Exam 1

Which of the following statements is correct regarding the liability of a CPA for services performed?

A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner.

A compilation report is always required when financial statements prepared by the accountant are expected to be used by which of the following?

A compilation report is only required whenever the accountant is engaged to subject the financial statements to compilation procedures.

Which of the following statements correctly defines the term "reasonable assurance"?

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement

In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?

A member whose practice is primarily bankruptcy discloses a client's name.

Which of the following rules of the AICPA Code of Professional Conduct must be observed even by a member who is not in public practice?

Integrity and objectivity

From the items listed below, choose the wording used in AU-C 200 that defines "professional skepticism." (Click on the indicated cell and select the appropriate answer.) 1. Making informed decisions about the course of action that are appropriate in the circumstances of the audit engagement 2. A level of assurance that is not absolute 3. Misstatements in an engagement that will not be detected 4. An inappropriate audit opinion expressed due to material misstatements 5. The measure of the quality of audit evidence 6. A critical assessment of audit evidence 7. Overseeing the strategic direction of the entity The definition of "professional skepticism" includes:

Item 6

Sullivan CPA is planning for communications with those charged with governance prior to the start of fieldwork on an audit of a nonissuer. Which of the following would it be inappropriate for Sullivan CPA to communicate?

"We will be confirming all accounts receivable greater than $50,000."

For each item in the table below, choose one or more engagements (compilation, review, or audit) for which it is required. 1. Disclosure of known departure from GAAP 2. Engagement letter 3. Representation letter 4. Inquiry procedures 5. Accountant independence

1. Compilation, Review, and Audit 2. Compilation, Review, and Audit 3. Review and Audit 4. Review and Audit 5. Review and Audit

For each item in the table below, choose "True" or "False." 1. The auditor may issue a communication stating that no significant deficiencies were identified during the audit. 2. Management must prepare a written response to the auditor's communication regarding significant deficiencies or material weaknesses. 3. The auditor may issue a communication stating that no material weaknesses were identified during the audit of the financial statements. 4. The auditor must wait until after the audit is finished to communicate material weaknesses.

1. False 2. False 3. True 4. False

For each item, choose if the responsibility lies with management or the auditor. 1. Design and implement programs and controls to prevent and detect fraud 2. Disclose related party transactions in the financial statements 3. Apply generally accepted accounting principles 4. Comply with generally accepted auditing standards 5. Express an opinion on the financial statements 6. Furnish written representations 7. Perform procedures to obtain sufficient appropriate audit evidence

1. M 2. M 3. M 4. A 5. A 6. M 7. A

As part of the audit planning process, which of the following inquiries would a successor auditor make of a predecessor auditor? Choose "Yes" or "No" by clicking on the indicated cell for each statement. (A selection must be made for each cell.) 1. Information that might bear on the integrity of management 2. Permission to use results of testing from previous audits to support the opinion for the current year 3. Permission to review the working papers 4. Any information which the client has specifically requested not be discussed with the successor auditor 5. Disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters 6. Communications to audit committees or others with equivalent authority and responsibility regarding fraud and noncompliance with laws and regulations by clients 7. Communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control 8. Information about pending litigation 9. The predecessor auditor's understanding as to the reasons for the change of auditors

1. Y 2. N 3. Y 4. N 5. Y 6. Y 7. Y 8. N 9. Y

An exception to the "percentage of coverage" rule in the OMB's Uniform Guidance rules allows an auditor to reduce the scope of the audit when the entity is determined to be low risk. For an entity that meets the criteria for a low-risk entity, the percentage of federal expenditures covered by the audit can be reduced as low as:

20%

The OMB's Uniform Guidance rules contain a "percentage of coverage" rule that requires the auditor of entities receiving federal financial support who do not meet the criteria for low risk to test major programs that, in the aggregate, encompass at least:

40% of federal expenditures.

Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients' express permission?

A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

A CPA in public practice providing auditing and other attestation services

Which of the following is true?

A review is an assurance engagement, as well as an attest engagement.

Which of the following statements is correct regarding a review engagement of a nonpublic company's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

A review provides an accountant with a basis for expressing limited assurance on the financial statements.

AICPA members who perform compilation and review engagements are governed by all of the following except:

ARSCs.

Due professional care requires the auditor to exercise professional skepticism. Which paragraph in the auditing professional standards addresses the professional skepticism of an auditor?

AU-C §200.A22

During an audit engagement, the auditor may discover matters related to the entity's internal control that should be reported to the entity's audit committee. These matters are known as significant deficiencies or material weaknesses. What paragraph in the auditing professional standards requires that such matters be reported to those charged with governance?

AU-C §265.11

The authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities is the:

Accounting and Review Services Committee.

Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk?

An appropriate level of management

What is the definition of fraud in an audit of financial statements?

An intentional act that results in a material misstatement in financial statements that are the subject of an audit

Which of the following situations would not impair objectivity, integrity, or independence with respect to an audit client?

An out-of-town client takes the audit engagement team out to dinner at a renowned local restaurant.

Montoya CPA is performing an audit engagement for a nonissuer. Which combination of the following would be the traits of the individual that the sufficiency of documentation should be directed towards?

An experienced auditor who has no previous experience with the specific audit

Which of the following matters in a financial statement audit is most appropriate to communicate with those charged with governance?

An overview of the planned scope and timing of the audit

How do the OMB's Uniform Guidance rules define a subrecipient?

As a nonfederal entity that expends federal awards received from another entity to carry out a federal program

Which of the following procedures most likely would not be included in a review engagement of a nonpublic entity?

Assessing control risk

Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?

Assigning personnel to engagements

Which of the following is the authoritative body designated to promulgate attestation standards?

Auditing Standards Board

Which of the following matters is an auditor required to communicate to an entity's audit committee? 1. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolved 2. Other findings or issues arising from the audit that are significant and relevant

Both I and II

Which of the following are items of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures?

Both advancement of personnel and consultation

In addition to the Statements on Standards for Accounting and Review Services (SSARS), which of the other following standards must also be complied with in an annual review of the financial statements of a nonissuer?

Code of Professional Conduct and Statements on Quality Control Standards

Which of the following services provides the least assurance regarding the fairness of financial statements?

Compilation

A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming that any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?

Compilations

Who of the following may be deemed to be "those charged with governance" who oversee the preparation and fair presentation of financial statements that may be subject to audit?

Corporate trustee, board of directors, audit committee, and/or executive management

Which of the following activities is an accountant not responsible for in review engagements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

Developing an understanding of internal control

A CPA was engaged to audit the financial statements of a municipality that received federal financial assistance and that required a single audit for compliance with the terms of the financial assistance. Which of the following guidelines should the CPA consider?

Generally accepted auditing standards and generally accepted government auditing standards

In preparation for a meeting on the firm's ethics policy, a manager wants to include a segment on the question a CPA should ask when confronted with ethical dilemmas affecting integrity for which there is no specific authoritative guidance. Which paragraph of the professional standards provides guidance for the manager's presentation on the decision-making process?

ET §0.300.040.04

Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards?

Establish policies to ensure that the audit work meets applicable professional standards

When performing a financial statement audit of a nonpublic, nonprofit entity in conformance with generally accepted government auditing standards, which of the following best describes the standards that the independent auditor must comply with on the engagement?

Generally accepted government auditing standards and generally accepted auditing standards issued by the AICPA

Under the Statements on Auditing Standards (SASs), the auditor should adopt reasonable procedures to retain and access audit documentation for a period of time sufficient to meet the needs of his or her practice and to satisfy any applicable legal or regulatory requirements for records retention. Such retention period, however, should not be fewer than how many years following the report release date?

Five years

In accordance with Office of Management and Budget audit requirements for audits of nonfederal entities expending federal awards, which of the following statements is accurate regarding federal awards expended?

Free rents received as part of an award to carry out a federal program are treated as federal funds expended.

Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?

In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance.

Which of the following statements is true with regard to review services performed under the Statements on Standards for Accounting and Review Services?

In a review, an accountant will express limited assurance as to the applicable financial reporting framework on the financial statements.

Which of the following should be communicated to those charged with governance at the conclusion of a financial statement audit of a nonissuer?

Material, corrected misstatements that were identified by the auditor's procedures

A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services when: 1. processing financial data for clients of other CPA firms. 2. consulting on accounting matters.

Neither I nor II

The auditor is precluded from including which of the following statements in his or her communication of internal control related matters identified in an audit?

No significant deficiencies were identified during the audit.

Which of the following areas of professional responsibility should be observed by a CPA not in public practice?

Objectivity

Which of the following should be the first step in reviewing the financial statements of a nonpublic entity?

Obtaining a general understanding of the entity's organization, its operating characteristics, and its assets, liabilities, revenues, and expenses

According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA's independence?

Only direct and material indirect financial interests

The inability to complete which of the following activities most likely would prevent an accountant from accepting and completing an engagement for a review of financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

Performing inquiries and analytical procedures

Audit engagement team members should remain alert for evidence of noncompliance with which of the following relevant ethical requirements?

Performing professional responsibilities with the highest sense of integrity

An accountant is required to comply with the provisions of the Statements on Standards for Accounting and Review Services (SSARS) when performing which of the following tasks?

Preparing financial statements of a nonissuer

Generally accepted government auditing standards use which of the following terms to describe a professional requirement to comply with a standard or provide a special explanation for not doing so?

Presumptively mandatory requirement

Able, CPA, was engaged by Wedge Corp. to audit Wedge's financial statements. Wedge intended to use the audit report to obtain a $10 million loan from Care Bank. Able and Wedge's president agreed that Able would give an unmodified opinion on Wedge's financial statements in the audit report even though there were material misstatements in the financial statements. Care refused to make the loan. Wedge then gave the audit report to Ranch to encourage Ranch to purchase $10 million worth of Wedge common stock. Ranch reviewed the audit report and relied on it to purchase the stock. After the purchase, Able's agreement with Wedge's president was revealed. As a result, Wedge stock lost half its value and Ranch sued Able for fraud. What will be the result of Ranch's suit?

Ranch will win because Able intentionally gave an unmodified opinion on Wedge's materially misstated financial statements.

Which of the following procedures is an accountant required to perform before issuing a compilation report under Statements on Standards for Accounting and Review Services (SSARS)?

Read the financial statements and consider whether such financial statements appear to be free from obvious material errors.

Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information?

Releasing financial information to a local bank with the approval of the client's mail clerk

Which of the following actions by a CPA most likely violates the profession's ethical standards?

Retaining client records after the client has demanded their return

Which of the following is not a quality control policy or procedure related to engagement supervision?

Scheduling vacations and other paid time off

According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee?

Seeking a private letter ruling

Smith, CPA, is a partner of Johnson Accounting Firm. Johnson audited the books of Hometown Bank. Smith's independence would be impaired under which of the following circumstances?

Smith is a director of Hometown Bank.

What standards are applicable for a compilation of a nonissuer?

Statements on Standards for Accounting and Review Services (SSARS)

North Co., a privately held entity, asked its tax accountant, King, a CPA in public practice, to review and generate North's interim financial statements on King's microcomputer when King prepared North's quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of:

Statements on Standards for Accounting and Review Services.

A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?

Statements on Standards for Attestation Engagements

A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of:

Statements on Standards for Attestation Engagements (SSAE).

An accountant's working papers for an engagement to review the financial statements of a nonpublic entity would be least likely to include which of the following forms of documentation?

Study and evaluation of internal control

Which of the following statements is most accurate regarding sufficient and appropriate documentation?

Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.

A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA's independence with respect to the client?

The CPA authorizes client transactions and reports them to management.

According to the AICPA Code of Professional Conduct, in which of the following circumstances may a CPA serve on a company's board of directors?

The CPA does not audit the company and has no other business connection with the company.

Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonpublic entity's financial statements?

The accountant does not contemplate obtaining an understanding of internal control.

Which of the following is correct regarding a compilation of financial statements engagement in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

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

Which of the following circumstances would generally require an accountant to decline to perform a compilation of financial statements under the Statements on Standards for Accounting and Review Services (SSARS)?

The accountant was not able to come to an understanding with representatives of the organization for services to be performed.

A CPA's audit workpapers include a narrative description of the cash receipts and billing portions of the internal control of Parktown Medical Center, Inc. Parktown is a small health care provider owned by a publicly held (issuer) corporation. It employs 7 salaried physicians, 10 nurses, 3 support staff in a common laboratory, and 3 clerical workers. The clerical workers perform tasks such as reception, correspondence, cash receipts, billing, and appointment scheduling, and are adequately bonded. They are referred to below as the office manager, "Clerk 1," and "Clerk 2." Most patients pay for services by cash or check at the time services are rendered. Credit is not approved by the clerical staff. The physician who is to perform the respective services approves credit based on an interview with the patient. When credit is approved, the physician files a memo with the billing clerk (Clerk 2), who sets up the receivable using data generated by the physician. The attending physician prepares a charge slip that is given to Clerk 1 for pricing and preparation of the patient's bill. Clerk 1 transmits a copy of the bill to Clerk 2 for preparation of the revenue summary and for posting in the accounts receivable subsidiary ledger. The cash receipt functions are performed by Clerk 1, who receives cash and checks directly from patients and issues a prenumbered cash receipt to each patient. Clerk 1 opens the mail, immediately stamps all checks "for deposit only," and prepares a list of cash and checks for deposit by the office manager. The list of cash and checks together with the related remittance advices are forwarded by Clerk 1 to Clerk 2. Clerk 1 also serves as receptionist and performs general correspondence duties. Clerk 2 prepares and sends monthly statements to patients making payments during the month and also to those patients with unpaid balances. Clerk 2 also prepares the cash receipts journal and is responsible for the accounts receivable subsidiary ledger. Clerk 2 is the only clerical employee permitted access to the accounts receivable subsidiary ledger. When the physician who performed the respective services believes an account to be uncollectible and communicates uncollectible account approval to the office manager, the office manager issues a write-off memo to Clerk 2. Clerk 2 receives the memo and writes off the account. The office manager supervises the clerks, issues write-off memos, schedules appointments for the doctors, makes bank deposits, reconciles bank statements, and performs general correspondence duties. Additional services are performed monthly by a local accountant who receives summaries prepared by the clerks and posts them to the general ledger, prepares income statements, and files the appropriate payroll forms and tax returns. The accountant reports directly to the parent corporation. The board of directors has an audit committee, and you must make the audit committee aware of material weaknesses that you have discovered in the audit. The following three items were noted: The allowance for doubtful accounts was materially misstated. You as the auditor caught this error, and the client subsequently adjusted the financial statements. 1. The clerk failed to stamp "PAID" on three invoices in your control testing sample, and you assessed control risk as "high" for the assertion. 2. Management failed to perform risk assessment for the changes in technology for medical billing (switching billing software). Which item above would be the best choice to be identified in your communication with the audit committee as a material weakness?

The allowance for doubtful accounts was materially misstated. You as the auditor caught this error, and the client subsequently adjusted the financial statements.

Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common?

The auditor determines whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations?

The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client.

Which of the following is a requirement for an audit of both an issuer's and a nonissuer's financial statements?

The auditor is required to assess the risk of fraud.

The scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies. Which of the following elements do these audits have in common?

The auditor is required to document an understanding of internal control established to ensure compliance with the applicable laws and regulations.

During an audit of internal controls, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery?

The auditor should bring the transaction to the attention of an appropriate level of management.

If a statement from the Statements on Standards for Attestation Engagements (SSAE) provides that a procedure or action is one that the practitioner "should consider," then which of the following interpretations is correct?

The consideration of the procedure is presumptively required, whereas carrying out the procedure is not required.

Which of the following cognizant agencies is most likely to be assigned to an auditee?

The federal agency that provides the most funding to the auditee

In which of the following circumstances would a covered member's independence be impaired with respect to a nonissuer client?

The member owns municipal utility bonds issued by a client, and the bonds are not material to the member's wealth.

What should an accountant consider in determining needs for retention of engagement documents?

The nature of the engagement and the firm's circumstances

The standard compilation report includes which statement or phrase?

The objective of a compilation is to assist management in presenting financial information in the form of financial statements.

Which of the following matters is an auditor required to communicate to those charged with governance?

The process used by management in formulating sensitive accounting estimates

Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards?

The requirement that the CPA be independent in mental attitude is included in both sets of standards.

A company engages a practitioner to assist the audit committee by performing specific procedures that were agreed to by the audit committee. Which of the following statements is correct regarding the procedures to be performed?

The specific procedures performed should be listed in the practitioner's report to the audit committee.

A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities are not material to the CPA's wealth but are material to the child's personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA's independence with the client?

Yes, because the stock would be a direct financial interest and materiality is not a factor

The AICPA's Code of Professional Conduct states that:

a member may follow another country's rules if practicing outside of the United States.

In auditing a not-for-profit entity that receives governmental financial assistance, the auditor has a responsibility to:

assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements.

In order for a firm to designate itself as "Members of the AICPA":

all CPA owners must be members of the AICPA.

Audit documentation should enable an experienced auditor, having no previous connection to the audit, to understand all of the following except:

changes in the audit plan from the prior year.

In documenting the nature, timing, and extent of audit procedures performed, the auditor should include all of the following except:

copies of client invoices supporting the tests of operating effectiveness or substantive tests of details.

In an audit of a nonprofit organization under the Uniform Guidance rules, an auditor must comply with all of the following, except:

correspond with all individuals or entities that have received or made use of the federal award funds and determine the appropriateness of such distributions.

During the initial planning phase of an audit, a CPA most likely would:

discuss the timing of the audit procedures with the client's management.

In an electronic environment, auditors and practitioners frequently carry forward and update files or schedules from one audit or attest period to the next. The auditor or practitioner must be careful, however, to adopt reasonable procedures that:

enable him or her to access the electronic audit or attest documentation throughout the entire retention period.

The phrase "generally accepted accounting principles" is an accounting term that:

encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

In performing an attestation engagement, a CPA typically:

expresses a conclusion about an assertion.

An auditor's letter issued on significant deficiencies relating to an entity's internal control observed during a financial statement audit should:

indicate that the audit's purpose was to report on the financial statements and not to provide assurance on the internal control.

A compilation of financial statements in accordance with the Statements on Standards for Accounting and Review Services is limited to presenting:

information in the form of financial statements that is the representation of management.

The standard report issued by a CPA after reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS) should state that the CPA:

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

As compared to the AICPA Code of Professional Conduct, the ethical and independence rules of the SEC tend to be:

more restrictive.

Under the OMB's Uniform Guidance rules, when an entity uses funds from more than one federal program and the disbursements from the federal programs during the year exceed $750,000, then the entity:

must have a single audit.

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Accounting and Review Services (SSARS) when:

neither advising a client regarding the selection of computer software nor advocating a client's position before the IRS.

The procedure, "The accountant should obtain an understanding of the entity's internal control," is:

not required for either a compilation or a review.

An objective of an engagement to review financial statements in accordance with the Statements on Standards for Accounting and Review Services (SSARS) is to:

obtain limited assurance that no material modifications should be made.

In an accountant's review of interim financial information, the accountant typically performs each of the following except:

obtaining corroborating external evidence.

The objective of a Section 70, Preparation of Financial Statements, engagement in accordance with the Statements on Standards for Accounting and Review Services (SSARS) is to:

prepare the financial statements in accordance with an applicable financial reporting framework.

The AICPA's Code of Professional Conduct permits CPA firms to organize as:

proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law.

When performing a review of interim financial information, an accountant would typically do each of the following except:

test controls related to the preparation of annual financial information.

The regulatory body that has the primary authority to develop requirements for performing federal program compliance audits in accordance with the Single Audit Act is:

the Office of Management and Budget (OMB).

The "responsible party" with respect to prospective financial statements is usually:

the entity's management.

A member of a group engagement team will not be subject to discipline if a foreign component auditor departed from the ethics requirement as long as:

the foreign component auditor is in accord with the ethics and independence requirements set forth in the IESBA's Code of Ethics for Professional Accountants.

During the planning phase of an audit, an auditor is identifying matters for communication to the entity's audit committee. The auditor most likely would ask management whether:

there were changes in the application of significant accounting policies.