Audit Chapters 1-3

Audit committee activities and responsibilities include which of the following? a. selecting the external audit firm b. approving corporate strategy c. reviewing management performance and determining compensation d. all of the above e. none of the above

A

Audit quality involves which of the following? A. performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud B. performing an audit in accordance with GAAP to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAS and providing assurance that those financial statements are not materially misstated whether due to errors or fraud C. performing an audit in accordance with GAAS to provide absolute assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud D. performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements contain no misstatements due to errors or fraud

A

Congress authorized which of the following organizations to establish GAAP? a. SEC b. APB c. AICPA d. FASB

A

How is the audit report referred to when the auditor has no reservations about management's financial statements? a. an unqualified report b. a qualified report c. an adverse report d. an integrated report

A

Management of Premium Discovery Company is compensated through large salaries, stock options and bonuses tied to the company's working capital growth. The CEO is constantly holding meetings to ensure that management is on target for increased operating income each month. Based upon the above information only, what type of probably motivation is there to commit fraud at the Premium Discovery Company? a. incentive b. opportunity c. rationalization d. expectation

A

Requiring the mail clerk to prepare a listing of all checks received, with copies of the list going to the cashier and to accounting, is an example of which type of control? a. Preventive. b. Corrective. c. Detective. d. Directive.

A

The Center for Audit Quality is dedicated to enhancing investor confidence in what? a. The financial markets. b. Management. c. Auditors. d. Both B and C. e. All of the above.

A

The Sarbanes-Oxley Act enacted which of the following provisions as a response to a growing number of frauds? a. the PCAOB was established, and it has the power to conduct inspections of audits for external audit firms that audit more than 100 publicly traded companies in a given year b. the lead audit partner and reviewing partner must rotate off the audit of a publicly traded company at least every 10 years. c. annual reports must state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and management must have the company's internal audit function attest to the accuracy of the annual reports d. all of the above e. none of the above

A

What is the first phase in an audit? a. Client acceptance or client continuance. b. Understanding the client. c. Understanding internal controls. d. Testing of account balances.

A

Which governing board performs quality reviews on registered audit firms that audit public companies? a. PCAOB. b. GAO. c. AICPA. d. FASB.

A

Which of the following organizations is the primary organization that performs inspections of registered external audit firms that audit public companies? A. PCAOB B. CAQ C. AICPA D. FASB

A

Which of the following statements about fraud detection is true? a. management may physically alter evidence to perpetrate and conceal the fraud b. fraudulent financial reporting is generally not material enough to consider c. journal entries will supply evidence necessary to detect fraud d. the advent of new technology prevent fraud, thereby leading to less fraud over time

A

Which one of the following represents a control deficiency? a. A missing control that is required for achievement objectives. b. A control that operates as designed. c. A control that ensures the reliability of financial reporting. d. A control that does not prevent immaterial errors.

A

Which one of the following represents a control deficiency? a. a missing control that is required for achieving objectives b. a control that operates as designed c. a control that provides reasonable, but not absolute assurance, about the reliability of financial reporting d. an immaterial individual misstatement in internal control

A

How must an auditor address fraud in the planning stage? a. the auditor must test for fraud in the planning stage. b. the auditor must consider the likelihood of fraud existing in the company in the planning stage. c. the auditor must realize that most people are honest and not automatically assume that fraud exists when planning the audit. d. the auditor must not be aggressive in its initial approach to fraud as trust may be lost by the client

B

In the US, what is the most common criteria against which the auditor measures the fairness of financial statement presentation? a. auditing standards b. GAAP c. GAAS d. governmental accounting principles

B

The COSO principle that an organization should identify and assess changes that significantly impact the system of internal control is related to which COSO component? a. Control Environment b. Risk Assessment c. Control Activities d. Monitoring

B

The PCAOB has how many board members? a. Three b. Five c. Seven d. Nine

B

The fraud triangle says three conditions are generally present in the client's organization when fraud occurs. Which of the following is not one of those conditions? a. Incentives b. Professional Skepticism. c. Opportunity. d. Ability to rationalize fraud.

B

Under the Sarbanes-Oxley Act, which of the following services performed by registered accounting firms for their audit clients would not impair their independence? a. Systems design. b. Tax services. c. Appraisal services. d. Internal audit services.

B

What are the components of internal control per COSO's updated Internal Control-Integrated Framework? a. organizational structure, management philosophy, planning, risk assessment, and control activities b. control environment, risk assessment, control activities, information and communication, and monitoring c. risk assessment, control structure, backup facilities, responsibility accounting, and natural laws d. legal environment of the firm, management philosophy, organizational structure, control activities, and control assessment

B

What is the management of a company responsible for? a. Hiring the auditor. b. Preparing the financial statements. c. The audit workpapers. d. Ensuring auditor independence.

B

What is the primary difference between fraud and errors in financial statement reporting? a. the materiality of the misstatement b. the intent to deceive c. the level of management involved d. the type of transaction effected

B

What should an audit team do when it discovers that fraud risk factors are present on an audit engagement? a. retract from the client and inform regulatory bodies b. modify procedures to actively search for the existence of fraud c. reduce the amount of evidence requires and resort to management inquiry d. turn the audit over to forensic accountants

B

Which of the following audit committee responsibilities has the NYSE mandated? a. obtaining each year a report by the internal auditors that addresses the company's internal control procedures, any quality control or regulatory problems, and any relationships that might threaten the independence of the internal auditor b. discussing in its meeting the company's earnings press releases, as well as financial information and earnings guidance provided to analysts c. reviewing with the internal auditor any audit problems or difficulties that they have had with management d. all of the above e. none of the above

B

Which of the following best represents fraudulent financial reporting? a. the transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors. b. the controller of the company inappropriately records January sales in December so that year-end results will meet analysts' expectations. c. the in-house attorney received payments from the French government for negotiating the development of a new plant in Paris. d. the accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization

B

Which of the following components of internal control over financial reporting sets the tone for the organization? a. control risk assessment b. control environment c. information and communication d. monitoring

B

Which of the following creates an opportunity for committing fraudulent financial reporting in an organization? a. management demands financial success b. poor internal control c. commitments tied to debt covenants d. management is aggressive in its application of accounting rules

B

Which of the following creates an opportunity for fraud to be committed in an organization? a. management demands financial success b. poor internal control c. commitments tied to debt covenants d. management is aggressive in its application of accounting rules

B

Which of the following expectations can users of the audit report reasonably expect with regards to the audited financial statements? A. the financial statements include all financial disclosures desired by users B. the financial statements are presented fairly according to the substance of GAAP C. the financial statements are free from all errors D. all of the above are reasonable expectations E. none of the above are reasonable expectations

B

Which of the following factors does not create a demand for external audit services? A. potential bias by management in providing information B. requirement of the CAQ C. complexity of the accounting processing systems D. remoteness between a user and the organization

B

Which of the following factors is not a driver of audit quality as discussed by the FRC? A. audit firm culture B. skills and personal qualities of client management C. reliability and usefulness of audit reporting D. factors outside the control of auditors

B

Which of the following is a NYSE mandated guideline for corporate governance? a. Boards need to consist entirely of independent directors. b. Boards must have an audit committee with a minimum of three independent directors. c. Boards must have a compensation committee with a minimum of three independent directors. d. CFOs must provide an annual certification of compliance with corporate governance standards.

B

Which of the following is another name for transaction controls? a. Entity-wide controls. b. Application controls. c. Supporting controls. d. Detail controls.

B

Which of the following is not one of management's responsibilities? a. Ensuring accounting principles are following in preparing financial statements. b. Engaging a qualified auditor. c. Implementing effective internal controls. d. Ensuring financial statements and disclosures are accurate.

B

Which of the following is not part of management's fraud risk assessment process? a. the assessment considers ways the fraud could occur b. the assessment considers the role of the external auditor in preventing fraud c. fraud risk assessments serve as an important basis for determining the control activities needed to mitigate fraud risks d. the assessment considers pressures that might lead to fraud in the financial statements

B

Which of the following statements about application controls is true? a. organizations can have manual application controls or automated application controls, but not a combination of the two b. application controls are intended to mitigate risks associated with data input, data processing, and data output c. application controls are a part of the monitoring component of internal control d. self-checking digits are an output control

B

Which of the following statements regarding internal control is false? a. internal control is a process consisting of ongoing tasks and activities b. internal control is primarily about policy manuals, forms, and procedures c. internal control is geared toward the achievement of multiple objectives d. a limitation of internal control is faulty human judgement e. all of the above statements are true

B

Which of the following would be considered an effective implementation of the information and communication component of COSO's updated Internal Control-Integrated Framework? a. the organization has one-way communication with parties external to the organization b. the organization has a whistleblower function that allows parties internal and external to the organization to communicate concerns about possible inappropriate actions in the organization's operations c. the organization has a robust process for assessing risks internal and external to the organization d. the organization builds in edit checks to determine whether all purchases are made form authorized vendors e. all of the above

B

Which one of the following COSO components of internal controls influences the tone for the organization? a. Control risk assessment. b. Control environment. c. Information and communication. d. Monitoring.

B

Which organization issued the Internal Control, Integrated Framework which serves the primary criterion for evaluating the quality of a company's internal control system? a. PCAOB b. COSO c. AICPA d. GAO

B

An Integrated Audit Report provides opinion(s) on which of the following? a. the financial statements b. internal controls c. both financial statements and internal controls d. neither financial statements or internal controls

C

As it relates to an audit, which of the following statements about professional skepticism is true? a. it is not taken into consideration b. it relates only to the nature of procedures performed c. it is an attitude d. it is determined based upon the importance to a user of the financial statements

C

How did the Sarbanes-Oxley Act strengthen auditor independence? a. By requiring auditors to provide reports in accordance with the Foreign Corrupt Practices Act. b. By requiring auditors to report the nature of any auditor-client disagreements to the SEC. c. By requiring the lead partner to rotate off the audit engagement at least every five years. d. By requiring a different audit firm from the one that performs the audit to prepare the client's tax return.

C

How often does the PCAOB inspect registered accounting firms that audit fewer than 100 issuers? a. annually b. every two years c. every three years d. every five years

C

Internal control is a process affected by the organization's board of directors, management, and other personnel to provide reasonable assurance of achieving certain objectives. Which of the following does not fit into one of these categories of objectives? a. Reliability of financial reporting. b. Compliance with laws and regulations. c. Continuing existence. d. Effectiveness and efficiency of operations.

C

Protection Transparency, INc. is being audited by Messer and Bromely, LLP. During the assessment of fraud, Messer and Bromely discover that the controller has been creating fictional sales and posting them to the general ledger. Who should the auditors make aware of this issue? a. Protection Transparency's legal counsel. b. The police. c. The chairman of Protection Transparency's audit committee. d. The predecessor auditor of Protection Transparency.

C

The AICPA remains a valuable organization to the external auditing profession because of its continuing involvement in which of the following activities? A. the audit standard setting process for audits of publicly traded companies B. regulation and enforcement of the internal audit profession C. education and administration of the CPA exam D. promulgation of financial accounting standards

C

The PCAOB performs external inspections of audit firms registered to audit publicly traded clients. Which of the following is accurate regarding the timing of those inspections? A. inspections occur once a year for audit firms that conduct over 50 public clients in a given year B. inspections occur once every three years for audit firms that conduct over 100 public clients in a given year C. inspections occur once a year for audit firms that conduct over 100 public clients in a given year D. inspections occur once every five years for audit firms that conduct over 50 public clients in a given year

C

Which of the following best represents actions that may indicate fraud is pervasive throughout the company? a. the company's management negotiates deals with vendors in such a manner as to pay lower prices b. the company's management drives luxury vehicles and takes vacations to exotic places c. the company's management takes an overly aggressive approach to revenue recognition d. the company's management estimates bad debts using an aged accounts receivables ledger rather than as a percent of sales

C

Which of the following is a valid conclusion of the third COSO report? a. the most common frauds involve outright theft of assets b. the individuals most often responsible for fraud include low-level accounting personnel, such as accounts payable clerks c. the majority of fraud took place at companies that were listed on the Over-the-Counter market rather than those listed on the NYSE. d. all of the above e. none of the above

C

Which of the following is an example of fraud? a. A mistake in processing accounting data. b. An incorrect accounting estimate arising from misinterpretation of facts. c. Misappropriation of an asset. d. A mistake in the application of accounting principles.

C

Which of the following is the most accurate statement related to the monitoring component of COSO's updated Internal Control-Integrated Framework? a. monitoring is a process that is relevant only to the control activities component of COSO's updated IC-IF. b. separate evaluations are more timely than ongoing evaluations in identifying control deficiencies c. monitoring is a process that provides feedback on the effectiveness of each component of internal control d. monitoring includes automated edit checks to determine whether all purchases are made from authorized vendors

C

Which of the following items are registered audit firms not required to report to the audit committee? a. critical accounting policies and practices b. alternative treatments of financial information within generally accepted accounting principles that have been considered by management, as well as the preferred treatment of the audit firm c. a list of all audit procedures performed d. significant written communications between the audit firm and management

C

Which of the following statements is accurate regarding the Center for Audit Quality's 2010 paper on deterring and detecting fraud in financial reporting? a. it recognizes that preventing and detecting fraud is the job of the external auditor alone. b. it notes that an effective fraud risk management program can be expected to prevent virtually all fraud, especially those perpetrated by top management. c. it illustrates that communication among those involved in the financial reporting process is critical d. all of the above e. none of the above

C

Which one of the following is not a management expectation for independent auditors? a. An outside source of expertise on accounting matters. b. Individuals who perform tests and draw conclusions on assertions. c. A participant in management decision making. d. A provider of a written communication.

C

Which phase of the audit opinion formulation process is most commonly thought of as auditing by the general public? a. Performing risk assessment. b. Obtaining evidence about internal controls. c. Obtaining substantive evidence about accounts. d. Making reporting decisions.

C

Who is responsible for internal controls within an organization? a. the internal auditor b. the external auditor c. management d. the PCAOB

C

Who licenses CPAs? a. the PCAOB b. the AICPA c. the state boards of accountancy d. the SEC

C

Why is auditing important in a free market society a. The public requires auditors to function as divisions of regulatory bodies. b. Auditors detect all errors and fraud perpetrated by company employees. c. It provides reliable information upon which to judge economic performance. d. The auditor is an amiable insurance policy for investors. e. All of the above are true.

C

With whom does the tone of internal control typically originate? a. Auditors. b. Employees. c. Management. d. Stockholders.

C

Assume that an organization sells software. The sales contracts with the customers often have nonstandard terms that impact may the timing of revenue recognition. Thus, there is a risk that revenue may be recorded inappropriately. To mitigate that risk, the organization has implemented a policy that requires all nonstandard contracts greater than $1 million to be reviewed on a timely basis by an experienced and competent revenue accountant for appropriate accounting; prior to the recording of revenue. Management tested this control and found several instances in which the control was not working. Management has classified this deficiency as a material weakness. Which of the following best describes the conclusion made by management? a. there is more than a remote possibility that a material misstatement could occur b. the likelihood of misstatements is reasonably possible c. there is more than a remote possibility that a misstatement could occur d. there is a reasonable possibility that a material misstatement could occur e. there is a reasonable possibility that a misstatement could occur

D

In a large company, who usually monitors the internal control? a. External auditors. b. PCAOB. c. CFO. d. Internal auditors. D

D

In terms of technical knowledge and expertise, which of the following should external auditors do? A. understand accounting and auditing authoritative literature B. develop industry and client-specific knowledge C. develop and apply computer skills D. all of the above E. none of the above

D

In which of the following categories do Big 4 audit firms operate? A. sole practitioner firms B. local firms C. regional firms D. multinational firms

D

One of the primary goals of the PCAOB is to restore confidence in which group? a. SEC. b. Boards of Directors. c. Internal auditors. d. Independent auditors.

D

Segregation of duties is best achieved in which of the following scenarios? a. employees perform only one job, even though they might have access to other records b. the internal audit department performs an independent test of transactions throughout the year and reports any errors to departmental managers c. the person responsible for reconciling the bank account is responsible for cash disbursement but not for cash receipts d. the payroll department cannot add employees to the payroll or change pay rates without the explicit authorization of the personnel department

D

The quality of an organization's internal controls affect which of the following? a. The reliability of financial data. b. The ability of management to make good decisions. c. The ability to remain in business d. All of the above.

D

What is the primary ofjective of the independent auditor's report on financial statements? a. To report on all instances of fraud. b. To assist the board in evaluating management's effectiveness. c. To attest to the credit-worthiness of the client. d. To give credibility to management's prepared financial statements.

D

What must audit firms do to perform financial statements audit for public companies? a. register with the AICPA b. register with the IIA c. register with the US GAO d. register with the PCAOB

D

Which of the following best describes professional skepticism? a. an intent to deceive b. an attitude of intrusion and obstinacy c. a character that does not waver d. a questioning mind

D

Which of the following factors should an auditor consider in evaluating the effect of fraud upon the planned audit procedures? a. the type of fraud that may occur b. the potential materiality of fraud c. the likelihood of fraud occurring d. all of the above

D

Which of the following groups is not typically considered to be a user of the audited financial statements? a. management b. vendors c. retired employees d. competitors

D

Which of the following is a specific corporate governance responsibility of Executive Management? a. Approving major changes, such as mergers. b. Approving non-audit work performed by the audit firm. c. Reviewing the budget of the internal audit function. d. Implementing an effective ethical environment.

D

Which of the following is not a principle of the information and communication component of COSO's updated Internal Control-Integrated Framework? a. the organization identifies, obtains, and uses relevant information b. the organization communicates internally c. the organization communicates externally d. all of the above

D

Which of the following services does the PCAOB require auditors of public companies to perform? a. A financial statement audit and an attest audit. b. A financial statement audit and an assurance audit. c. A financial statement audit and agreed upon procedures. d. A financial statement audit and an examination of the effectiveness of internal controls.

D

Which of the following statements are true? a. unless an independent audit can provide assurance that financial information has not been materially misstated because of fraud, it has little if any value to society b. repeated revelations of accounting scandals and audit failures related to undetected frauds have seriously damaged public confidence in external auditors c. a strong ethical tone at the top of an organization that permeates corporate culture is essential in preventing fraud d. all of the above e. none of the above

D

Which of the following statements is correct regarding the Public Company Accounting Oversight Board (PCAOB)? a. the PCAOB is a nonprofit corporation, not an agency of the US government b. the PCAOB will have five financially literate members who are prominent individuals of integrity and reputation with a commitment to the interests of investors and the public c. the PCAOB has authority to set standards related to public company audit reports and to conduct inspections of registered external audit firms d. all of the above e. none of the above

D

Which of the following statements is false regarding the risk assessment component of internal control? a. risk assessment includes assessing fraud risk b. risk assessment includes assessing internal and external sources of risk c. risk assessment includes the identification and analysis of significant changes d. economic changes would not be considered a risk that needed to be analyzes as part of the risk assessment process

D

Which of the following types of transactions did WorldCom management engage in as part of that company's fraudulent financial reporting scheme? a. recorded bartered transaction as sales b. used restructuring reserves from prior acquisitions to decrease expenses c. capitalized line costs rather than expensing them d. all of the above e. none of the above

D

Which of the following would not be considered an effective implementation of the monitoring component of COSO's updated Internal Control-Integrated Framework? a. internal audit periodically performs an evaluation of internal controls that have been documented and tested in prior years b. management reviews current economic performance against expectations and investigates to determine causes of significant deviations from the expectations c. the company implements software that captures all instances in which the underlying program is designed to capture processed transactions that exceed company-authorized limits d. the company builds in edit checks to determine whether all purchases are made from authorized vendors

D

Which one of the following organizations is recognized for providing guidance on a framework for internal control? a. AICPA b. PCAOB c. IAASB d. COSO

D

Strict client acceptance/continuance guidelines should be established by external auditors to screen out which of the following? A. those that are in financial and/or organizational difficulty B. those that constitute a disproportionate percentage of the audit firm's total practice C. those that are disreputable D. those that offer an unreasonably low fee for the auditor's services E. all of the above

E

The quality of an organization's internal controls affects which of the following? a. reliability of financial data b. ability of management to make good decisions c. ability of the organization to remain in business d. approach used by the auditor in auditing the financial statements e. all of the above

E

Which of the following are the responsibility of the external auditor in auditing financial statements? A. maintaining internal controls and preparing financial reports B. providing internal assurance on internal control and financial reports C. providing internal oversight of the reporting process D. all of the above E. none of the above

E

Which of the following is a common rationalization for fraudulent financial reporting? a. this is the one-time transaction and it will allow the company to get through the current financial crisis, but we'll never do it again. b. we are only borrowing the money; we will pay it back next year c. executives at other companies are getting paid more than we are, so we deserve the money d. the accounting rules don't make sense for our company, and they make our financial results look weaker than is necessary so we have a good reason to record revenue using a nonGAAP method e. A and D

E

Which of the following is a driver of audit quality? a. Audit firm culture. b. Engagement team skills and attributes. c. Factors outside control of auditors. d. Investor requirements. e. A, B, and C only.

E

Which of the following parties are involved in preparing and auditing financial statements? A. management B. audit committee C. internal audit function D. external auditor E. all of the above

E

Which of the following would not be considered a principle of an organization's control environment? a. independence and competence of the board b. competence of accounting personnel c. structures, reporting lines, and authorities and responsibilities d. commitment to integrity and ethical values e. they would all be considered principles of the controls environment

E