An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed? A. Test of transactions. B. Analytical procedures. C. Test of controls. D. Test of details.

B. Analytical procedures.

75. Which of the following is most likely to be considered an analytical procedure? A. Testing purchases at year-end to determine they were recorded in the proper period. B. Comparing inventory balances to recent sales activities. C. Selecting a sample of year-end receivables for confirmation. D. Reconciling physical counts of inventory to perpetual records.

B. Comparing inventory balances to recent sales activities.

76. An unexpected economic downturn is likely to have which effect on inventory turnover. A. Increase. B. Decrease. C. No effect. D. Each of these replies is equally likely.

B. Decrease.

24. During financial statement audits, auditors seek to restrict which type of risk? A. Control risk. B. Detection risk. C. Inherent risk. D. Account risk.

B. Detection risk.

72. The date on which no information may be deleted from audit documentation is the A. Client's year-end. B. Documentation completion date. C. Last date of significant fieldwork. D. All of these are incorrect in that no information may ever be deleted from audit documentation.

B. Documentation completion date.

36. An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as: A. Vertical analysis. B. Horizontal analysis. C. Cross-sectional analysis. D. Comparison analysis.

B. Horizontal analysis.

25. Which of the following groups are not considered a specialist by AICPA Professional Standards? A. Appraisers. B. Internal auditors. C. Engineers. D. Geologists.

B. Internal auditors.

44. The auditors use analytical procedures during the course of an audit. The most important phase of performing these procedures is the: A. Vouching of all data supporting various ratios. B. Investigation of significant variations and unusual relationships. C. Comparison of client-computed statistics with industry data on a quarterly and full-year basis. D. Recalculation of industry date.

B. Investigation of significant variations and unusual relationships.

41. A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a: A. Supporting schedule. B. Lead schedule. C. Corroborating schedule. D. Reconciling schedule.

B. Lead schedule.

30. Which of the following best describes the reason that auditors are concerned with the detection of related party transactions? A. The financial statements must often be adjusted for the effects of material related party transactions. B. Material related party transactions must be disclosed in the notes to the financial statements. C. The substance of related party transactions will differ from their form. D. In a related party transaction one party has the ability to exercise significant influence over the other party.

B. Material related party transactions must be disclosed in the notes to the financial statements.

12. The components of the risk of misstatement are: Inherent Risk Control Risk Detection Risk A. Yes Yes Yes B. Yes Yes No C. Yes No No D. No Yes Yes A. Option A B. Option B C. Option C D. Option D

B. Option B

42. Which of the following is not a function of working papers? A. Provide support for the auditors' report. B. Provide support for the accounting records. C. Aid partners in planning and conducting future audits. D. Document staff compliance with generally accepted auditing standards.

B. Provide support for the accounting records.

48. An independent auditor finds that the Simmer Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding indicates the existence of: A. Management fraud. B. Related party transactions. C. Window dressing. D. Weak internal control.

B. Related party transactions.

77. Which of the following is most consistent with an increase in the ratio of debt to equity? A. Payment of a required principal payment on long-term debt. B. Repurchase of a portion of the company's outstanding common stock. C. Higher than expected profits due to a decrease in cost of goods sold. D. Payment of most accounts receivable immediately prior to year-end using a portion of the company's cash.

B. Repurchase of a portion of the company's outstanding common stock.

16. Which of the following is not an assertion relating to classes of transactions? A. Accuracy. B. Sufficiency. C. Cutoff. D. Classification.

B. Sufficiency.

46. Which of the following ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion? A. The audit time budget. B. The auditors' judgment. C. Generally accepted accounting quality standards. D. The auditors' working papers.

B. The auditors' judgment.

68. Which of the following statements is not correct regarding the auditor's further analysis? A. The Mid-Central Region has fewer average full-time equivalent employees per store than the other regions per store. B. The other regions all generate higher sales per square foot than the Mid-Central Region. C. The Mid-Central Region has the highest average wages per full-time equivalent employee. D. The largest contributor to total corporate profits is the Southwest Region.

B. The other regions all generate higher sales per square foot than the Mid-Central Region.

The risk associated with a company's survival and profitability is referred to as:

Business Risk.

The risk that a company will not be able to meet its obligations when they become due is referred to as:

Business risk.

16. [LO 1] If the auditor disagrees with management's assertion of internal control, the auditor: (a) ignores this and issues the proper opinion. (b) notes this in the footnotes. (c) notes this in the audit report. (d) None of the above.

19. [LO 2] An integrated audit consists of: (a) examining the effectiveness of internal control. (b) examining the fairness of the financial statements. (c) Both a and b. (d) Neither a nor b.

19. [LO2] Which of the following best describes the role of an audit firm's quality control standards to provide guidance addressing client acceptance and continuance? (a) A standard framework should provide important benchmarks to be used by client companies to evaluate their own risk factors. (b) Representative legal cases should be documented whenever client company characteristics resemble fact patterns. (c) Policies and procedures should be in place for determining whether to accept or continue to perform an audit engagement. (d) A well-structured timeline and written communication plan should be in place for all proposal and decision processes.

22. [LO 1] Which of the following best describes the conclusions an auditor makes in an integrated audit that results in an audit report that is unqualified? a. The financial statements are fair according to GAAP. b. The financial statements are free of material misstatement based on U.S. GAAP and management's report on internal control over financial reporting states that there are no material weaknesses. c. The financial statements and internal control over financial reporting are materially correct. d. The financial statements are free of material misstatement based on U.S. GAAP and based on the audit, the auditor agrees with management's report that internal control over financial reporting is effective and does not have any material weaknesses.

23. [LO 1] What is the purpose of a financial statement audit? a. To provide assurance that the company is solvent. b. To provide assurance that the company has an effective internal control system that can produce fair financial statements. c. To provide assurance that the financial statements are reliable. d. Both b and c.

24. [LO 1] Ultramares established that: a. Auditors could be held liable for negligence. b. Plaintiffs had to show gross negligence to prevail. c. Plaintiffs have to show privity in order to sue for negligence. d. None of the above.

24. [LO3] Which of the following is least likely to be used as a source of information about a potential new audit client? (a) The potential client company's predecessor auditor. (b) The potential client's management and directors. (c) Former employees and shareholders of the potential client company. (d) Published financial information of the potential client company.

26. [LO 1] Auditing is defined as a: a. set pattern of tests. b. random process. c. systematic process. d. All of the above.

27. [LO 1] A "clean" audit report states that: a. there are no errors in the financial statements. b. the internal control environment is operating well. c. the auditors evaluated evidence. d. All of the above.

27. [LO 1] The plaintiff's legal standing is influenced by: a. The connection between the potential plaintiff and the auditor. b. The nature of the wrongdoing alleged against the auditor. c. Both a and b. d. None of the above.

28. [LO 3] If the auditor decides that the internal controls are not designed appropriately then: (a) the auditor tests those controls in-depth. (b) the auditor performs tests of internal control for those transactions and accounts deemed risky. (c) the auditor performs substantive procedures. (d) All of the above.

28. [LO3] Which of the following is least likely to warrant further investigation of a potential client company? (a) Several companies in the same industry are experiencing business failures. (b) None of the audit committee members is a financial expert. (c) The audit committee concurs with management's selection of accounting treatments. (d) One of the directors was convicted of tax evasion.

30. [LO3] Which of the following is least important to the auditor when investigating a potential new audit client? (a) The audit committee does not have the requisite number of independent members or financial experts. (b) The company has experienced recent operating losses and other financial difficulties. (c) The company has a highly decentralized organizational structure. (d) The company has experienced high turnover rates among management or members of the accounting, internal audit, or IT staff.

31. [LO 1] The auditor: a. prepares the financial statements after the client agrees to all adjustments. b. writes the footnotes to the financial statements to ensure their accuracy. c. performs work to reach an opinion on the ICFR and financial statements. d. None of the above.

31. [LO1] The responsibility of the audit firm is to communicate to users: A. its opinion on whether the company's financial statements are free from error. B. the results of the operations of the company during the period. C. its opinion on whether the company's financial statements fairly present the company's economic events. D. the names of all individuals involved with the audit.

33. [LO 4] Which of the following assertions would not apply to short-term debt: (a) existence. (b) completeness. (c) right and obligations. (d) All of the above.

39. [LO 2] Auditors communicate audit results to users concerning a company's financial statements by: a. issuing a report on the effectiveness of ICFR. b. issuing the financial statements. c. issuing a report about the financial statements. d. None of the above.

39. [LO2] Individuals at this level of moral development consider impacts beyond those that will affect them personally. A. Pre-development level. B. Pre-conventional level. C. Conventional level. D. Post-conventional level.

40. [LO 2] Errors in financial statements are: a. never material. b. intentional. c. unintentional. d. Both a and c.

40. [LO 2] When might an auditor choose arbitration over a trial: a. When the cost of a trial is prohibitive. b. To avoid possible damage to its reputation. c. Both a and b. d. None of the above.

42. [LO2] Ethical orientation related to the ethic of care would include which of the following? A. Independence as strength. B. Individuals as separate. C. Importance of interdependence. D. Importance of self-sufficiency.

43. [LO4] A management representation letter is prepared for the purpose of: (a) confirming management's acceptance of the audit fees. (b) setting forth the terms of the audit engagement. (c) confirming the honesty and validity of audit information provided by management. (d) establishing management's responsibility for making the company's financial records available to the auditor.

44. [LO 3] Referring to #42 above, Mary Ellen will not prevail if: a. The "reasonable man" standard was met, but barely. b. Her firm followed GAAS. c. The ICRF was not reasonably tested for accuracy. d. All of the above.

46. [LO 3] Who is responsible for oversight of the integrated audit function? a. Shareholders. b. Officers of the company. c. The audit committee. d. None of the above.

46. [LO4] The first step in making an ethical decision would be to: A. identify alternative courses of action that are available. B. identify the values related to the situation. C. determine the facts in the situation. D. consider the consequences of viable courses of action.

47. [LO 4] To come to an opinion on management's assertions, an auditor must: (a) obtain evidence in writing. (b) obtain evidence that is convincing. (c) obtain evidence that is appropriate and reliable. (d) All of the above.

48. [LO 3] The Board of Directors: a. Reports to management. b. Runs the company on a day-to-day basis. c. Is elected by the shareholders. d. All of the above.

Financial statement audit

process through which an auditor examines supporting information and evaluates whether the financial statements represent the underlying economic events that the company has experienced

49. [LO 3] Under the joint and severally liable theory, if there are three defendants and defendant 1 goes bankrupt, then defendants 2 and 3 are: a. Each liable for one-third of the amount. b. Each liable for one-half the amount. c. Both liable for the full amount, although each only has to pay half assuming both can pay. d. None of the above.

50. [LO 4] Audit risk is defined as: (a) the risk that the client is committing fraud. (b) the risk associated with a specific client. (c) the risk that the auditor fails to detect a material misstatement. (d) All of the above.

50. [LO5] Which of the following is one of the levels of the structure of the AICPA Code of Conduct? A. Membership in the AICPA. B. Independence. C. Interpretations of the Rules of Conduct. D. Professional governance.

51. [LO 4] Audit risk involves: (a) only the financial statements. (b) only the ICFR. (c) both the financial statements and ICFR. (d) only cases where fraud exists.

51. [LO4] Which of the following items is not one of management's responsibilities for communicating with the auditors? (a) Suspected fraudulent activities within the company. (b) Deficiencies in the design or operating effectiveness of ICFR. (c) Key accounts and transactions to be selected for testing. (d) Violations of regulations applicable to the company's activities.

53. [LO 3] The main difference between fraud and negligence is: a. The amount of the loss. b. The degree of audit failure. c. The state of whether the auditor knew what (s)he was doing was wrong. d. All of the above.

54. [LO 4] An example of qualitative materiality is: (a) an error involving an amount of great magnitude. (b) an error involving management oversight of small amounts. (c) a misstatement caused by management fraud. (d) All of the above.

54. [LO 4] The GASB: a. Sets audit standards for auditors engaged in auditing not-for-profit entities. b. Regulates state and local governments. c. Set reporting standards for state and local government entities. d. All of the above.

55. [LO 3] "Fraud on the Market" theory holds that: a. The auditor need not be liable for damages if the market ignored the audit report. b. The auditor is liable for damages to those who relied on financial statements it audited that contained a material misstatement. c. The plaintiffs do not have to show they relied on the financial statements, but merely that the market used the information contained in the financial statements to affect the stock price. d. Both a and b.

55. [LO 4] If an auditor concludes the financial statements contain only immaterial errors, then the auditor should: (a) correct the errors. (b) have the client correct the errors. (c) issue an unqualified ("clean") opinion on the financial statements. (d) issue a qualified opinion on the financial statements.

55. [LO 5] Internal auditors may not perform: a. Audits of financial statements resulting in reports intended for management's use only. b. Forensic audits. c. Integrated audits leading to an audit opinion issued in accordance with AICPA or PCAOB standards. d. All of the above.

55. [LO5] An engagement that requires independence as defined by the AICPA Professional Standards is termed: A. Professional Engagement. B. Lending Engagement. C. Attest Engagement. D. Tax Engagement.

Remediation

process through which management corrects internal control problems

57. [App.] A CPA firm engaged in the audit of public companies must: a. Have at least 5 partners. b. Have multiple offices across the U.S. c. Hire and train competent personnel. d. All of the above.

59. [LO 4] Section 10b-5 of the Securities Act of 1934 requires that: a. Plaintiffs must show the auditors lacked reasonable care when performing an audit. b. Plaintiffs must show standing before bringing a lawsuit. c. Plaintiffs must prove scienter. d. All of the above.

60. [LO 5] Which of the below is an example of an inherent risk: (a) the risk that the economy will sink into recession. (b) the risk that the firm will be a take-over target. (c) the risk that a particular financial statement account is incorrect. (d) All of the above.

60. [LO5] The AICPA Principles of Professional Conduct includes which of the following? A. Contingent fees. B. Accounting principles. C. Due care. D. Advertising.

61. [App.] A non-equity partner likely: a. Shares in all of the work for the firm. b. Is compensated by sharing in the profits of the firm. c. Has partner responsibility for work performed. d. All of the above.

63. [LO 4] RICO is typically used for violations of: a. Securities fraud. b. Casino fraud. c. Mail fraud. d. All of the above.

64. [LO 4] In order to be held guilty under RICO, the plaintiff must prove that: a. The auditor was negligent in detecting fraud. b. The auditor was negligent in detecting material misstatements. c. The auditor participated in the operations and management of the fraudulent act. d. All of the above.

64. [LO 6] Auditors auditing nonpublic companies must follow: (a) all audit standards. (b) only those standards issued by the PCAOB. (c) only those standards issued by the AICPA. (d) None of the above.

64. [LO5] Which of the following is NOT one of the sections of the PCAOB rules approved by the SEC? A. Inspections. B. Professional Standards. C. Due Diligence. D. Registration and Reporting.

68. [LO5] A covered member (i.e., the auditor) will be considered independent from the client if his or her close relative: A. has a direct financial interest in the client. B. is an employee of the client in a key position. C. has a financial interest in a client that allows the relative to have an insignificant influence over the activities of the client. D. has a material indirect financial interest in a client.

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.

A nonpublic company auditors' report is most likely to be addressed to the company whose financial statements are being examined or to that company's: A. Chief operating officer. B. President. C. Audit Committee. D. Chief financial officer.

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.

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.

An engagement review form of peer review is least likely to include a peer reviewer's detailed analysis of: A. Compilation reports. B. Documentation of procedures followed on a review. C. Overall system of quality control. D. Review reports.

Authoritative GAAP Sources include: A. FASB Remediation Statements and FASB Codification B. FASB Remediation Statements C. FASB Codification D. Neither

Primary responsibility for the financial statements lies with: A. Auditors and Management B. Auditors C. Management D. Neither

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.

To present fairly in conformity with generally accepted accounting principles, the financial statements must: A. Be consistently applied. B. Inform users of all matters that could materially affect a decision. C. Reflect transactions and events within a range of reasonable limits. D. Be considered preferable to the users of those financial statements.

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.

Which of the following is least likely to be directly examined in an inspection performed by the PCAOB? A. Audit engagements. B. Review engagements. C. Compilation engagements. D. CPA firm quality control system.

Which of the following is least likely to be included as a titled section in a standard unqualified public company audit report? A. Basis for opinion section. B. Critical audit matters section. C. Management responsibilities section. D. Opinion section.

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.

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.

Which of the following statements best describes the primary purpose of Statements on Auditing Standards? A. They are guides intended to set forth auditing procedures which are applicable to a variety of situations. B. They are procedural outlines which are intended to narrow the areas of inconsistency and divergence of auditor opinion. C. They are authoritative statements, enforced through the Code of Professional Conduct. D. They are interpretations which may be useful guidance to auditors.

Which of the following types of audits are ordinarily performed following generally accepted auditing standards? A. Public Company Audit and Nonpublic Company Audit B. Public Company Audit C. Nonpublic Company Audit D. Neither

Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with: A. Technical training that assures proficiency as an auditor. B. Professional education that is required in order to perform with due professional care. C. Knowledge required to fulfill assigned responsibilities and to progress within the firm. D. Knowledge required in order to perform a peer review.

Independence is required of a CPA performing: A) Audits, but not any other professional services. B) All attestation and tax services, but not other professional services. C) All attestation services, but not other professional services. D) All professional services.

C) All attestation services, but not other professional services.

An accounting association established a code of ethics for all members. The most likely primary purpose for establishing the code of ethics was to: A) Provide a framework within which accounting policies could be effectively developed and executed. B) Outline criteria that can be utilized in conducting interviews of potential new accountants. C) Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association. D) Establish standards to follow for effective accounting practice.

C) Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association.

Which of the following are not enforceable under the AICPA Code of Professional Conduct? A) Statements on Standards for Accounting and Review Services. B) Statements on Auditing Standards. C) Statements on Responsibilities in Tax Practice. D) Statements of Standards for Consulting Services.

C) Statements on Responsibilities in Tax Practice.

11. To be effective, analytical procedures performed near the end of the audit should be performed by A. The partner performing the quality review of the audit. B. A beginning staff accountant who has had no other work related to the engagement. C. A manager or partner who has a comprehensive knowledge of the client's business and industry. D. The CPA firm's quality control manager.

C. A manager or partner who has a comprehensive knowledge of the client's business and industry.

17. Audit documentation should be sufficient to allow which individual to understand the audit work performed, the evidence obtained, and the significant conclusions? A. A certified public accountant. B. A partner in a CPA firm. C. An experienced auditor. D. The controller at the company being audited.

C. An experienced auditor.

65. In preparing for an audit of the retail footwear division of a major retail organization, the auditor gathered the following information about the organization's stores: All Stores Northeast Region Southwest Region Mid-Central Region Average sales per store $736,000 $840,000 $760,000 $630,000 Average cost of goods sold per store $375,000 $420,000 $325,000 $395,000 Number of stores 48 13 18 17 Average square feet per store 1,800 2,200 1,850 1,550 Average sales per full-time employee $137,000 $152,000 $140,000 $122,000 Average wage related expense per store $98,000 $102,000 $82,000 $112,000 Average net profit contribution per store $238,000 $285,000 $320,000 $115,000 An auditor performs analytical procedures that involve comparing the gross margins of various divisional operations with those of other divisions and with the individual division's performance in previous years. The auditor notes a significant increase in the gross margin at one division. The auditor does some preliminary investigation and also notes that there were no changes in products, production methods, or divisional management during the year. Based on the above information, the most likely cause of the increase in gross margin would be: A. An increase in the number of competitors selling similar products. B. A decrease in the number of suppliers of the material used in manufacturing the product. C. An overstatement of year-end inventory. D. An understatement of year-end accounts receivable.

C. An overstatement of year-end inventory.

56. Which of the following is not a typical analytical procedure? A. Study of relationships of the financial information with relevant nonfinancial information. B. Comparison of the financial information with similar information regarding the industry in which the entity operates. C. Comparison of recorded amounts of major disbursements with appropriate invoices. D. Comparison of the financial information with budgeted amounts.

C. Comparison of recorded amounts of major disbursements with appropriate invoices.

37. An auditor is performing an analytical procedure that involves comparing a client's ratios with other companies in the same industry. This technique is referred to as: A. Vertical analysis. B. Horizontal analysis. C. Cross-sectional analysis. D. Comparison analysis.

C. Cross-sectional analysis.

62. Working papers that record the procedures used by the auditor to gather evidence should be: A. Considered the primary support for the financial statements being examined. B. Viewed as the connecting link between the books of account and the financial statements. C. Designed to meet the circumstances of the particular engagement. D. Destroyed when the audited entity ceases to be a client.

C. Designed to meet the circumstances of the particular engagement.

21. The inspection of a vendor's invoice by the auditors is: A. Direct evidence about occurrence of a transaction. B. Physical evidence about occurrence of a transaction. C. Documentary evidence about occurrence of a transaction. D. Part of the client's accounting system.

C. Documentary evidence about occurrence of a transaction.

66. Management is concerned about the lower level of profitability in the Mid-Central Region. Which of the following would be a reasonable possible explanation(s) of the lower profitability for the Mid-Central Region? I. The lower number of stores in the Mid-Central Region. II. Sales employees are not as productive in generating sales as those in other regions. III. The Mid-Central Region has a lower gross margin. A. I only. B. II only. C. II and III only. D. I, II and III.

C. II and III only.

78. Fraudulent sales and accounts receivables recorded at year-end (with no cost of goods sold entry) will: A. Decrease recorded net income. B. Decrease the current ratio. C. Increase days of sales in accounts receivable. D. Increase year-end recorded inventory.

C. Increase days of sales in accounts receivable.

64. Confirmation would be most effective in addressing the existence assertion for the: A. Addition of a milling machine to a machine shop. B. Payment of payroll during regular course of business. C. Inventory held on consignment. D. Granting of a patent for a special process developed by the organization.

C. Inventory held on consignment.

53. Which of the following expressions is least likely to be included in a client's representation letter? A. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements. B. The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance. C. Management acknowledges responsibility for illegal actions committed by employees. D. Management has made available all financial statements, including notes.

C. Management acknowledges responsibility for illegal actions committed by employees.

14. Further audit procedures include: Risk assessment procedures Tests of controls A. Yes Yes B. Yes No C. No Yes D. No No A. Option A B. Option B C. Option C D. Option D

C. Option C

23. Analytical procedures are required at the risk assessment stage and as: A. Tests of internal control. B. Substantive procedures. C. Procedures near the end of the audit. D. Computer generated procedures.

C. Procedures near the end of the audit.

15. Assertions that have a meaningful bearing on whether an account balance, transaction class, or disclosure is fairly stated are referred to as: A. Appropriate assertions. B. Sufficient assertions. C. Relevant assertions. D. Reliable assertions.

C. Relevant assertions.

58. Concerning retention of working papers, the Sarbanes-Oxley Act: A. Has no provisions. B. Requires permanent retention. C. Requires retention for at least 7 years. D. Requires retention for a period of 4 or less years.

C. Requires retention for at least 7 years.

35. Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? A. Confirmation. B. Observation. C. Reviewing subsequent events or transactions. D. Analyzing corporate organizational structure.

C. Reviewing subsequent events or transactions.

71. Assertions with high inherent risk are least likely to involve: A. Complex calculations. B. Difficult accounting issues. C. Routine transactions. D. Significant judgment by management.

C. Routine transactions.

59. During an audit engagement pertinent data are prepared and included in the audit working papers. The working papers primarily are considered to be: A. A client-owned record of conclusions reached by the auditors who performed the engagement. B. Evidence supporting financial statements. C. Support for the auditors' representations as to compliance with generally accepted auditing standards. D. A record to be used as a basis for the following year's engagement.

C. Support for the auditors' representations as to compliance with generally accepted auditing standards.

45. The auditors must obtain written client representations that normally should be signed by: A. The president and the chairperson of the board. B. The treasurer and the internal auditor. C. The chief executive officer and the chief financial officer. D. The corporate counsel and the audit committee chairperson.

C. The chief executive officer and the chief financial officer.

57. Which of the following is not a primary purpose of audit working papers? A. To coordinate the examination. B. To assist in preparation of the audit report. C. To support the financial statements. D. To provide evidence of the audit work performed.

C. To support the financial statements.

Which of the following is a correct statement related to CPA legal liability under common law? Answer CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence. CPAs may escape all personal liability through incorporation as a limited liability corporation. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed. CPAs are guilty until they prove that they performed the audit with "good faith."

CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed.

Preliminary Engagement Procedures

Client acceptance, establish terms of engagement, and auditor independence

A principle that may reduce or entirely eliminate auditor liability to a client is: Client contributory negligence. Auditor ordinary negligence. Client constructive negligence. Auditor gross negligence.

Client contributory negligence.

Which of the following is not one of the criteria for revenue recognition? Collectibility is certain. Delivery has occurred or services have been rendered. Evidence of an arrangement exists and is persuasive. A fixed or determinable price to buyer exists.

Collectibility is certain.

COSO

Committee of Sponsoring Organizations of the Treadway Commission

A case by a client against its CPA firm alleging negligence would be brought under: The Securities Exchange Act of 1934. The state blue sky laws. The Securities Act of 1933. Common law.

Common law.

A case by a client against its CPA firm alleging negligence would be brought under: Answer The Securities Act of 1933. Common law. The Securities Exchange Act of 1934. The state blue sky laws.

Common law.

A case by a client against its CPA firm alleging negligence would be brought under: Answer The Securities Exchange Act of 1934. The Securities Act of 1933. The state blue sky laws. Common law.

Common law.

Reporting Company

Companies required to register under the 1934 act and Any issuer required to register under the 1933 act. Reporting companies must file: 1. Annual report, Form 10-K 2. Quarterly report, Form 10-Q 3. Early warning report, 8-K

Fifth step in ethical decision making process

Compare and weigh alternatives

Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor?

Compliance audit.

Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also:

Compliance.

Anti-Fraud (Section 10b and Rule 10b-5)

Condemns any device, scheme, or artifice to defraud. 1. Trading on inside information 2. Giving or receiving tips based on inside information 3. Spreading false rumors 4. Falsely creating the appearance of increased trading volume.

The Government Accountability Office (GAO):

Conducts operational audits and reports the results to Congress.

Fourth step of ethical decision making process

Consider available alternatives

Assume that a client has encountered a $500,000 fraud and that the CPA's percentage of responsibility established at 10%, while the company itself was responsible for the other 90%. Under which approach to liability is the CPA most likely to avoid liability entirely? Answer Comparative negligence. Joint Negligence. Contributory negligence. Absolute negligence.

Contributory negligence.

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? Contributory negligence. Comparative negligence. Joint Negligence. Absolute negligence.

Contributory negligence.

In which type of court case is proving "due diligence" essential to the auditors' defense? Answer Court cases brought by clients under common law. Court cases brought under the Securities Act of 1933. Court cases brought by third parties under common law. Court cases brought under the Securities Exchange Act of 1934.

Court cases brought under the Securities Act of 1933.

Moral imagination

Creatively identifying alternatives

16. [LO1] An audit firm's business risk is affected by: (a) the client's business risk. (b) its ability to make profits from the work it performs. (c) the integrity of client's management. (d) All of the above.

18. [LO 1] The process of client acceptance or continuance involves: (a) deciding whether the auditor is willing to audit the client. (b) wants the firm as a client. (c) can do a good job auditing the client. (d) All of the above.

20. [LO2] Which of the following is used by auditors as a source of guidance on client acceptance and continuance decisions? (a) COSO Enterprise Risk Management and Internal Control frameworks. (b) Auditing standards on risk, fraud, and ICFR. (c) The audit firm's quality control standards. (d) All of the above.

21. [LO 1] An integrated audit results in: a. an audit opinion on the financial statements. b. an audit opinion on ICFR. c. a series of reports to major stakeholders. d. Both a and b.

21. [LO 1] Privity is: a. Connection or relationship between two parties each having a common interest in the same subject matter. b. Connection or relationship between two parties each having a material interest in the same subject matter. c. Connection or relationship between two parties each having any interest in the same subject matter. d. None of the above.

21. [LO 3] The audit is concluded with: (a) the audit opinion on the financial statements. (b) the audit opinion on the ICFR. (c) wrap-up procedures. (d) All of the above.

22. [LO 1] Standing is defined as: a. The right to bring a lawsuit. b. The right to bring a legal cause of action. c. The court's permission for a plaintiff to bring a lawsuit. d. The court's permission for a plaintiff to bring a legal cause of action.

22. [LO 3] Planning an audit involves which of the following steps: (a) risk assessment. (b) collecting information concerning the client's information system. (c) collecting information about the client. (d) All of the above.

23. [LO 1] Generally, the closer the relationship between auditor and plaintiff, the: a. Easier it is to prove negligence. b. The harder it is to prove negligence. c. The more likely a plaintiff is to prevail. d. None of the above.

23. [LO 3] Information system refers to: (a) the client's accounting information system. (b) the system by which management collects and analyzes information. (c) the computer system used by the client. (d) Both a and b.

23. [LO3] Independence issues that would preclude an audit firm from proposing on a potential audit client: (a) are only applicable on public company audit engagements. (b) are not affected by the Sarbanes-Oxley Act. (c) cannot be determined until the audit planning process is complete. (d) may result from current business relationships of the audit firm's former employees.

24. [LO 3] For public companies, the auditor also reviews which of the following on a regular basis: (a) the 10Qs filed quarterly with the SEC. (b) the 8-Ks (if filed) with the SEC. (c) the 10Ks filed annually with the SEC. (d) All of the above.

25. [LO 1] Near privity differs from privity in that: a. The plaintiff has standing in cases where the wrongdoing is less severe than fraud. b. The auditor must know the plaintiff. c. The plaintiff must show that (s)he relied on the financial statements. d. All of the above.

25. [LO 1] The audit report states that the audit provides: a. a guarantee of quality. b. complete assurance that the financial statements are free from misstatements. c. absolute assurance that the internal control environment is operating effectively. d. None of the above.

25. [LO 3] The ICFR is important because: (a) it links the client's financial statements and the risks associated with financial reporting. (b) it links the information system and the risks associated with financial reporting. (c) it provides readers with an assessment of how effective the internal control system is. (d) All of the above.

26. [LO 1] The foreseen third-party rule states: a. Auditors can be held liable for damages to plaintiffs even if they are not known to the auditor. b. The auditor is liable to third parties not normally having privity. c. The plaintiff does not have to show standing. d. Both a and b.

26. [LO3] Which of the following are least problematic for an auditor about going concern issues of a potential audit client? (a) Recent cash flow trends raise questions about the company's ability to pay its audit fees and other financial obligations. (b) Recent financial instability heightens the company's risk for being sued. (c) Escalating financial pressures heighten the company's risk of experiencing management fraud. (d) Changing economic conditions create additional demand for the company's products.

28. [LO 1] A public company must: a. register with the SEC. b. undergo an integrated audit. c. trade on a stock exchange. d. Both a and b.

28. [LO 1] Foreseeable third parties are those who: a. Are potential users of the financial statements. b. Are potential plaintiffs in legal actions against auditors. c. Increase the potential liability for auditors. d. All of the above.

29. [LO 1] Which of the following organizations is considered to be a public company? a. A firm whose privately held stock is owned exclusively by an individual. b. A partnership of doctors. c. A privately-held firm controlled by three family members. d. A firm whose stock is registered with the SEC.

29. [LO 3] The auditor's finding with respect to internal control is: (a) assessed at the beginning of the audit as part of the ICFR review. (b) assessed during substantive testing procedures. (c) assessed during testing of internal control. (d) All of the above.

29. [LO3] Financial statement restatements: (a) are a strong indicator of material weakness in ICFR when they are undertaken for the purpose of correcting an error in previously issued financial statements. (b) may not be considered significant when they are the result of more evidence becoming available after the financial statements have been released. (c) are required to be disclosed in the financial reports, as well as in the financial press. (d) All of the above.

Audit purpose

provide assurance that financial statements are reliable

30. [LO 1] Financial statements must be prepared: a. in accordance with GAAP. b. in accordance with IFRS. c. in accordance with OCBOA. d. Any of the above, depending on which set of standards the circumstances dictate as applicable.

30. [LO 1] Generally, the auditor: a. Cannot control audit risk. b. Can control audit risk. c. Controls audit risk to the extent of audit testing. d. None of the above.

31. [LO 4] Management assertions contain which of the following: (a) statements concerning that accounts exist. (b) statements that all liabilities are included in the balance sheet. (c) statements that the financial statements are presented fairly. (d) All of the above.

32. [LO 2] Arbitration may occur: a. Before a trial. b. During a trial. c. After a trial. d. Both a and b.

32. [LO 4] The balance sheet for a client shows a balance of $5,000. This is an example of which assertion: (a) completeness. (b) right and obligations. (c) valuation and allocation. (d) All of the above.

33. [LO 2] The audit engagement team consists of: a. more than one partner. b. associates and seniors. c. managers. d. All of the above.

33. [LO 2] The complaint, as filed by the plaintiff, includes: a. Remedies being sought. b. Proposed course of action. c. Dollar amount of damages sought from the auditor. d. All of the above.

33. [LO1] In a corporate environment: A. stockholders own the company and directly hire the management team. B. board of directors delegates the responsibility to oversee shareholder interest to the management team. C. the audit committee is part of the management team. D. the shareholders own the company and elect the board the directors.

33. [LO3] Where can auditors obtain information about a potential client company? (a) The company's Web site. (b) Reports filed with the SEC. (c) The shareholders. (d) Both a and b.

34. [LO 2] Assertions are: a. audited by the auditors. b. declarations made by management. c. declarations made by the auditor. d. Both a and b.

34. [LO 2] The "answer" in a legal proceeding: a. Refers to the auditor's response. b. Can cite lack of standing on the part of the plaintiff. c. Contains answers that agree with the complaint. d. All of the above.

34. [LO 4] The reason auditors collect evidence is to: (a) determine if management's assertions are fair. (b) obtain a reasonable basis for forming an opinion on the financial statements. (c) obtain a reasonable basis for forming an opinion on the effectiveness of ICFR. (d) All of the above.

34. [LO1] The Sarbanes-Oxley Act requires that the audit committee: A. oversees the auditor's compensation. B. interact with the auditor as needed regarding issues of the audit. C. select and hire the auditor. D. All of the above.

35. [LO 2] Discovery: a. Involves depositions. b. Involves reviewing documents. c. Involves third parties, such as experts. d. All of the above.

35. [LO 4] Which assertion(s) is met if proper cut-off is achieved: (a) right and obligations. (b) completeness. (c) existence or occurrence. (d) Both b and c.

35. [LO3] By speaking with individuals inside the company, an auditor may learn about: (a) Management's philosophy and integrity. (b) The composition of the Board of Directors and audit committee. (c) The organizational structure and accounting functions. (d) All of the above.

36. [LO 2] A summary judgment: a. Is brought by the plaintiff's attorney. b. Is brought by the defendant's attorney. c. Seeks to dismiss the case before evidence is presented at trial. d. Both b and c.

36. [LO 4] Which of the following assertions address presentation and disclosure: (a) existence. (b) accuracy and valuation. (c) rights and obligations. (d) Both b and c.

37. [LO 2] Arthur Andersen & Co. was found guilty by the: a. District court. b. Supreme Court. c. Court of public opinion d. Both a and c.

37. [LO 2] For an integrated audit to be possible: a. Established criteria must exist against which the financial statements and ICFR can be compared. b. The auditor must have sufficient knowledge of both the AICPA SAS and PCAOB AS. c. The entity must have sufficient books, records and other underlying evidence so that the auditor can determine whether there is a high degree of correspondence between the underlying evidence and the financial statements. d. a and c

37. [LO 4] Which of the following assertions address account balances at the period end: (a) completeness. (b) right and obligations. (c) existence. (d) All of the above.

38. [LO 2] COSO: a. is the body that established an internal control standards framework referenced by the PCAOB. b. published a document that explains what an internal control system should be like to be effective. c. is the acronym widely used to refer to the Committee of Sponsoring Organizations of the Treadway Commission. d. All of the above.

38. [LO 2] If a jury "finds for the defendant," then: a. The auditor must pay the damages awarded. b. The plaintiff must pay the damages. c. The auditor may appeal. d. The plaintiff may appeal.

39. [LO 2] The appellate court can: a. Reverse the lower court's decision. b. Remand the case back to the lower court for further fact finding. c. Uphold the lower court's decision. d. All of the above.

39. [LO 4] The amount of evidence collected during an audit has a direct relationship to: (a) expected risk. (b) accuracy of management assertions. (c) appropriateness of management assertions. (d) All of the above.

39. [LO3] Which of the following is not a likely reason why an audit firm does not possess the necessary resources to perform an audit engagement? (a) The client company is very large and has multiple geographic locations. (b) The client company is in a highly regulated industry for which significant industry expertise is required. (c) The client company has a very complex IT system for which significant technical expertise is required. (d) The client company has a decentralized structure for providing management oversight.

40. [LO 4] In order to obtain evidence regarding valuation of accounts receivable, the auditor is likely to: (a) send out confirmations to the client's debtors requesting amount owed verification. (b) inquire of management as to the accuracy of sales transactions. (c) examine completed confirmation requests for discrepancies between debtor and client amount. (d) All of the above.

40. [LO2] The ethical orientation of the decision maker, that suggest the decision maker focuses on individuals as separate entities is said to be following the: A. ethic of laws. B. ethic of accounting. C. ethic of degree. D. ethic of care.

41. [LO 3] Negligence is defined as: a. Conduct which falls below the standards established by law. b. Conduct which violates the audit standards. c. Conduct which fails to detect a misstatement in the financial statements. d. Both a and b.

41. [LO 4] Which of the below depicts the correct path of action an auditor takes in assessing assertions: (a) management assertions—audit procedures—risk assessment. (b) management assertions—risk assessment—audit evidence. (c) management assertions—risk assessment—audit procedures. (d) management assertions—material risk assessment—audit procedures.

41. [LO4] An audit engagement letter: (a) is prepared by the client company and signed by a representative of the audit firm. (b) provides a guarantee that the auditor will express an opinion as a result of the audit. (c) is signed by management at the conclusion of the audit engagement. (d) specifies that management is responsible for establishing and maintaining effective ICFR.

42. [LO 2] Which functions do audit reports serve for the capital markets? a. Enhance confidence in financial statements. b. Provide guarantees regarding the quality of investments. c. Provide assurance that financial statements and management's reports on internal control over financial reporting provide reliable information. d. Both a and c

42. [LO 4] Due professional care applies to: (a) sample selection. (b) follows appropriate audit standards. (c) accepts professional guidance. (d) All of the above apply to due professional care.

42. [LO4] An audit engagement letter specifies that management of the client company is responsible for all of the following except: (a) preparing the financial statements. (b) maintaining effective ICFR. (c) providing the company's financial records for the auditor. (d) performing the audit in accordance with PCAOB standards.

43. [LO 4] An auditor selects a sample using a random number generator, even though she believes the account being audited presents increased risk. This is a violation of: (a) professional care. (b) professional skepticism. (c) Both a and b. (d) Neither a nor b.

44. [LO 4] Judgment errors indicate: (a) the auditor behaved in a negligent manner. (b) the auditor failed to exhibit professional care. (c) the auditor failed to exhibit professional skepticism. (d) None of the above.

45. [LO 3] Contributory negligence concerns: a. The management of the corporation under audit. b. Cases where management hides liabilities intentionally from the auditors. c. Cases where management is responsible for the negligent act. d. All of the above.

45. [LO 4] Absolute assurance: (a) is desired and strived for by auditors. (b) is not cost-effective. (c) is not possible given the estimation of many numbers in the financial statements. (d) Both b and c.

45. [LO3] Auditors, as professionals, have a contract with society. This means that the professional group, as well as the individuals within that group: A. commit to certain behaviors and receive rewards in return. B. commit to protecting the public interest. C. maintain standards of excellence. D. All of the above.

46. [LO 3] Damages can be: a. Compensatory, but limited to the loss incurred. b. Compensatory, and include both the loss incurred and an amount for punitive damages. c. Compensatory, but limited to the amount set by each state. d. Both a and b.

46. [LO 4] Evidence must be: (a) sufficient. (b) persuasive. (c) convincing. (d) Both a and b.

46. [LO4] Which of the following matters would not be included in the terms of an engagement letter? (a) Audit fees and billing arrangements. (b) Involvement of internal auditors and/or a predecessor auditor. (c) Additional services to be provided in connection with the engagement. (d) Conditions under which the auditor's independence requirement may be waived.

47. [LO 3] In order for punitive damages to be awarded, the auditors must be guilty of: a. Negligence. b. Gross negligence. c. Fraud. d. Either b or c.

48. [LO4] The limitations of an audit which are documented in an engagement letter pertain to each of the following except: (a) material errors or illegal activities having a direct and material financial statement impact may not be detected because of the judgmental nature of many audit areas and the fact that detailed tests are not performed for all types of transactions. (b) fraudulent activities having a direct and material financial statement impact may not be detected because of the nature of fraud, including the possibility of the perpetrator's concealment efforts and/or management's override of controls. (c) internal controls may change or deteriorate such that they may not be effective in the prevention or detection of future material misstatements in the financial statements. (d) under the standards established by the PCAOB, the auditor's responsibilities for communicating internal control weaknesses are limited to notification to the company's shareholders regarding material weaknesses.

49. [LO 3] The Securities and Exchange Commission: a. Is a government entity. b. Authorizes all PCAOB standards before they become effective. c. Can reject company filings or suspend trading of company stocks. d. All of the above.

49. [LO 4] Auditors do not provide absolute assurance in an audit due to (a) Financial statement numbers are based on estimates. (b) Auditors usually examine a sample rather than all of a company's transactions. (c) Those who commit fraud go to great lengths to conceal their actions. (d) All of the above.

49. [LO5] Which of the following organizations does not have authority over auditors? A. PCAOB B. AICPA C. SEC D. All of the above have authority over auditors.

50. [LO 4] Regarding the PCAOB, which of the following is INCORRECT? The PCAOB: a. Is responsible for oversight of audit firms engaged in the audit of public companies. b. Issues standards that govern audits of public companies. c. Is a not-for-profit entity. d. Has authority that is equal in power to the SEC.

50. [LO4] Which of the following items is not important with regard to an auditor's responsibilities for communicating with the audit committee? (a) Disagreements with management. (b) Difficulties encountered in the performance of audit testing. (c) Significant deficiencies and material weaknesses in ICFR. (d) New staff members included on the audit team.

51. [LO 3] Fraud: a. Involves deception on the part of the auditor in conducting an audit of the financial statements. b. Is similar to gross negligence. c. Is defined in the Securities Acts of 1933 and 1934. d. All of the above.

51. [LO 4] The AICPA (American Institute of Certified Public Accountants): a. Is regulated by Congress. b. Reports to the PCAOB. c. Regulates CPAs at the state level. d. None of the above.

51. [LO5] The level of the AICPA Code that is intended to be the ideal standard of conduct is: A. Rules of Conduct. B. Rulings by the Professional Ethics Executive Committees. C. Interpretations of the Rules of Conduct. D. Principles of Professional Conduct.

52. [LO 4] Materiality decisions are based on: (a) qualitative factors. (b) quantitative factors. (c) the audit fees. (d) Both a and b.

53. [LO 4] An auditor encounters an error and decides not to suggest an adjustment. This is an example of: (a) professional skepticism. (b) professional judgment. (c) materiality decision. (d) Both b and c.

53. [LO 4] The SEC requires publicly traded companies to file a. 10Ks that include audited quarterly financial statements and audited management reports on internal control over financial reporting. b. 10Qs that include audited quarterly financial statements. c. 10Ks that include audited annual financial statements, with or without a management report on ICFR. d. 10Ks that include annual financial statements, a management report on ICFR, and the audit opinions resulting from an integrated audit.

53. [LO4] The engagement letter states that an auditor's opinion on the financial statements and effectiveness of the company's ICFR will depend upon the following type of evidential matter: (a) results of audit testing. (b) responses to auditor inquiry. (c) management representation letter. (d) All of the above.

53. [LO5] Which of the following is NOT a professional organization that an accountant or auditor may join? A. AICPA. B. IIA. C. IMA. D. PCAOB.

54. [LO 3] In a breach of contract claim, the auditor can: a. Cite the professional standards. b. Cite lack of privity on the part of the plaintiff. c. Cite client refusal to provide records to the auditor on a timely basis. d. All of the above.

56. [LO 5] As part of the proposal process the auditor: (a) determines if the potential client is a good fit. (b) determines of the auditor can perform an effective audit. (c) determines if the potential client management is reputed to be of good character. (d) All of the above.

57. [LO 4] The Securities Act of 1933 significantly differs from other statutes concerning auditor liability in that: a. The plaintiff does not need to show negligence. b. The plaintiff does not need to show (s)he relied on the financial statements. c. Any third party that purchased securities described in the registration statement may sue the auditor for any material misrepresentation. d. All of the above.

58. [App.] The "highest" level of a CPA firm hierarchy is: a. The shareholders. b. The partners. c. The managers. d. Both a and b.

58. [LO5] An individual in a position to influence the attest engagement is one who: A. evaluates the performance or recommends the compensation of the attest engagement partner. B. directly supervises or manages the attest engagement partner. C. participates in or oversees, at all successively senior levels, quality control activities including internal monitoring, with respect to the specific attest engagement. D. All of the above.

59. [App. B] Which of the following is not a responsibility of an audit committee? (a) Hiring, compensating, and overseeing the company's independent auditor relationship. (b) Receiving and addressing complaints about accounting, internal control, and auditing matters. (c) Resolving disagreements between management and the auditor regarding financial reporting. (d) Preparing the disclosures that accompany the financial statements in the company's annual report.

59. [LO5] A key position is one in which an individual: A. has the ability to exercise influence over the contents of the financial statements. B. has primary responsibility for the preparation of the financial statements. C. has a primary responsibility for significant functions that support material components of the financial statements. D. All of the above.

60. [App.] Non-assurance type work performed by CPAs includes: a. Tax preparation. b. Consulting. c. Bookkeeping. d. All of the above.

61. [LO 4] The Hochfelder case involved: a. Management collusion. b. Management fraud. c. Scienter. d. All of the above.

63. [LO5] Which of the following is the not-for-profit entity structured by the SEC in response to the Sarbanes-Oxley Act to oversee the auditors and audits of public companies? A. FASB. B. AICPA. C. IASB. D. PCAOB.

65. [LO 4] The Foreign Corrupt Practices Act of 1977: a. Requires certain records be kept for a minimum amount of time. b. Forbids the bribing of foreign officials. c. Requires companies maintain a reasonable set of internal controls. d. All of the above.

66. [LO 4] The Sarbanes-Oxley Act of 2002 (SOX): a. Sets auditor penalties in sections 104 and 105. b. Requires the PCAOB to inspect public accounting firms that audit public companies. c. Requires an annual audit for all publically traded companies. d. Both a and b.

67. [LO 7] Auditing Standard #5 requires: (a) auditors perform tests of internal control. (b) auditors have technical competence to perform audits. (c) auditors exercise professional skepticism. (d) Both b and c.

68. [LO 7] The field work standards address: (a) due professional care. (b) independence. (c) attention to GAAP. (d) obtaining sufficient evidential matter.

69. [LO5] In 2001, the SEC changed the rules defining the group of people in an audit firm to whom the independence rules apply. The independence rules apply to: A. all partners and staff who work for the audit firm. B. partners who are not in the audit chain of command. C. managers and partners who provide any nonaudit services to the audit client. D. partners who are located in the same office as the lead partner on the audit engagement.

70. [LO 4] Obstruction of justice involves: a. Shredding audit evidence. b. A criminal offense. c. Destroying emails pertinent to the audit. d. All of the above.

A peer review in which the peer reviewers study and appraise a CPA firm's system of quality control to perform accounting and auditing work is referred to as a(n): A. Engagement review. B. Inspection review. C. Supervision review. D. System review.

A procedure in which a quality control partner periodically tests the application of quality control procedures is most directly related to which quality control element? A. Engagement performance. B. Human resources. C. Leadership responsibilities for quality with the firm. D. Monitoring.

A public company's audit report must be addressed to the board of directors and the A. Audit committee. B. Company itself. C. President. D. Shareholders.

An audit performed in accordance with generally accepted auditing standards should: A. Be expected to provide absolute assurance that noncompliance with all laws will be detected where internal control is effective. B. Be relied upon to disclose violations of truth in lending laws. C. Encompass a plan to actively search for all illegalities which relate to operating aspects. D. Not be relied upon to provide absolute assurance that all noncompliance with laws will be detected.

If noncompliance with a law is discovered during the audit of a publicly held company, the auditors should first: A. Notify the regulatory authorities. B. Determine who was responsible for the noncompliance. C. Intensify the examination to identify noncompliance with any laws. D. Report the act to those in charge of governance within the client's organization.

In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control objective would this be most likely to satisfy? A. Acceptance and continuance of clients and engagements. B. Engagement performance. C. Personnel management. D. Relevant ethical requirements.

The Auditing Standards Board's guidance on matters such as the purpose of an audit, the premise of an audit, and auditor personal responsibilities is included in: A. The professional responsibilities section of the generally accepted auditing standards. B. The Code of Professional Conduct. C. Accounting Series Releases. D. Principles Underlying an Audit Conducted in Accordance with GAAS.

The order of presentation of sections in a public company financial statement audit report is: A. Basis for Opinion, Critical Audit Matters, Opinion. B. Basis for Opinion, Opinion, Critical Audit Matters. C. Critical Audit Matters, Basis for Opinion, Opinion. D. Opinion, Basis for Opinion, Critical Audit Matters.

Which of the following is a principle underlying an audit conducted in accordance with generally accepted auditing standards? A. The audit provides reasonable assurance the client will remain in business for at least one year. B. The audit report expresses an opinion on whether the financial statements are free of material and immaterial misstatement. C. Auditors are responsible for, among other things, maintaining professional objectivism, exercising professional engagement, and obtaining appropriate documentation. D. An auditor's opinion enhances the degree of confidence that intended users can place in the financial statements.

Which of the following is most likely to be included in a public company financial statement audit report? A. Adverse opinion. B. The name of the engagement partner. C. The audit was performed in accordance with generally accepted auditing standards. D. The year the auditor began serving the company.

Which of the following is not included in the auditors' standard unmodified audit report for a nonpublic company? A. The procedures selected by the auditor depend on the auditor's judgment. B. An audit includes evaluating the appropriateness of accounting policies used. C. An audit includes evaluating the overall presentation of the financial statements. D. Preferred accounting principles have been consistently applied.

[LO1] Which of the following is not a reason why auditors perform an investigation of potential clients as part of their client acceptance and continuance procedures? (a) It is important for auditors to establish good reputations, so they strive to accept clients that possess a high level of integrity. (b) They want to avoid business risks associated with potential litigation. (c) They want to be reasonably assured of their ability to earn a profit from the audit engagements they perform. (d) They want to assist their audit clients in recovering from financial decline.

A CPA should maintain objectivity and be free of conflicts of interest when performing: A) All attestation services, but not other professional services. B) All attestation and tax services, but not other professional services. C) Audits, but not any other professional services. D) All professional services.

D) All professional services.

The AICPA allows an auditor to perform which of the following services for an audit client: A) Authorization of transactions for the client. B) Preparation and posting of journal entries without the client's approval. C) Preparation of client source documents. D) Performance of bookkeeping services for the client.

D) Performance of bookkeeping services for the client.

Which of the following is not a broad category of threat to auditor independence? A) Undue Influence. B) Financial self interest. C) Familiarity. D) Safeguards implemented by the client.

D) Safeguards implemented by the client.

Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client? A) The auditor is independent if he or she is able to maintain a level of professional detachment. B) The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements. C) The auditor cannot audit the financial statements since a lack of integrity exists. D) The auditor is not independent.

D) The auditor is not independent.

An audit independence issue might be raised by the auditor's participation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue? A) The decision as to loss of independence must be made by the client based on the facts of the particular case. B) Information obtained as a result of a consulting services engagement is confidential to that specific engagement and should not influence performance of the attest function. C) The auditor who is asked to review management decisions, is also competent to make these decisions and can do so without loss of independence. D) The auditor should not make management decisions for an audit client.

D) The auditor should not make management decisions for an audit client.

34. Which of the following is true about analytical procedures? A. Performing analytical procedures results in the most reliable form of evidence. B. Analytical procedures are tests of controls used to evaluate the quality of a client's internal control. C. Analytical procedures are used for planning, but they should not be used to obtain evidence as to the reasonableness of specific account balances. D. Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements.

D. Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements.

60. Although the quantity, type, and content of working papers will vary with the circumstances, the working papers generally would include the: A. Copies of those client records examined by the auditor during the course of the engagement. B. Evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit. C. Auditor's comments concerning the efficiency and competence of client management personnel. D. Auditing procedures followed and the testing performed in obtaining audit evidence.

D. Auditing procedures followed and the testing performed in obtaining audit evidence.

29. An auditor should expect that fair value is the price that would be received to sell an asset in an orderly transaction between the market participants at the: A. Acquisition date of the asset. B. Audit report date. C. Expected replacement date of the asset. D. Measurement date (ordinarily the date of the financial statements).

D. Measurement date (ordinarily the date of the financial statements).

61. The permanent file section of the working papers that is kept for each audit client most likely contains: A. Review notes pertaining to questions and comments regarding the audit work performed. B. A schedule of time spent on the engagement by each individual auditor. C. Correspondence with the client's legal counsel concerning pending litigation. D. Narrative descriptions of the client's accounting procedures and controls.

D. Narrative descriptions of the client's accounting procedures and controls.

69. Management has centralized purchasing and uses a model based upon previous year's sales with adjustments for trends in the market place (e.g., the trend to more casual shoes). A staff auditor has suggested that the centralized purchasing may be one of the reasons for the lower level of profitability in the Mid-Central Region. Which of the following would be the best single audit procedure to address the staff auditor's assertion? A. Take a sample of receiving documents at stores and trace to purchase orders to determine the length of time between the purchase and delivery of the goods. B. Interview store managers in the Mid-Central Region to determine their attitude toward centralized purchasing. C. Perform an inventory count at selected stores in the Mid-Central Region and determine if adjustments are needed to the perpetual records. D. Perform a product-line analysis of sales and purchases in the Mid-Central Region and compare with other regions.

D. Perform a product-line analysis of sales and purchases in the Mid-Central Region and compare with other regions.

19. An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice A. Eliminates the use of certain statistical sampling methods that would otherwise be available. B. Presumes that the auditor will reperform the tests as of the balance sheet date. C. Should be especially considered when there are rapidly changing economic conditions. D. Potentially increases the risk that errors which exist at the balance sheet date will not be detected.

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

73. In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are A. Prepared in a satisfactory control environment. B. Consistent with industry guidelines. C. Based on verifiable objective assumptions. D. Reasonable in the circumstances.

D. Reasonable in the circumstances.

32. Which of the following is not a financial statement assertion relating to account balances? A. Completeness. B. Existence. C. Rights and obligations. D. Recorded value and discounts.

D. Recorded value and discounts.

31. Which of the following is not a basic procedure used in an audit? A. Risk assessment procedures. B. Substantive procedures. C. Tests of controls. D. Tests of direct evidence.

D. Tests of direct evidence.

55. Which of the following statements relating to audit evidence is the most accurate statement? A. Audit evidence gathered by an auditor from outside an enterprise is reliable. B. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions. C. Oral representations made by management are not valid evidence. D. The auditor must obtain sufficient appropriate audit evidence.

D. The auditor must obtain sufficient appropriate audit evidence.

Change Blindness

Decision makers fail to notice gradual changes over time

First step in ethical decision making process

Determine the facts

Which of the following best describes the reason why independent auditors report on financial statements?

Different interests may exist between the company preparing the statements and the persons using the statements.

Short-swing profits

Directors, officers and persons owning 10% or more of stock may not make profits or avoid losses by trading within six-month period of time.

CPAs should not be liable to any party if they perform their services with: Ordinary negligence. Good faith. Due professional care. Regulatory providence.

Due professional care.

CPAs should not be liable to any party if they perform their services with: Answer Regulatory providence. Ordinary negligence. Due professional care. Good faith.

Due professional care.

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: Lack of due diligence. Lack of good faith. Either ordinary or gross negligence. Gross negligence, but not ordinary negligence.

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: Answer Lack of due diligence. Either ordinary or gross negligence. Gross negligence, but not ordinary negligence. Lack of good faith.

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: Gross negligence, but not ordinary negligence. Lack of due diligence. Lack of good faith. Either ordinary or gross negligence.

Either ordinary or gross negligence.

The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for: Answer Either ordinary or gross negligence. Only gross negligence. Only criminal acts. Only fraud.

Either ordinary or gross negligence.

A limited liability partnership form of organization: Eliminates personal liability for some, but not all, partners. Has similar liability requirements to that of a professional corporation. Decreases liability of all partners of a CPA firm. Eliminates personal liability for all partners.

Eliminates personal liability for some, but not all, partners.

Normative ethics

Ethics deals with our reasoning about how we should act

Three categories of assertions

Events for period under audit, account balances at period end, presentation and disclosure

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

Examinations, but not reviews.

Five management assertions

Existence and occurrence, completeness, rights and obligations, valuation, presentation and disclosure

Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for: Answer Ordinary negligence. Lack of due diligence. Auditors have no liability to security purchasers under this act. Existence of scienter.

Existence of scienter.

1. True/False The professional standards consider calculating depreciation expense a "routine" transaction.

FALSE

2. True/False The most reliable form of documentary evidence generally is considered to be documents created by the client.

FALSE

5. True/False The primary purpose of a letter of representations is to obtain additional evidence about specific accounts.

FALSE

6. True/False The auditors should propose an adjusting journal entry for all material related-party transactions.

FALSE

8. True/False Working papers of continuing audit interest usually are filed with the administrative working papers.

FALSE

9. True/False The use of lead schedules is designed to increase the detail of the working trial balance.

FALSE

Bugle Corp. approved a plan of merger with Stanley Corp. One of the determining factors in approving the merger was the strong financial statements of Stanley which were audited by Dennis & Co., CPAs. Bugle had engaged Dennis to audit Stanley's financial statements. While performing the audit, Dennis failed to discover certain instances of fraud which have subsequently caused Bugle to suffer substantial losses. In order for Dennis to be liable under common law, Bugle, at a minimum, must prove that Dennis: Failed to exercise due care. Acted recklessly or with lack of reasonable grounds for belief. Was grossly negligent. Knew of the instances of fraud.

Failed to exercise due care.

A CPA's duty of due care to a client most likely will be breached when a CPA: Fails to follow generally accepted auditing standards. Gives a client incorrect advice based on an honest error of judgment. Fails to give tax advice that saves the client money. Gives a client an oral report instead of a written report.

Fails to follow generally accepted auditing standards.

A CPA's duty of due care to a client most likely will be breached when a CPA: Answer Fails to give tax advice that saves the client money. Gives a client an oral report instead of a written report. Fails to follow generally accepted auditing standards. Gives a client incorrect advice based on an honest error of judgment.

Fails to follow generally accepted auditing standards.

Racketeer Influenced and Corrupt Organizations Act (1970) (RICO)

Federal Crime to engage in racketeering activity in the acquisition, maintenance or conduct of the affairs of a business enterprise or to conspire to do any racketeering activities. Incorporates by reference 26 federal crimes and 9 state felonies, including: securities fraud, mail fraud and wire fraud. requires At least two acts of racketeering activity, one Of which occurred after the effective date of This chapter and the last of which occurred Within ten years (excluding any period of imprisonment) after the commission of prior act of racketeering activity;

Title VIII: Corporate and Criminal Fraud Accountability Act of 2002

Felony to "knowingly" destroy or create documents to "impede, obstruct or influence" any existing or contemplated federal investigation. Auditors are required to maintain "all audit or review work papers" for five years.

Which of the following are issued by the Securities and Exchange Commission?

Financial Reporting Releases.

The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over

Financial reporting.

Which of the following types of services is generally provided only by CPA firms?

Financial statement audits.

Operational auditing is primarily oriented toward:

Future improvements to accomplish the goals of management.

Three categories of GAAS

General standards, standards of fieldwork, and standards of reporting

GAAS

Generally accepted auditing standards

An auditor will do ______ reviews of clients, submitting findings on the 10Q

quarterly or interim

The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be: Answer Greater than the Securities Act of 1933. Less than the Securities Act of 1933. The same as the Securities Act of 1933. Indeterminate in relation to the Securities Act of 1933.

Greater than the Securities Act of 1933.

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 Answer Negligence. Gross negligence. Strict liability. Criminal deceit.

Gross negligence.

Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general Jones will have to prove that: Answer The plaintiffs did not show him to be negligent. He is not guilty of gross negligence. He performed the audit with due diligence. He performed the audit with good faith.

He performed the audit with due diligence.

Morality

How I should live my life

Ethics

How human beings should properly live their lives

Perceptual Differences

How individuals experience and understand situations differently

Social Ethics

How should we live (business ethics)

Unqualified/clean

ICFR is effective and financials fairly represent company's economic experiences and situation

Third step of ethical decision making process

Identify and consider all people affected by a decision

Second step in ethical decision making process

Identifying ethical issues involved (first step if issues are introduced first)

Blue Sky Laws

In addition to the rules and regulations of the Securities and Exchange Commission, each State has its own rules and regulators. Justice McKenna wrote the Court's opinion in Hall vs. Geiger-Jones Co., 242 U.S. 539 (1917), which was three cases, all dealing with the constitutionality of state securities regulations. Justice McKenna wrote "The name that is given to the law indicates the evil at which it is aimed, that is, to use the language of a cited case, "speculative schemes which have no more basis than so many feet of 'blue sky'"

Outsiders

In general, securities market professionals or holders of securities who may trade on the basis of the information

The attest function:

Includes the preparation of a report of the CPA's findings.

Which of the following attributes most clearly differentiates a CPA who audits management's financial statements as contrasted to management?

Independence.

Material Information

Information is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision.

The risk that information is misstated is referred to as:

Information risk.

Which of the following procedures is not customarily used by the auditors in determining the existence of related parties?

Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions.

IASB

International Accounting standards board

IAASB

International Auditing and Assurance Standards Board

ISA

International Standards on Auditing

When compared to an audit performed prior to 1900, an audit today:

Is more likely to include tests of compliance with laws and regulations.

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

Is substantially less in scope of procedures than an audit.

In a common law action against an accountant, lack of privity is a viable defense if the plaintiff: Answer Bases the action upon fraud. Can prove the presence of gross negligence that amounts to a reckless disregard for the truth. Is the accountant's client. Is the client's creditor who sues the accountant for negligence.

Is the client's creditor who sues the accountant for negligence.

Auditors communicate audit results to users concerning a company's financial statements by:

Issuing a report about the financial statements.

Which of the following is not correct relating to the Sarbanes-Oxley Act?

It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board.

Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995? Answer It provides certain small investors better recovery rights than it does large investors. It retains joint and several liability in certain circumstances. It eliminates securities fraud as an offense under civil RICO. It makes recovery against CPAs more difficult under common law litigation.

It makes recovery against CPAs more difficult under common law litigation.

Which of the following is correct relating to the use of data analytics in financial statement auditing?

It may result in the audit of an entire population rather than a sample from that population.

Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. As a result the CPA has been required to pay the entire $500,000. The auditor's liability is most likely based upon which approach to assessing liability? Answer Contributory negligence Absolute liability Proportional liability. Joint and several liability.

Joint and several liability.

Assume that $800,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 20%, while others are responsible for the other 80%. Assume the others have no financial resources. As a result the CPA has been required to pay the entire $800,000. The auditor's liability is most likely based upon which approach to assessing liability? Proportional liability. Contributory negligence. Absolute liability. Joint and several liability.

Joint and several liability.

Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements? Answer Contributory negligence on the part of the client. Lack of gross negligence. A disclaimer contained in the engagement letter. Lack of due diligence.

Lack of gross negligence.

Which of the following eliminates voluminous details from the auditors' working trial balance by classifying and summarizing similar or related items?

Lead schedules.

Section 11

Liability for material misrepresentation or omission. Does not require intent or negligence.

Rule 504

Limited to $1 million sold within 12 months. Can sell to any purchasers, No disclosure required prior to sale

Rule 505

Limited to $5 million is sales, Must sell within 12 month period, May be sold to any number of accredited investors and 35 or fewer unaccredited investors. If only accredited investors purchase, no disclosure is required. If any unaccredited investors than all investors must be given at least an annual report containing audited financial statements.

Sixth step in ethical decision making process

Make a decision

A typical objective of an operational audit is for the auditor to:

Make recommendations for improving performance.

____ is accountable to the BoD for the company's performance

Management

Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933? Answer The unqualified opinion contained in the registration statement was relied upon by the party suing the CPA. The CPA was negligent. The CPA knew of the misstatement. Material misstatements were contained in the financial statements.

Material misstatements were contained in the financial statements.

Which statement is correct with respect to continuing professional education (CPE) requirements of members of the AICPA?

Members, regardless of whether they are in public practice, are required to meet such requirements

Seventh and last step in ethical decision making process

Monitor and learn from outcomes

Rule 506

No limit on amount of stock that may be sold May be sold to any number of accredited investors and 35 or fewer unaccredited but sophisticated investors. (Issuer must reasonable believe the investor has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of the investment.) If only accredited investors no disclosure required if unaccredited that must give financial statements.

Which of the following is not ordinarily considered a limitation in applying data analytics in auditing?

Obtaining computers with the needed storage capacity to perform procedures.

Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, which he characterized as "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt." The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession. Section 201 It shall be "unlawful" for a registered public accounting firm to provide any non-audit service to an issuer contemporaneously with the audit, including: (1)bookkeeping or other services related to the accounting records or financial statements of the audit client; (2)financial information systems design and implementation; (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (4) actuarial services; (5) internal audit outsourcing services; (6) management functions or human resources; (7) broker or dealer, investment adviser, or investment banking services; 8) legal services and expert services unrelated to the audit; (9) any other service that the Board determines, by regulation, is impermissible.

Accredited Investor

One such as an institutional investor, a bank, a natural person with at least $1 million in net worth or $200,000 in annual income, officers or directors of the issuer, etc.

The confirmation process may be performed using a(n): Paper form Electronic form A. Yes Yes B. Yes No C. No Yes D. No No Option A Option B Option C Option D

Option A

An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on:

Option A (Fin Statements: Yes Internal Control: Yes)

______ documents are considered more reliable than photocopies or faxes

Original

OCBOA

Other comprehensive basis of accounting

Appropriate

refers to the quality of evidence

Sufficient

refers to the quantity of evidence

Acronym to remember five management assertions

PERCV

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.

Insider Trading (Rule 10b-5)

Person with nonpublic confidential, inside information, may not use that information When trading with a person who does not Possess that information. Insider: Officers, directors and anyone who is entrusted with corporate information for a corporate purpose. (Consultant, lawyer, auditor)

Under the Securities Act of 1933 the burden of proof that the plaintiff sustained a loss must be proven by the: Answer Plaintiff. Defendant. SEC. Jury.

Plaintiff

Risk assessment

Process that identifies potential events that may affect the entity, and manage risk, to provide reasonable insurance

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

Professional standards for CPAs.

Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. The CPA has been required to pay $50,000. The auditor's liability is most likely based upon which approach to assessing liability? Answer Proportional liability. Contributory negligence. Joint and several liability. Absolute liability.

Proportional liability.

Assume that $800,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 20%, while others are responsible for the other 80%. Assume the others have no financial resources. The CPA has been required to pay $160,000. The auditor's liability is most likely based upon which approach to assessing liability? Joint and several liability. Proportional liability. Contributory negligence. Absolute liability.

Proportional liability.

PCAOB

Public Company Accounting Oversight Board

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

Public Company Accounting Oversight Board.

Theoretical Reasoning

Reasoning about what we should believe

Practical Reasoning

Reasoning about what we should do

Securities Exchange Act of 1934

Regulates ongoing trading of securities after issuance. 1. Prohibits Fraud 2. Requires Corporate Reports to SEC 3. Prohibits short-swing profits. Certain companies must register with the SEC 1. Companies whose shares are traded on a national exchange 2. Companies that have a least 500 shareholders and more than $10 million in assets 3. National stock exchanges, brokers and dealers must also register.

Registration Statement

registration forms call for: A description of the company's properties and business; A description of the security to be offered for sale; Information about the management of the company; and Financial statements certified by independent accountants. both domestic and foreign, must file their registration statements electronically. (Effective 20 days after filing) These statements and the accompanying prospectuses become public shortly after filing, and investors can access them electronically. (SEC does not guarantee accuracy) issuers, underwriters and dealers must register in accordance to the securities act of 1933

Inquiries and analytical procedures ordinarily form the basis for which type of engagement?

Review.

Detection risk

Risk that misstatement will be missed when audit steps are performed

Securities Act of 1933

regulates original issues of securities. Requires issuers to 1.) Register new issues of securities and 2.) Provide a prospectus to prospective investors. Requires that all new issues of securities sold in interstate commerce must be registered with the SEC before sale, unless exempted. Registration includes certified financial statements and prospectus. Main objectives are to require that investors receive financial and other significant information concerning securities being offered for public sale; and to prohibit deceit, misrepresentations, and other fraud in the sale of securities.

Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party? Answer Ultramares Approach. Restatement of Torts Approach. Due Diligence Approach. Rosenblum Approach.

Rosenblum Approach.

In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law? Answer Continental Vending. Hochfelder v. Ernst. 1136 Tenants Corporation v. Rothenberg. Rosenblum v. Adler.

Rosenblum v. Adler.

Which of the following court cases highlighted the need for obtaining engagement letters for professional services? Answer Rosenblum v. Adler. 1136 Tenants Corporation v. Rothenberg. Hochfelder v. Ernst. Ultramares v. Touche.

Rosenblum v. Adler.

relevant

relates to the audit issue being addressed

The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the:

Securities and Exchange Commission.

Minimum decision criteria (satisficing)

Selecting the option that people can live with, but may not be the best option

Normative Myopia

Shortsightedness about values

Simplified decision rules

Simple rule to follow for decision makers

Descriptive ethics

Social sciences, such as psychology and sociology, that provide account of how and why people act the way they do

Norms

Standards of appropriate and proper ("normal") behavior

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

State Boards of Accountancy.

The serially-numbered pronouncements issued by the Auditing Standards Board over a period of years are known as:

Statements on Auditing Standards (SASs).

10. True/False Adjusting journal entries are ordinarily recorded by the client, while reclassifying journal entries need not be recorded.

TRUE

3. True/False A vendor's invoice is an example of documentary evidence created by a third party and held by the client.

TRUE

4. True/False In performing analytical procedures, the auditors may use dollar amounts, physical quantities, or percentages.

TRUE

7. True/False When the risk of material misstatement for an account is high, the auditors may perform additional substantive procedures to restrict detection risk to a lower level.

TRUE

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? Fleming had no knowledge of the embezzlement. The financial statements were presented in conformity with GAAP. That the audit was performed in accordance with GAAS. The controller was Walton's agent and as such had designed the controls which facilitated the embezzlement.

That the audit was performed in accordance with GAAS.

Section 302: Corporate Responsibility For Financial Reports

The CEO and CFO of each issuer shall prepare statement to accompany the audit report to certify the appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer."

The Securities and Exchange Commission (SEC)

The Created by Congress in 1934 to enforce the newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Integrated audits of US publicly traded companies are required by...

The Sarbanes-Oxley Act

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? The investor has not proven CPA negligence. The CPA detected the misstatement after the audit report date. The audit work was adequate to support the CPA's opinion. The investor did not rely upon the financial statement.

The audit work was adequate to support the CPA's opinion.

An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences?

The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period.

Issuer

The entity whose securities are being sold

Obstruction of Justice

The gist of the crime of obstruction of justice is an endeavor to interfere with the administration of justice. "Obstruction of justice" is not a single offense, but a category of crimes that interfere with the public administration of justice. Obstruction of justice involves any attempt to impede the due administration of justice.

Section 203: Audit Partner Rotation.

The lead audit or coordinating partner and the reviewing partner must rotate off of the audit every 5 years.

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? Answer The misstatement is immaterial in the overall context of the financial statements. The CPA detected the misstatement after the audit report date. The investor has not proven CPA negligence. The investor did not rely upon the financial statement.

The misstatement is immaterial in the overall context of the financial statements.

Which of the following professionals has primary responsibility for the performance of an audit?

The partner in charge of the engagement.

Which of the following is not a factor that affects the independent auditors' judgment as to the quantity, type, and content of working papers?

The timing and the number of personnel to be assigned to the engagement.

A principal purpose of a representation letter from management is to:

remind management of its primary responsibility for the financial statements

Quincy bought Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Quincy must prove that: Answer Quincy was in privity with Worth. There was a material misstatement in the financial statements. There was fraudulent activity by Worth. Quincy relied on Worth's opinion.

There was a material misstatement in the financial statements.

Trust Indenture Act of 1939

This Act applies to debt securities such as bonds, debentures, and notes that are offered for public sale. Even though such securities may be registered under the Securities Act, they may not be offered for sale to the public unless a formal agreement between the issuer of bonds and the bondholder, known as the trust indenture, conforms to the standards of this Act.

Investment Company Act of 1940

This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis.

Investment Advisers Act of 1940

This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. Since the Act was amended in 1996, generally only advisers who have at least $25 million of assets under management or advise a registered investment company must register with the Commission.

Ethical Values

Those beliefs and principles that impartially promote human well being

Audit risk

risk an auditor may unknowingly fail to modify their opinion of financials that are materially misstated

The initial audit planning process is linked with..

risk assessment

Together, inherent risk and control risk are called..

risk of material misstatement

The PCAOB has authority/regulates firms auditing..

US public companies

Values

Underlying beliefs that cause us to act or deciding one way or another

The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who: Answer Unknowingly violates the 1933 Securities Act. Unknowingly violates the 1934 Securities Exchange Act. Knowingly or unknowingly violates the 1934 Securities Exchange Act. Knowingly or unknowingly violates the 1933 Securities Act.

Unknowingly violates the 1934 Securities Exchange Act.

Which of the following is not a management assertion?

Verification.

Consider limited alternatives

When decision makers only see two options when there is always more

Inattentional blindness

When you focus on failures or a particular element of an event and miss the surrounding details

Hark, CPA, negligently failed to follow generally accepted auditing standards in auditing Long Corporation's financial statements. Long's president told Hark that the audited financial statements would be submitted to several, at this point undetermined, banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will: Answer Lose because Hark knew that a bank would be relaying the financial statements. Win because Third was contributory negligent in granting the loan. Win because there was no privity of contract between Hark and Third. Lose because Hark was negligent in performing the audit.

Win because there was no privity of contract between Hark and Third.

Management information system

set of processes and procedures that management uses to collect and analyze information that is used for managing the business

Personal Integrity

Your personal morals

The permanent file of the auditors' working papers generally should include:

a copy of the corporate charter.

ICFR must be comparable to..

a set benchmark, such as those identified by COSO

Which of the following is an assertion? a. A statement made by management regarding the collectability of accounts receivable. b.The audit firm's estimation of the client's inventory obsolescence. c.The statement by management regarding the appointment of auditors. d.The statement by management that the firm will close its branch office because of snow.

a. A statement made by management regarding the collectability of accounts receivable.

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the: a. Collection of receivables. b. Purchase of merchandise inventory. c. Payment of accounts payable. d. Sale of long-term debt.

a. Collection of receivables.

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? a. Examine cash receipts received after year-end. b. Confirm receivables. c. Examine dates of purchase orders. d. Foot the receivables lead schedule.

a. Examine cash receipts received after year-end.

For effective internal control, the billing function should not be performed by the: a. Sales department. b. Accounting department. c. Finance department. d. Information Processing department.

a. Sales department.

Forensic auditing

situation when an auditor is hired to look for specific and detailed information, usually in the records of a company

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: a. Send positive confirmation requests. b. Send negative confirmation requests. c. Examine evidence of subsequent cash receipts. d. Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

a. Send positive confirmation requests.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: a. Shipping documents file. b. Sales journal. c. Accounts receivable subsidiary ledger. d. Remittance advices.

a. Shipping documents file.

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? a. The account balances as of year-end will generally be confirmed. b. The auditors will in general use blank rather than positive confirmation requests. c. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year-end. d. Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

a. The account balances as of year-end will generally be confirmed.

Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable? a. The confirmation requests are sent on the client's letterhead. b. The confirmation requests are mailed to customers by the internal auditors. c. The client's mailroom personnel closely monitor and inspect confirmation requests during mailing. d. The return address on the envelope used to send the confirmation request is that of the client.

a. The confirmation requests are sent on the client's letterhead.

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: a. Trace a sample of the bills of lading to sales invoices. b. Confirm a sample of accounts payable. c. Review the aging of accounts receivable. d. Trace a sample of recorded sales to shipping documents.

a. Trace a sample of the bills of lading to sales invoices.

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: a. Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. b. Write-offs must be approved by the accounts receivable department. c. Write-offs must be authorized by the shipping department. d. Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

a. Write-offs must be approved by a responsible official after review of credit department

Which of the following could cause an auditor to refuse to submit a proposal for a prospective audit client: a. a senior sales VP's 10 yr old conviction for tax evasion b. board of directors comprised of management's close friends c. a reputation for high employee turnover d. non of the above

a. a senior sales VP's 10 yr old conviction for tax evasion

If the auditor initially considers the internal control environment risky, but later during the audit concludes it to be adequate as a result of substantive procedures, the auditor: a. should reflect the new assessment in its report on ICFR b. should increase substantive testing c. should issue a new opinion on the financial statements d. should issue a new opinion on the ICFR

a. should reflect the new assessment in its report on ICFR

In order to be a good auditor, you must first be a good..

accountant

The planning and risk assessment process begins with initial decision about...

staffing and timing

Accounting information system

subset of management information system that deals with processes and information that relate to accounting information and reports

Audit committe

subset of the Board of Directors

operational auditors

assess and evaluate the functioning of the company

Integrated audit

audit of financial statements and ICFR

one must first be a good accountant to be a good..

auditor

If misstatement exists, but is immaterial, then..

auditor can conclude that financial statements are fair

Definition of auditing

systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users

ICFR are tested using..

test of controls and dual purpose tests

substantive procedures are further..

testing to mitigate risks

Tracing copies of sales invoices to shipping documents will provide evidence that all: a. Shipments to customers were recorded as receivables. b. Billed sales were shipped. c. Debits to the subsidiary accounts receivable ledger are for sales shipped. d. Shipments to customers were billed.

b. Billed sales were shipped.

Which of the following manipulations would understate receivables on the financial statements? a. Understatement of cash sales. b. Closing the sales journal prior to year-end. c. Closing the cash receipts journal prior to year-end. d. Underestimating the allowance for doubtful accounts.

b. Closing the sales journal prior to year-end.

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? a. Existence or occurrence. b. Completeness c. Rights and obligations. d. Presentation and disclosure.

b. Completeness

Which of the following is not true about the confirmation of accounts receivable? a. Confirmation requests should bear the auditors' return address. b. Confirmation requests should be signed by the auditors. c. Confirmation requests should be mailed directly by the auditors. d. Confirmation requests should include a return envelope addressed to the office of the auditors.

b. Confirmation requests should be signed by the auditors.

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? a. Footing the sales journal. b. Confirming accounts receivable. c. Tracing the total sales in the sales journal to the general ledger. d. Observation of the physical inventory count at year-end.

b. Confirming accounts receivable.

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? a. Collectibility is reasonably assured. b. Delivery has occurred or is scheduled to occur in the near future. c. Persuasive evidence of an arrangement exists. d. The seller's price to the buyer is fixed or determinable.

b. Delivery has occurred or is scheduled to occur in the near future.

The confirmation of accounts receivable is most closely associated with: a. Business risk. b. Detection risk. c. Inherent risk. d. Relative risk.

b. Detection risk.

Forensic auditors.. a.Investigate only fraud. b. Look for specific and detailed information. c.Perform engagements that can result in a standard, clean audit report. d.May not be CPAs.

b. Look for specific and detailed information.

You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that: a. The cash receipts journal was closed before year-end. b. The cash receipts journal was held open after year-end. c. There are many unrecorded liabilities. d. The sales journal was held open after year-end.

b. The cash receipts journal was held open after year-end.

Which of the following would not be considered audit evidence? a. Invoices received by the company and retained on the company's IT system in electronic form. b. The electronic work paper program package used by the auditor to produce the electronic work papers. c. Hard copy minutes of the Board of Directors and Audit Committee meetings. d.Electronic images of the front and back of checks that the company has written.

b. The electronic work paper program package used by the auditor to produce the electronic work papers.

Audit procedures performed to obtain an understanding of the client and its environment, including its internal control, and to assess the risk of material misstatement are referred to as:

tests of controls.

Analytical procedures are:

tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data.

Auditors consider internal control during the audit of a nonpublic company: a.For all the same purposes as on an audit of a public company. b.To identify areas of risk and help to plan the financial statement audit. c.To help to plan the financial statement audit and issue an opinion on effectiveness. d.Only if they are sure it will be helpful when performing the financial statement audit.

b.To identify areas of risk and help to plan the financial statement audit.

Auditing standards for nonpublic companies are provided by..

the AICPA

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: a. Subsequent collections are to be reviewed. b.internal control over receivables is good. c. Negative confirmation requests are to be used. d. There is a simultaneous examination of cash and accounts receivable.

b.internal control over receivables is good.

Control risk

basically risk that a misstatement is not prevented or misstatement that has occurred not discovered by the ICFR

Differences of opinion between members of the audit staff about auditing matters should:

be documented along with the manner in which they were resolved.

Auditing standards for publicly traded companies are provided by..

the PCAOB

ICFR audit governed by..

the PCAOB

Public companies must register with..

the SEC

Internal auditors report to..

the audit committee

To test the existence assertion for recorded receivables, the auditors would select a sample from the: a. Sales orders file. b. Customer purchase orders. c. Accounts receivable subsidiary ledger. d. Shipping documents (bills of lading) file.

c. Accounts receivable subsidiary ledger.

After the CPAs have selected particular accounts receivable for confirmation: a. As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. b. It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. c. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm. d. All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

c. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? a. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. b. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. d. The failure to prepare shipping documents may lead to an understatement of inventory balances.

c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? a. Reviewing an aging of accounts receivable. b. Examination of cash receipts subsequent to the balance sheet date. c. Confirming current (0-30 day) year-end accounts receivable. d. Reviewing credit files for selected account.

c. Confirming current (0-30 day) year-end accounts receivable.

A non-equity partner likely: a. Shares in ALL of the work for the firm. b. Is compensated by sharing in the profits of the firm. c. Has partner responsibility for work performed. d. All of the above.

c. Has partner responsibility for work performed.

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements? a. Sales. b. Cash. c. Inventory. d. Accounts receivable.

c. Inventory.

Materiality decisions can only be made based on..

the judgment of involved party who has all the information

Tracing recorded sales transactions to the bills of lading provides evidence about the: a. Completeness of sales transactions. b. Collectibility of sales transactions. c. Occurrence of sales transactions. d. Billing of all sales transactions

c. Occurrence of sales transactions.

Which of the following is consistent with effective internal control over sales transactions? a. The accounting department prepares a shipping report authorizing the shipment of goods. b. The accounting department accounts for all receiving reports. c. The billing department accounts for all shipping documents. d. The accounts payable department annually approves the extension of credit to customers.

c. The billing department accounts for all shipping documents.

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures to apply to the accounts and transactions. In a particular case, s/he might do this by: a. Tracing sales invoices to shipping documents to tests the completeness of reported sales. b. Tracing shipping documents to sales invoices to test the occurrence of reported sales. c. Tracing sales invoices to shipping documents to test the occurrence of reported sales. d. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

c. Tracing sales invoices to shipping documents to test the occurrence of reported sales.

Which of the following assertions would not apply to short-term debt: a. existence b. completeness c. right and obligations d. all of the above

c. right and obligations

One important motivator for an audit is...

the need for orderly, functioning capital markets

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? a. Merchandise received is not promptly reconciled to the outstanding purchase order file. b. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. c.The write-off of receivables by personnel who receive cash permits the misappropriation of cash. d. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

c.The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

The auditor: a.prepares the financial statements after the client agrees to all adjustments. b.writes the footnotes to the financial statements to ensure their accuracy. c.performs work to reach an opinion on the ICFR and financial statements. d.None of the above.

c.performs work to reach an opinion on the ICFR and financial statements.

Beneficiaries of an audit..

capital markets, management and the comp., current stockholders, other financial statement users

Reliable and relevant

characteristics required for evidence to be competent

The SEC governs..

the securities market in the US

The BoD is elected by..

the shareholders and is given responsibility for protecting shareholder interests

The auditors' working papers will generally be least likely to include documentation showing how the:

client's schedules were prepared.

Audit report

communicates to users of financials that audit was performed and the auditor's opinion

When auditing a non-public company, auditors..

consider internal control to identify areas of concern/risk

To assess ICFR effectiveness the auditor..

considers controls built into system and decides whether those controls are appropriate for the risks that are important to the company's business

confirmation process

consists of contacting debtors, usually in writing, and asking them if they agree that they have AP to the company for amounts specified

Audit working papers should include:

content that is sufficient to provide support for the auditors' report, including the auditors' representation as to compliance with auditing standards.

Evidence is generally considered sufficient when:

there is enough of it to afford a reasonable basis for an opinion on the financial statements.

Non-assurance type work performed by CPAs includes: a. Tax preparation. b. Consulting. c. Bookkeeping. d. All of the above.

d. All of the above.

Which of the following would provide the most assurance concerning the valuation of accounts receivable? a. Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. b. Compare receivable turnover ratios to industry statistics for reasonableness. c. Inquire about receivables pledged under loan agreements. d. Assess the allowance for uncollectible accounts for reasonableness.

d. Assess the allowance for uncollectible accounts for reasonableness.

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? a. Excessive goods returned for credit. b. Unrecorded sales discounts. c. Lapping of year-end accounts receivable. d. Inflated sales for the year.

d. Inflated sales for the year.

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? a. Restrictions placed on sales by laws and regulations. b. Decline in sales due to economic declines. c. Decline in sales due to product obsolescence. d. Over-recorded sales due to a lack of control over the sales entry function.

d. Over-recorded sales due to a lack of control over the sales entry function.

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from: a. The sales journal. b. The billing clerk's file of sales orders. c. Duplicate copies of sales invoices. d. The shipping clerk's file of duplicate copies of bills of lading.

d. The shipping clerk's file of duplicate copies of bills of lading.

Which of the following is an example of misappropriation of assets relating to sales? a. Accidentally recording cash that represents a liability as revenue. b. Holding the sales journal open to record next year's sales as having occurred in the current year. c. Intentionally recording cash received from a new debt agreement as revenue. d. Theft of cash register sales.

d. Theft of cash register sales.

For public companies, the auditor also reviews which of the following on a regular basis: a. the 10Qs filed quarterly with the SEC b. the 8-Ks (if filed) with the SEC c. the 10Ks filed annually with the SEC d. all of the above

d. all of the above

In order to obtain evidence regarding valuation of AR, the auditor is likely to: a. send out confirmations to the client's debtors requesting amount owed verification b. inquire of management as to the accuracy of sales transactions c. examine completed confirmation requests for discrepancies between debtor and client amount d. all of the above

d. all of the above

The amount of evidence collected during an audit has a direct relationship to: a. expected risk b. accuracy of management assertions c. appropriateness of management assertions d. all of the above

d. all of the above

Due professional care applies to: a. sample selection b. follows appropriate audit standards c. accepts professional guidance d. all of the above apply to due professional care

d. all of the above apply to due professional care

Which of the following assertions address presentation and disclosure: a. existence b. accuracy and valuation c. rights and obligations d. both b and c

d. both b and c

An auditor selects a sample using a random number generator, even though she believes the account being audited presents increased risk. This is a violation of: a. professional care b. professional skepticism c. both a and b d. neither a nor b

d. neither a nor b

Judgement errors indicate: a. the auditor behaved in a negligent manner b. the auditor failed to exhibit professional care c. the auditor failed to exhibit professional skepticism d. none of the above

d. none of the above

Financial statements must be prepared: a.in accordance with GAAP. b.in accordance with IFRS. c.in accordance with OCBOA. d.Any of the above, depending on which set of standards the circumstances dictate as applicable.

d.Any of the above, depending on which set of standards the circumstances dictate as applicable.

______ is more reliable than oral evidence

documentary evidence

Although there are sometimes exceptions, ordinarily the most reliable audit evidence is:

documentary in form rather than an oral representation.

Analytical procedures

evaluate company's financial information based on expected outcome and relationships

substantive procedures

examines the accounts and disclosures

The PCAOB outlines _____ assertions

five

The major reason auditors gather evidence is to:

form an opinion on the financial statements.

reliability

trustworthy source and manner of collection

Regulation D (private offerings)

has three private offering Exemptions: Rule 504, 505 and 506 General Conditions:Private offering, no advertising, Buyer may not resell for 2 years, Must notify SEC within 15 days

dual purpose test collects..

useful information to audit financials

Test of control determines..

whether a control is functioning as designed

Before the engagement letter, the audit firm must communicate in writing with the client's audit committee about..

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