Audit Chapter Module A

c. Developing an understanding of internal control.

4. Which of the following activities is an accountant not responsible for in review engagements performed in accordance with Statements on Standards for Accounting and Review Services? a. Performing basic analytical procedures. b. Remaining independent. c. Developing an understanding of internal control. d. Providing a form of limited assurance.

a. Management provides a report attesting to satisfactory compliance.

5. For a compliance engagement, three conditions must be met. Which of the following is not one of the three conditions? a. Management provides a report attesting to satisfactory compliance. b. Management's evaluation of compliance is capable of evaluation and is measured against reasonable criteria. c. Sufficient evidence is available to support management's evaluation. d. Management accepts responsibility for compliance.

b. improve the quality of information, or its context, for decision makers

1. Assurance services are defined as independent professional services that: a. establish criteria for effective measurement of business activity. b. improve the quality of information, or its context, for decision makers. c. attest to the adequacy of controls over business operations. d. develop efficient and effective accounting systems to ensure compliance with accounting standards and policy.

d. Omission is not undertaken with the intention of misleading the users of General's financial statements.

1. General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General's request provided the omission is clearly indicated in Ford's report and the: a. Distribution of the financial statements and Ford's report is restricted to internal use only. b. Reason for omitting the disclosures is acknowledged in the notes to the financial statements. c. Omitted disclosures would not influence any potential creditor's conclusions about General's financial position. d. Omission is not undertaken with the intention of misleading the users of General's financial statements.

a. Understand the internal controls used in the processes that generated the information.

1. To perform an attestation engagement on prospective information or pro forma information, accountants must do all of the following except a. Understand the internal controls used in the processes that generated the information. b. Obtain knowledge about the entity's business and accounting principles. c. Evaluate the assumptions used to prepare the information. d. Obtain an understanding of the process through which the information was developed.

c. Objectivity and integrity.

10. In providing assurance services to clients, CPAs are building on their reputations for a. Knowledge and integrity. b. Independence and due professional care. c. Objectivity and integrity. d. Professionalism and trust.

a. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.

10. Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonpublic entity? a. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles. b. Obtaining written representations from management indicating that the compiled financial statements will not be used to obtain credit. c. Making inquiries of management concerning actions taken at meetings of the stockholders and the board of directors. d. Applying analytical procedures designed to corroborate management's assertions that are embodied in the financial statement components.

b. Improves the quality of information for decision makers

11. An assurance service is defined as a service that a. Reviews unaudited financial information. b. Improves the quality of information for decision makers. c. Reduces the risk in management decision making. d. Provides auditing services to nonfinancial information.

c. analytical procedures, inquiry, and obtaining a management representation letter.

11. The procedures used in a review engagement are: a. physical examination, reperformance, and obtaining a management representation letter. b. analytical procedures, reperformance, and obtaining a management representation letter. c. analytical procedures, inquiry, and obtaining a management representation letter. d. physical examination, inquiry, and obtaining a management representation letter.

b. The website displays the WebTrust seal.

12. B. Harper is surfing the Internet and finds a great pair of rollerblades at a really low price, but he has never heard of the company and is concerned that the product he ordered may not be the product he receives. Harper may be more willing to place an order with this company if a. The company provides a money-back guarantee. b. The website displays the WebTrust seal. c. Only a partial payment is required prior to receiving the product. d. The company provides its annual report and the report of the independent auditors on its website.

b. need to understand the internal controls over the transaction regardless of the location of the control.

12. When a company uses a service organization to prepare its payroll, the company's auditors: a. have no obligation concerning the internal controls at the service organization. b. need to understand the internal controls over the transaction regardless of the location of the control. c. must audit the internal controls at the service organization. d. should include the audit report of the service company's auditors with their auditors' report.

b. Understand the internal controls used in the processes that generated the information.

13. To perform an attestation engagement on prospective information or pro forma information, accountants must do all of the following except a. Evaluate the assumptions used to prepare the information. b. Understand the internal controls used in the processes that generated the information. c. Obtain knowledge about the entity's business and accounting principles. d. Obtain an understanding of the process through which the information was developed.

a. A statement referring to standards established by the AICPA

13. Which of the following statements should be included in a practitioner's report on the application of agreed-upon procedures? a. A statement referring to standards established by the AICPA. b. A statement of negative assurance based on procedures performed. c. A statement of scope limitation that will qualify the practitioner's opinion. d. A statement that the practitioner performed an examination of prospective financial statements.

c. AICPA AT 501, "An Examination of an Entity's Internal Control over Financial Reporting That Is Integrated with an Audit of Its Financial Statements."

14. If a nonissuer wants an accountant to perform an examination of its internal controls, the accountant should follow: a. AICPA AU 315, "Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement." b. PCAOB AS 2201, "An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements." c. AICPA AT 501, "An Examination of an Entity's Internal Control over Financial Reporting That Is Integrated with an Audit of Its Financial Statements." d. FASB Concepts Statement No. 1, "Objectives of Financial Reporting by Business Enterprises."

a. Unaudited financial statements of nonissuers.

14. The official Statements on Standards for Accounting and Review Services are applicable to practice with a. Unaudited financial statements of nonissuers. b. Unaudited financial statements of public companies. c. Audited financial statements of public companies. d. Audited financial statements of nonissuers.

d. Compilation report.

15. When accountants are not independent, which of the following reports can they nevertheless issue? a. Examination report on a forecast. b. Standard unmodified audit report. c. Examination of internal control over financial reporting. d. Compilation report.

c. Adequate knowledge of the subject matter.

15. Which of the following is a generally accepted attestation standard but is not a fundamental auditing principle? a. Independence. b. Appropriate competence and capability. c. Adequate knowledge of the subject matter. d. Due care.

d. Management must disclose the probability of obtaining the results included in the prospective financial information.

16. The performance of an attestation engagement on prospective financial information does not require which of the following? a. If the basis of the prospective financial information is different than the financial statements, a reconciliation of the two must be provided. b. Management must disclose all significant assumptions used in generating the prospective financial information. c. Management must disclose significant accounting policies and procedures used in generating the prospective financial information. d. Management must disclose the probability of obtaining the results included in the prospective financial information.

a. Express an unmodified opinion on a single financial statement.

17. If the auditor expresses an adverse or disclaimer of opinion on the complete set of financial statements, she or he is not permitted to: a. Express an unmodified opinion on a single financial statement. b. Express an unmodified opinion on an element of the financial statements. c. Express a similar opinion on a single financial statement. d. Perform any of the choices.

b. A preparation of financial statement engagement.

18. An accountant need not assess compliance with independence rules during a. An examination of prospective financial information. b. A preparation of financial statement engagement. c. A compilation engagement. d. A review engagement

c. Preparation of personal financial statements for presentation alongside a financial plan

19. Which of the following would be considered a preparation of financial statements engagement? a. Drafting financial statement notes. b. Preparing financial statements in conjunction with business valuation services. c. Preparation of personal financial statements for presentation alongside a financial plan. d. Preparation of financial statements with a tax return solely for submission to taxing authorities

d. AICPA AT 501, "An Examination of an Entity's Internal Control over Financial Reporting That Is Integrated with an Audit of Its Financial Statements."

2. If a nonissuer wants an accountant to perform an examination of its internal controls, the accountant should follow: a. AICPA AU 315, "Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement." b. PCAOB AS 2201, "An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements." c. FASB Concepts Statement No. 1, "Objectives of Financial Reporting by Business Enterprises." d. AICPA AT 501, "An Examination of an Entity's Internal Control over Financial Reporting That Is Integrated with an Audit of Its Financial Statements."

a. WebTrust and SysTrust Services.

2. The phrase "Trust services" refers to: a. WebTrust and SysTrust Services. b. XBRL and SysTrust Services. c. WebTrust and XBRL Services. d. all AICPA designated assurance services.

c. The accountant is not required to make inquiries nor perform procedures to corroborate the information provided by the client.

2. Which of the following is correct regarding a compilation of financial statements engagement in accordance with Statement on Standards for Accounting and Review Services? a. If the accountant's independence is impaired, a qualified opinion must be issued. b. The accountant may not base the report on information obtained from prior engagements with the same client. c. The accountant is not required to make inquiries nor perform procedures to corroborate the information provided by the client. d. The accountant should perform analytical procedures to financial data.

c. Less work than an audit but more work than a compilation

3. A review service engagement involving unaudited financial statements involves a. Less work than a compilation but more work than an audit. b. More work than a compilation and an audit. c. Less work than an audit but more work than a compilation. d. More work than an audit but less work than a compilation.

c. Is not aware of any material modifications that should be made to the financial statements.

3. The standard report issued by a CPA after reviewing the financial statements of a nonissue in accordance with Statements on Standards for Accounting and Review Services (SSARS) should state that the CPA: a. Assessed the accounting principles used and significant estimates made by management. b. Has no responsibility to update the CPA's report for events and circumstances occurring after the report's date. c. Is not aware of any material modifications that should be made to the financial statements. d. Believes that there will usually be differences between the projected and actual results.

a. WebTrust.

3. What is the appropriate name for an assurance service provided by a CPA regarding a client's commercial Internet site with reference to the principles of privacy, security, processing integrity, availability, and confidentiality? a. WebTrust. b. SysTrust. c. XBRL. d. WebSecure

c. improves the full disclosure of financial information.

4. Extensible Business Reporting Language (XBRL) provides a computer readable identifying tag for each individual item of data. The advantages of XBRL include all of the following except: a. increases the speed of handling of financial data. b. reduces the chance of error. c. improves the full disclosure of financial information. d. permits automatic checking of information.

d. Compilation report.

4. When accountants are not independent, which of the following reports can they nevertheless issue? a. Standard unmodified audit report. b. Examination of internal control over financial reporting. c. Examination report on a forecast. d. Compilation report.

c. Obtain an attorney's letter regarding litigation and unasserted claims.

5. Shelly's Bank has loaned money to Pete's Auto Supply. The loan is collateralized by inventory. The loan also requires a CPA to observe the count of the inventory and trace sampled items to the vendor invoices in order to determine the value of inventory is not misstated. This service would be: a. an assurance service engagement. b. an attestation engagement. c. a review engagement. d. a compilation engagement.

c. Making inquiries of management regarding maturities, interest rate, and collateral.

5. Which of the following procedures regarding notes payable would an accountant most likely perform during a nonissuer's review engagement? a. Confirming the year-end outstanding notes payable balance with the lender. b. Examining records indicating proper authorization of the notes payable. c. Making inquiries of management regarding maturities, interest rate, and collateral. d. Documenting control procedures for payment calculations of the notes' principal and interest.

a. Review report on unaudited financial statements.

6. Accountants are permitted to express "negative assurance" in which of the following reports? a. Review report on unaudited financial statements. b. Standard unmodified audit report on financial statements. c. Compilation report on unaudited financial statements. d. Adverse opinion report on financial statements.

b. restricts the report to specified users.

7. In an agreed-upon procedures engagement, an accountant: a. follows all of the fundamental principles of GAAS. b. restricts the report to specified users. c. includes negative assurance in the report. d. gives a qualified audit report.

b. Management must present its assertion about the effectiveness of its internal control in a written report.

7. Which of the following conditions must be met before an accountant can conduct an examination of an entity's internal control? a. The accountant must have designed a significant portion of the internal controls. b. Management must present its assertion about the effectiveness of its internal control in a written report. c. Management must represent that there are no internal control deficiencies. d. The accountant must represent that he or she has not conducted an audit of the financial statements.

a. might influence users' conclusions about the business, if the disclosures were included.

8. When an accountant is engaged to compile a nonpublic entity's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements: a. might influence users' conclusions about the business, if the disclosures were included. b. are prepared in conformity with a comprehensive basis of accounting other than GAAP. c. are not compiled in accordance with Statements on Standards for Accounting and Review Services. d. are special-purpose financial statements that are not comparable to those of prior periods.

d. Not mention the interim information unless there is an exception that the auditors need to include in the report

8. When interim financial information is presented in a footnote to annual financial statements, the standard audit report on the annual financial statements should a. Contain an extra paragraph if the interim information note is labeled "Unaudited." b. Contain an extra paragraph that gives negative assurance on the interim information if it has been reviewed. c. Contain an audit opinion paragraph that specifically mentions the interim financial information if it is not in conformity with GAAP. d. Not mention the interim information unless there is an exception that the auditors need to include in the report.

b. Internal control deficiencies.

9. During a review of a nonissuer's financial statements, accountants are required to make certain inquiries of management. Which of the following inquiries is not required by the SSARS? a. Material subsequent events. b. Internal control deficiencies. c. Significant transactions occurring near the end of the reporting period. d. The basis for the preparation of financial statements.

a. An attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control structure.

9. Which of the following best describes an engagement to report on an entity's internal control over financial reporting for a nonpublic company? a. An attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control structure. b. An audit engagement to render an opinion on the entity's internal control structure. c. A prospective engagement to project, for a period of time not to exceed one year, and report on the expected benefits of the entity's internal control structure. d. A consulting engagement to provide constructive advice to the entity on its internal control structure.