Auditing Final Questions
Which of the following best describes litigation involving CPAs?
A CPA may be exposed to criminal as well as civil liability.
A member of the AICPA may render which service under a contingent fee arrangement
A CPA provides investment advisory services, with the fee based on a percentage of the client's investment portfolio
Accepting an engagement to examine an entity's financial projection most likely would be appropriate if the projection were to be distributed to
A bank with which the entity is negotiating for a loan
The profession's ethical standards most likely are violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the
Actual fee would be substantially higher
Under the Code s Independence Rule, which of the following must be independent in the performance of an audit?
All individuals on the attest engagement team, except those performing routine clerical functions
Martin Corporation orally engages Dawson, CPA, to audit its year-end financial statements. The engagement is to be completed within 2 months after the close of Martin's fiscal year for a fixed fee of $2,500. Under these circumstances what obligation is assumed by Dawson?
An implied promise to exercise reasonable standards of competence and care.
Under the ethical standards of the profession, which of the following investments by a CPA in a Corporate client is an indirect financial interest?
An investment held through a regulated mutual fund
Williams & Co is a medium-sized CPA firm enrolled in the Private Companies Practice Section (PCPS). The firm is to have a peer review under the AICPA Peer Review Program. The review will most likely be performed by
Another CPA firm
When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should:
Be related to preliminary judgments about materiality levels.
Ann Able, CPA, is considering forming a partnership with Ben Brown for the purpose of practicing public accounting. Which of the following is true?
Brown need not be a CPA if the partnership does not represent itself as a partnership of CPAs
A CPA who performs primary actuarial services for a nonissuer client normally is precluded from expression an opinion on the financial statements of that client if the
CPA prepared an actuarial report using assumptions not approved by the client
In which of the following instances is the independence of the CPA most likely not considered to be impaired? The CPA has been retained as the auditor of a
Credit union of which the CPA is a member
Which of the following statements is true concerning statistical sampling in tests of controls?
Deviations from specific control activities increase the likelihood of misstatements but do not always cause misstatements
The AICPA Code of Professional Conduct
Expects the CPA to honor the public trust
Under Section 11 of the Securities Act of 1933, which of the following statements may a CPA use as a defense?
Generally Accepted Accounting Principles - Yes Generally Accepted Fraud Detection Standards - No
The AICPA recommends that the format of prospective financial statements be similar to
Historical financial statements, such as income statements, balance sheets, and statements of cash flows
While performing a test of details during the audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
Incorrect rejection
Advertising or other forms of solicitation that are false, misleading, or deceptive are not in the public interest, and AICPA members in public practice shall not seek to obtain clients in such a manner. Such activities include all the following except those that
Indicate the CPA's educational and professional attainments
For which of the following audit tests, would an auditor most likely use attribute sampling?
Inspecting employee time cards for proper approval by supervisors.
An auditor strives to achieve independence in appearance to
Maintain public confidence in the profession
A violation of the profession's ethical standards most likely occurs when a CPA who
Maintains a separate, distinct practice but forms an association with other CPAs for joint advertising. The group practices public accounting under the association's name
Burrow & Co., CPAs, have provided annual audit and tax compliance services to Mare Corp. for several years. Mare has been unable to pay Burrow in full for services Burrow rendered 19 months ago. Burrow is ready to begin field work for the current year's audit. Under the ethical standards of the profession, which of the following arrangements will permit Burrow to begin the field work on Mare's audit?
Mare commits to pay the past due fee in full before the audit report is issued
An advantage of statistical sampling over non-statistical sampling is that statistical sampling helps an auditor to
Measure the sufficiency of the evidence obtained.
Contract law is the basis for the legal liability at common law of an auditor to his or her client. From which of the following may the auditor's liability arise?
Negligence, gross negligence, or fraudulent actions by the auditor.
You are a CPA retained by the manager of a cooperative retirement village to do bookkeeping and a compilation of the financial statements. You are expected to prepare unaudited financial statements with each page marked "unaudited" and accompanied by a disclaimer of opinion stating no audit was made In performing the work, you discover that there are no invoices to support $25,000 of the manager's claimed disbursements. The manager informs you that all the disbursements are proper. What should you do?
Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.
The prevailing legal view is that an auditor's liability to third parties at common law may be based on
Ordinary negligence if such parties belonged to a specifically foreseen class but were not specifically known.
Inclusion of which of the following statements in a CPA's advertisement is not acceptable pursuant to the AICPA Code of Professional Conduct?
Paul Fall Certified Public Accountant Endorsed by AICPA
The AICPA Code of Professional Conduct is violated if a CPA accepts a fee for services and the fee is
Payable after a specified finding is attained in a review of financial statements
A CPA most likely does not violate the Code's Integrity and Objectivity Rule, if the CPA
Performs expert witness services for a nonissuer attest client that is one of many plaintiffs in a class action lawsuit
Which of the following most completely describes how independence has been defined by the accounting profession
Possessing the ability to act with integrity and objectivity
How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors' liability to purchasers of securities beyond that of common law?
Privity with purchasers is not a necessary element of proof.
Stratified mean-per-unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually
Produces an estimate having a desired level of precision with a smaller sample size.
One purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to
Provide reasonable assurance that the integrity of the client is considered
The Confidential Client Information Rule is violated when a member in public practice
Provides client profit and loss percentages to a trade association without the client's consent
A violation of the profession's ethical standards most likely occurs when a CPA
Receives as a commission a percentage of the amounts invested by the CPA's audit clients in a tax shelter with the client's knowledge and approval
Jaye B. Honest, CPA, was offered the engagement to audit Wicket Corporation for the year ended June 30, Year 3. She had served as a director of Wicket Corporation until June 30, Year 1, and her spouse currently owns 600 of the 10,000 outstanding shares of Wicket Corporation. Jaye disassociated from Wicket prior to being offered the engagement. Moreover, the engagement does not cover any period that includes Jaye s association or employment with Wicket. Under the AICPA Code of Professional Conduct, she should
Refuse the engagement because of her spouse s stock ownership
The appearance of independence of a CPA, or that CPA s firm, is most likely to be impaired if the CPA
Serves as an executor and trustee of the estate of an individual who owned the majority of the stock of a closely held client corporation
A violation of the profession's ethical standards would most likely have occurred when a CPA in public practice
Serves on a municipal board of income tax appeals, discloses that status to concerned parties, participates as a board member in a tax appeal involving a client, but does not receive the client's consent for such action
The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and also a
Set of specific, mandatory rules describing minimum levels of conduct a member must maintain
In which of the following circumstances will a CPA who audits XM Corporation lack independence?
The CPA and XM s president each own 25% of FOB Corporation, a closely held company
DMO Enterprises, Inc., engaged the accounting firm of Martin, Seals, & Anderson to perform its annual audit. The firm performed the audit in a competent, nonnegligent manner and billed DMO for $16,000, the agreed fee. Shortly after delivery of the financial statements, Hightower, the assistant controller, disappeared, taking with him $28,000 of DMO's funds. It was then discovered that Hightower had been engaged in a highly sophisticated, novel defalcation scheme during the past year. He had previously embezzled $35,000 of DMO funds. DMO refused to pay the accounting firm's fee and is seeking to recover the $63,000 that was stolen by Hightower. Which of the following is most likely true?
The accountants are entitled to collect their fee and are not liable for $63,000.
Which is the true statement about an auditor's statutory legal liability?
The auditor has a greater burden of defense under the Securities Act of 1933 than the Securities Exchange Act of 1934
If the size of the sample to be used in a particular test of attributes has not been determined by using statistical concepts, but the sample has been chosen in accordance with random selection procedures.
The auditor may or may not achieve desired precision at the desired level of confidence
According to the profession s ethical standards, an auditor would be considered independent in which of the following instances?
The auditor s checking account, which is fully insured by a federal agency. is held at a client financial institution
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?
The auditor should not make management decisions for an audit client
The size of a sample designed for dual-purpose testing should be
The larger of the samples that would otherwise have been designed for the two separate purpose
A practitioner's compilation report on financial forecast should include a statement that
There will usually be differences between the forecasted and actual results
A practitioner may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that
Use of the report is restricted to the specified parties
An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the
Variability in the Dollar Amounts of Inventory Items - Yes Risk of Incorrect Injection - Yes
Which of the following sampling methods is used to estimate a numerical measurement of a population, such as a dollar value?
Variables Sampling
An external auditor is not permitted to discuss confidential client information without the specific consent of the client. This ethical proscription
Will not preclude the auditor from complying with a validly issued court subpoena
A CPA purchased stock in an audit client corporation and placed it in a revocable educational trust for the CPA s dependent minor child. The trust securities were not material to the CPA but were material to the child s personal net worth. Is the independence of the CPA considered to be impaired with respect to the client?
Yes, because the stock is considered a direct financial interest and, consequently, materiality is not a factor
6. Which of the following statements represents a quality control requirement under government auditing standards
a. A CPA seeking to enter into a contract to perform an audit should provide the CPA's most recent external peer review report to the party contracting for the audit
5. How does Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, define a subrecipient?
a. As a nonfederal entity that expends federal awards received from another entity to carry out a federal program
3. Statements on Standards for Accounting and Review Services (SSARSs) require an accountant to report when the accountant has
a. Compiled, through the use of computer software, financial statements to be used by third parties
1. An accountant s compilation report should be dated as of the date of
a. Completion of the compilation
8. During an engagement to review the financial statement of a nonissuer, an accountant becomes aware of a material departure from GAAP. If the accountant decides to modify the standard review report because management will not revise the financial statements, the accountant should
a. Disclose the departure from GAAP in a separate paragraph of the report
7. Miller, CPA, is engaged to compile the financial statements of Web Co., a nonissuer, in conformity with the income tax basis of accounting. If Web s financial statements do not disclose the basis of accounting used, Miller should
a. Disclose the special purpose framework in the accountant's compilation report
4. An accountant is required to comply with the provisions of the Statements on Standards for Accounting and Review Services when performing which of the following tasks?
a. Generating financial statements of a nonissuer
3. When performing an audit of a city that is subject to the requirements of the federal Single Audit Act, an auditor should adhere to
a. Governing Auditing Standards
4. The purpose of performance auditing is to determine if the desired results of a program are being achieved. The first step in conducting such an audit is to
a. Identify the legislative intent of the program being audited
10. Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?
a. In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance
2. In a review engagement, if the accountant becomes aware that information coming to his or her attention is correct, incomplete, or otherwise unsatisfactory, (s)he should
a. Perform the additional procedures necessary to obtain limited assurance
9. Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements?
a. Preparing an individual's personal financial statement to be used to obtain a mortgage
5. Each page of a nonissuer s financial statements reviewed by an accountant may include the following reference
a. Reviewed, No Material Modifications Required
1. Under the Single Audit Act, the auditor should report on compliance with laws, regulations and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements. This report should also express or disclaim an opinion on whether the auditee complied with laws, etc., that could have a direct and material effect on each major program. In accordance with the act and OMB Circular A-1333, which contains policies, procedures, and guidelines to implement the act, the auditor
a. Should determine whether the recipient has engaged in activities to which particular types of compliance requirements apply
6. Which of the following representations may an accountant make implicitly when issuing a report on the compilation of nonissuer s financial statements?
a. The accountant is independent with respect to the entity
7. Which of the following is a documentation requirement that an auditor should follow in a financial audit in accordance with Government Auditing Standards?
a. The auditor should document the supervisory review of the evidence that supports the findings, conclusions, and recommendations contained in the auditors' report
2. Reporting on internal control over financial reporting as part of a financial audit under generally accepted governmental auditing standards (GAGAS) requires a
a. Written report describing each significant deficiency observed, including identification of those considered material weaknesses
Which of the following statements concerning prospective financial statements is true
any type of prospective financial statements would normally be appropriate for limited use
A practitioner's standard report on a compilation of a projection should not include a
o Statement that the practitioner expresses only limited assurance that the results may be achieved
The party responsible for assumptions identified in the preparation of prospective financial statements is usually
o The client's management
Relative to prospective financial statements, a practitioner may not accept an engagement to:
preform a review
Under the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted
without good faith
