ACCT 401 - Exam 1 Review

List three types of general consulting activities that would impair the auditor's dependence based on the AICPA Code of Professional Conduct.

1. Authorizing, executing, or consummating a transaction. 2. Preparing source documents. 3. Having custody of client assets. 4. Supervising client employees in normal recurring activities. 5. Determining which recommendations should be implemented. 6. Reporting to the Board on behalf of management. 7. Serving as a client's stock transfer or escrow agent, registrar or general counsel.

List four types of consulting services prohibited by SOX that may be performed by auditors for their public company audit clients

1. Bookkeeping and other accounting/fin stmt services 2. Financial information systems design and implementation. 3. Appraisal, valuation, actuarial services. 4. Internal audit outsourcing services, human resources, or management functions. 5. Various investment services. 6. Legal services and expert services unrelated to auditing.

A plaintiff may elect to bring a lawsuit against auditors under applicable statutes-including the Securities Act of 1933 and the Securities Exchange Act of 1934-and under common law. For each circumstance, indicate the most likely source of CPA liability by placing the appropriate letter in the third column. A. The Securities Act of 1933 B. The Securities Exchange Act of 1934 C. Common Law 1. A CPA's client is filing suit for negligence in performing an audit. 2. A stockholder of a publicly-held company who purchased the stock from another investor is filing suit for losses sustained on the stock. 3. A bank that lent money to a company is filing suit for misleading financial statements that were audited by the CPA. 4. An investor is filing suit for losses sustained in the purchase of publicly-traded bonds that were bought from the company upon initial registration. 5. A stockholder who purchased stock of a public company in an initial public offering is filing a suit for losses sustained in the purchase of the stock. 6. A CPA's client is filing suit for losses sustained for errors in a tax return prepared by the CPA. 7. A supplier who prepared credit to the CPA's publicly-held client is filing suit for losses sustained when the client could not pay the account. 8. An investor who purchased a corporate bond from another investor on the New York Stock Exchange is filing suit to recover losses.

1. C - Common Law 2. B - 1934 3. C - Common Law 4. A - 1933 5. A - 1933 6. C - Common Law 7. C - Common Law 8. B - 1934

The following is a list of circumstances that might be faced by a public accounting firm. Select the rule violated of the AICPA Code of Professional Conduct in the second column. If no rule is violated select "no violation" (this may be used once, more than once, or not at all). Rules may be used either once, or not at all. A. Acts discreditable. B. Accounting principles. C. Integrity and objectivity. D. Compliance with standards. E. Independence. F. Contingent fees. G. No violation. 1. The dependent-son of a partner in a CPA firm owns ten shares of stock in an audit client. 2. In preparing a tax return, a CPA takes a deduction at the client's request that the CPA believes is not justified. 3. A CPA robs a bank. 4. A CPA owns 100 shares in a consulting client for which the firm provides no attest services. 5. A CPA charges an audit fee that depends on the amount of credit the client obtains. 6. A CPA advertises in a local newspaper. 7. A client knowingly issues financial statements that inappropriately and materially depart from a FASB standard. 8. A CPA and the president of an audit client both have an immaterial joint investment in another company. The CPA firm provides no services for the other company. 9. A CPA discloses information about a client because the information was subpoenaed. 10. A CPA does not follow generally accepted auditing standards in the audit of a nonpublic US company.

1. E - Independence 2. C - Integrity and objectivity 3. A - Acts discreditable 4. G - No violation 5. F - Contingent Fees 6. G - No violation 7. B - Accounting principles 8. B - Accounting principles 9. G -No violation 10. D - Compliance with standards

Which of the following types of employees must be independent of an audit client? A. A partner in the office that performs the engagement. B. Senior auditors in the office that performs the audit. C. Managers assigned to an office that does not participate in the engagement. D. All firms professionals, regardless of their positions.

A. A partner in the office that performs the engagement.

A summary of findings rather than assurance is most likely to be included in a(n): A. Agreed-upon procedures report. B. Compilation report. C. Examination report. D. Review report.

A. Agreed-upon procedures report.

A small CPA firm provides audit services to a large local company. Almost 80% of the CPA firm's revenue comes from this client. Which statement is most likely to be true: A. Appearance of independence may be lacking. B. The small CPA firm does not have the proficiency to perform a larger audit. C. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit. D. The auditor should provide an "emphasis of matter paragraph" to their report adequately disclosing this information and then it may issue an unqualified opinion.

A. Appearance of independence may be lacking.

The financial statements of a United States public company are most likely to follow: A. Generally accepted accounting principles. B. International Standards of Auditing. C. Public Company Accounting Oversight Board principles. D. Quality control standards.

A. Generally accepted accounting principles (GAAP)

An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n): A. Peer Review Engagement. B. Quality Control Engagement. C. Quality Assurance Engagement. D. Attestation Engagement.

A. Peer Review Engagement

Which of the following acts by a CPA would NOT necessarily be considered an act discreditable to the profession under the AICPA Code of Professional Conduct? A. Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so. B. Engaging in discriminatory employment practices. C. Robbing a convenience store. D. Knowingly signing a false tax return.

A. Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so.

Which of the following is considered a type of threat to compliance with the Rules of the Code of Professional Conduct? A. Self-interest. B. Illegitimate skepticism. C. Lack of management participation. D. Irrevocability.

A. Self-interest.

Fleming and Co., CPAs, issued an unqualified opinion on the 20X3 financial statements of Walton Corp. Late in 20X4, Walton determined that its controller had embezzled over $2,000,000. Fleming was unaware of the embezzlement. Walton has decided to sue Fleming to recover the $2,000,000. Walton's suit is based upon Fleming's failure to discover the missing money while performing the audit. Which of the following is Fleming's best defense? A. That the audit was performed in accordance with GAAS. B. Fleming had no knowledge of the embezzlement. C. The financial statements were presented in conformity with GAAP. D. The controller was Walton's agent and as such had designed the controls which facilitated the embezzlement.

A. The audit was performed in accordance with GAAS.

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

A. Unknowingly violates the 1934 Securities Exchange Act.

An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on: Financial Statements / Internal Audit A. Yes / Yes B. Yes / No C. No / Yes D. No / No

A. Yes / Yes

Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to: Fraudulent Financial Reporting /Misappropriation of Assets A. Yes / Yes B. Yes / No C. No / Yes D. No / No

A. Yes / Yes

The Public Company Accounting Oversight Board may conduct investigations and disciplinary proceedings of: Registered Public Accounting Firms / Registered Public Accounting Firm Employees A. Yes / Yes B. Yes / No C. No / Yes D. No / No

A. Yes / Yes

Wilson Company is audited by the Denver office of Anderson CPAs. Which of the following would be LEAST likely to be considered a "covered member" by the independence standard? A. Staff assistant on the audit. B. A staff assistant who prepares Wilson Company's tax returns. C. A tax partner in Denver who performs no attest services for Wilson Company or for any other clients. D. The partner in charge of Anderson CPAs (she does no work on the Anderson Company audit).

B. A staff assistant who prepares Wilson Company's tax returns.

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

B. Attestation services, but not other professional services.

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

B. Client contributory negligence.

An act passed by Congress aimed at promoting financial stability, improving accountability and transparency in the financial system: A. Better Governance Act. B. Dodd-Frank Act. C. Public Company Accounting Oversight Board Act. D. Sarbanes-Oxley Act.

B. Dodd-Frank Act.

If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on: A. Ordinary negligence. B. Gross negligence. C. Strict liability. D. Criminal deceit.

B. Gross negligence.

Passage of the Sarbanes-Oxley Act led to the establishment of the: A. Auditing Standards Board. B. Public Company Accounting Oversight Board. C. Public Accountancy Review Board. D. Securities and Exchange Commission.

B. Public Company Accounting Oversight Board.

An unconditional responsibility to follow AICPA professional standards exists when the professional standard uses the term(s): Must / Should A. Yes / Yes B. Yes/ No C. No / Yes D. No / NO

B. Yes / No

If the AICPA Code of Professional Conduct does not specifically address a threat to auditor independence the auditor should: A. Conclude that the threat is not significant unless proven so. B. Conclude that the threat results in a lack of independence unless it can be shown that no impairment of independence occurs. C. Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all relevant information. D. Consult the Statements on Auditing Standards for guidance.

C. Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all relevant information.

Assume that a client has encountered an $800,000 fraud and that the CPA's percentage of responsibility was established at 20%, while the company itself was responsible for the other 80%. Under which approach to liability is the CPA most likely to avoid liability entirely? A. Absolute negligence. B. Comparative negligence. C. Contributory negligence. D. Joint negligence.

C. Contributory negligence.

An audit should be designed to obtain reasonable assurance of detecting material misstatements due to: A. Errors. B. Errors and fraud. C. Errors, fraud, and non-compliance with laws with a direct effect on financial statement amounts, and others. D. Errors, fraud, and non-compliance with all laws.

C. Errors, fraud, and non-compliance with laws with a direct effect on financial statement amounts and others.

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

C. Guaranteeing the accuracy of the work performed.

Which of the following is not a service included in the attestation subject matter standard? A. Compliance attestation. B. Financial forecasts and projections. C. Historical financial statement examination. D. Service organization controls.

C. Historical financial statement examination (audit)

Which of the following is one of the elements of AICPA quality control? A. Assurance of proper levels of association. B. Due professional care. C. Human resources. D. Supervision

C. Human resources

Which of the following attributes is more essential for an auditor than of management? A. Integrity. B. Competence. C. Independence. D. Keeping informed on current professional developments.

C. Independence.

The body that issues international pronouncements providing auditing procedural and reporting guidance is the: A. International Federation of Auditors. B. Multinational Reporting Commission. C. International Auditing and Assurance Standards Board. D. AICPA Auditing Standards Board.

C. International Auditing and Assurance Standards Board.

Which of the following is not correct relating to the Sarbanes-Oxley Act? A. It toughens penalties for corporate fraud. B. It restricts the type of consulting CPAs may perform for audit clients. C. It applies to both public and non-public audit clients. D. It eliminates a significant portion of the accounting profession's system of self-regulation.

C. It applies to both public and non-public audit clients.

Which of the following is explicitly included as part of the description of management's responsibilities in a non-public company unmodified audit report? A. Management is responsible for making a judgment on which misstatements are material vs. non-material. B. Management is responsible for providing auditors with all relevant evidence. C. Management is responsible for the maintenance of internal controls. D. Management is responsible for listing all illegal acts with a direct effect on financial statement amounts and disclosures.

C. Management is responsible for the maintenance of internal controls.

Authoritative GAAP sources include: FASB Remediation Statements / FASB Codifications A. Yes / Yes B. Yes / No C. No / Yes D. No / No

C. No / Yes

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 management lacks integrity. D. To lessen the exposure to litigation resulting from failure to detect fraud in client financial statements.

C. To minimize the likelihood of association with clients whose management lacks integrity.

In which type of court case is proving "due diligence" essential to an auditor's defense? A. Court cases brought under the Securities Exchange Act of 1934. B. Court cases brought by clients under common law. C. Court cases brought by third parties under common law. D. Court cases brought under the Securities Act of 1933.

D. Court cases brought under the Securities Act of 1933.

An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the Restatement of Torts approach to liability the auditor is generally liable to the bank which subsequently grants the loan for: A. Lack of due dilligence. B. Lack of good faith. C. Gross negligence but not ordinary negligence. D. Either ordinary or gross negligence.

D. Either gross or ordinary negligence.

Which of the following is most likely to violate the AICPA Code of Professional Conduct? A. Accepting audit fees fixed by a public authority. B. Submitting a competitive bid to a potential client. C. Performing professional services relating to judicial proceedings. D. Issuing a current year audit report when fees for the past year audit remain uncollected.

D. Issuing a current year audit report when fees for the past year audit remain uncollected.

Inquiries and analytical procedures ordinarily form the basis for which type of engagement? A. Agreed-upon procedures. B. Audit. C. Examination. D. Review.

D. Review.

A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? A. The investor has not proven CPA negligence. B. The investor did not rely on the financial statement. C. The CPA detected the mistake after the audit report date. D. The audit work was adequate to support the CPA's opinion.

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

Indicate whether you agree or disagree with the following statements concerning a financial statement audit conducted in accordance with generally accepted auditing standards: a. Public companies are ordinarily audited by a CPA firm, with engagement review by the General Accounting Office. b. Audits provide absolute assurance of detecting material misstatements and reasonable assurance of detecting immaterial misstatements. c. For audit purposes, professional skepticism includes a questioning mind and a critical assessment of audit evidence and should be maintained throughout the planning and performance of an audit. d. The Auditing Standards Board issues accounting principles for nonpublic company audits, while the Public Company Accounting Oversight Board issues accounting principles for public company audits. e. Auditors have a higher responsibility for detecting noncompliance with laws affecting financial statement amounts and disclosures than they do for other laws. f. When an auditing standard uses the word "should," this indicates that the auditor must in all cases follow it if the requirement is relevant to the company being audited. g. At one point, the Public Company Oversight Board adopted the AICPA auditing standards in existence as its interim auditing standards. h. International auditing standards are developed by the International Auditing and Assurance Standards Board.

a. Disagree b. Disagree c. Agree d. Disagree e. Agree f. Disagree g. Agree h. Agree