ACC450 Final

A case by a client against its CPA firm alleging negligence would be brought under: a) The Securities Exchange Act of 1934. b) The state blue sky laws. c) The Securities Act of 1933. d) Common law.

d) Common law.

Which of the following is least likely to result in an emphasis-of-matter paragraph being added to an unmodified auditor's report on the financial statements of a nonpublic client that sells jewelry through a retail store? a) A decision by the auditor to emphasize that the client is a part of a larger organization. b) A question as to whether the client will be able to remain a going concern. c) Use of an unacceptable method to value inventory with results that differ materially from GAAP. d) A change from FIFO to specific identification accounting for inventory.

) Use of an unacceptable method to value inventory with results that differ materially from GAAP.

Shortly after year-end, Allen Corporation was informed of the bankruptcy of Quest. Allen Corporation showed a receivable of $20,000 (a material amount) due from Quest as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Quest had been experiencing financial difficulties for the past several years. Yet, Quest's bankruptcy did not occur until after Allen Corporation's year-end. Under these circumstances: The financial statements should be adjusted The event requires financial statement disclosure, but no adjustment The auditor's report should be modified for a lack of consistency A. Yes No No B. Yes No Yes C. No Yes Yes D. No Yes No

A. Yes No No

In addition to proving a loss, which of the following must be proven by a third party suing a CPA under Section 10 of the 1934 Securities Exchange Act? Misleading Financial Statements Reliance on financial statements A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

Ordinarily, a public company must be addressed to: Shareholders Board of Directors 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

Under which act (or acts) may criminal charges against a CPA be filed? Securities Act of 1933 Securities Exchange Act of 1934 A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

Under which act (or acts) may liability charges be filed against a CPA who has performed a financial statement review for a public company? Securities Act of 1933 Securities Exchange Act of 1934 A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

When auditing the statement of cash flows of a profitable, growing company which combination is most likely? Cash flows from operations Cash flows from investing A. Positive Positive B. Positive Negative C. Negative Positive D. Negative Negative

B. Positive Negative

In addition to proving a loss, which of the following must be proven by a third party suing a CPA under Section 11 of the 1933 Securities Act? Misleading Financial Statements Reliance on financial statements A. Yes Yes B. Yes No C. No Yes D. No No

B. Yes No

Under the Ultramares rule, to which of the following parties will an accountant be liable for ordinary negligence? Parties in privity Foreseen parties A. Yes Yes B. Yes No C. No Yes D. No No

B. Yes No

Which of the following representations does an auditor make explicitly and which implicitly when issuing a standard unqualified opinion on a public company's financial statements? Conformity with PCAOB Standards Going Concern Status A. Explicitly Explicitly B. Implicitly Implicitly C. Implicitly Explicitly D. Explicitly Implicitly

D. Explicitly Implicitly

Critical audit matters are included in a public company audit report with a(n): Adverse Opinion Disclaimer of Opinion A. Yes Yes B. Yes No C. No Yes D. No No

D. No No

Under which act (or acts) must a client prove that a CPA has performed an audit with due diligence to establish that CPA's liability? Securities Act of 1933 Securities Exchange Act of 1934 A. Yes Yes B. Yes No C. No Yes D. No No

D. No No

Which of the following is least likely to be included in a public company audit report with an unqualified opinion? a) The name of the engagement partner. b) A title with the word "Independent." c) A section on critical matters. d) A basis for opinion paragraph.

a) The name of the engagement partner.

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer? a) "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion." b) "No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements." c) "We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities." d) "There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed."

a) "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."

Which of the following court cases highlighted the need for obtaining engagement letters for professional services? a) 1136 Tenants Corporation v. Rothenberg. b) Ultramares v. Touche. c) Rosenblum v. Adler. d) Hochfelder v. Ernst.

a) 1136 Tenants Corporation v. Rothenberg.

An audit client has refused to allow the auditors to perform an auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of: a) A disclaimer of opinion. b) An unmodified report with an emphasis-of-matter paragraph. c) An adverse opinion. d) A standard unmodified opinion with a qualified scope paragraph.

a) A disclaimer of opinion.

Ray, an independent auditor, was engaged to perform an audit of the financial statements of Zena Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Ray, the auditors were able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Rays audit report will probably contain: a) A standard unmodified opinion. b) Either a qualified opinion or a disclaimer of opinion. c) An unmodified opinion and an emphasis-of-matter paragraph. d) An "except for" qualification.

a) A standard unmodified opinion.

Which of the following is not explicitly included in an audit report for a nonpublic company? a) A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance. b) A statement that the financial statements are the responsibility of management. c) A title with the word "independent." d) A statement that the auditor's responsibility is to express an opinion on the financial statements.

a) A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance.

An auditor's report on comparative financial statements should be dated as of the date of the: a) Accumulation of sufficient appropriate audit evidence. b) Latest financial statements being reported on. c) Last related-party transaction disclosed in the statements. d) Issuance of the report.

a) Accumulation of sufficient appropriate audit evidence.

Which of the following is not included in PCAOB Form AP? a) Audit staff investments in each particular client. b) The engagement partner for audits. c) Name of each accounting firm whose work constituted at least 5% of total audit hours. d) Aggregate participation of accounting firms whose individual work was less than 5% of total audit hours.

a) Audit staff investments in each particular client.

An audit report on a public company is least likely to include a paragraph titled: a) Auditor responsibility b) Critical Audit Matters. c) Opinion on the Financial Statements. d) Basis for Opinion.

a) Auditor responsibility

Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit? a) Calculate an estimate the total of uncorrected misstatements in the financial statements. b) Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. c) Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. d) Determine whether reportable conditions have been corrected.

a) Calculate an estimate the total of uncorrected misstatements in the financial statements.

When an auditor of a nonpublic company has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the date the financial statements will be released (1/26/X2), the auditor's responsibility includes: a) Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern. b) Projecting conditions and events from one year prior to this year's date (12/31/X0) to 12/31/X1. c) Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. d) Preparing prospective financial information to verify whether management's plans can be effectively implemented.

a) Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel due to a scope limitation, the auditor should issue a(an): a) Disclaimer of opinion. b) Standard unmodified opinion. c) Adverse opinion. d) Unmodified opinion with a separate emphasis-of-matter paragraph.

a) Disclaimer of opinion.

CPAs should not be liable to any party if they perform their services with: a) Due professional care. b) Ordinary negligence. c) Regulatory providence. d) Good faith.

a) Due professional care.

For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to: a) Each of the years in the two-year period. b) Each of the two years plus the preceding year. c) Only the current year under audit. d) Either one or both years at the option of the auditors.

a) Each of the years in the two-year period.

The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for: a) Either ordinary or gross negligence. b) Only fraud. c) Only gross negligence. d) Only criminal acts.

a) Either ordinary or gross negligence.

Which of the following is a term used in public company audit reports? a) Explanatory paragraph. b) Disclaimer of qualification. c) Unmodified opinion. d) Other matter paragraph.

a) Explanatory paragraph.

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate: a) Factual, judgmental and projected misstatements and an allowance for undetected misstatements in the financial statements. b) Factual and judgmental misstatements in the financial statements. c) Factual misstatements in the financial statements. d) Judgmental misstatements in the financial statements.

a) Factual, judgmental and projected misstatements and an allowance for undetected misstatements in the financial statements.

A CPA's duty of due care to a client most likely will be breached when a CPA: a) Fails to follow generally accepted auditing standards. b) Gives a client an oral report instead of a written report. c) Gives a client incorrect advice based on an honest error of judgment. d) Fails to give tax advice that saves the client money.

a) Fails to follow generally accepted auditing standards.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? a) Investigate changes in capital stock recorded after year-end. b) Inquire about payroll checks that were recorded before year-end but cashed after year-end. c) Review tax returns prepared by management after year-end. d) Determine whether inventory ordered before the year-end was included in the physical count.

a) Investigate changes in capital stock recorded after year-end.

An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year including those that occurred in prior years is referred to as: a) Iron curtain approach. b) Rollover approach. c) Projected misstatement approach. d) Evaluation materiality approach.

a) Iron curtain approach.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: a) Issue an "except for" qualification or an adverse opinion. b) Issue an unmodified opinion with a basis for modification paragraph. c) Issue an "except for" qualification or a disclaimer of opinion. d) Withdraw from the engagement.

a) Issue an "except for" qualification or an adverse opinion.

Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995? a) It makes recovery against CPAs more difficult under common law litigation. b) It retains joint and several liability in certain circumstances. c) It eliminates securities fraud as an offense under civil RICO. d) It provides certain small investors better recovery rights than it does large investors.

a) It makes recovery against CPAs more difficult under common law litigation.

Assume that $800,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 20%, while others are responsible for the other 80%. Assume the others have no financial resources. As a result the CPA has been required to pay the entire $800,000. The auditor's liability is most likely based upon which approach to assessing liability? a) Joint and several liability. b) Absolute liability. c) Contributory negligence. d) Proportional liability.

a) Joint and several liability.

The auditor's primary means of obtaining corroboration of management's information concerning litigation is a: a) Letter of audit inquiry to the client's lawyer. b) Confirmation of claims and assessments from an officer of the court presiding over the litigation. c) Confirmation of claims and assessments from the other parties to the litigation. d) Letter of corroboration from the auditor's lawyer upon review of the legal documentation.

a) Letter of audit inquiry to the client's lawyer.

Which of the following is least likely to result in an adverse opinion? a) Limitation in the scope of the audit. b) Related party transaction. c) Change in accounting principle. d) Uncertainty.

a) Limitation in the scope of the audit.

The first section of a public company audit report is the: a) Basis for opinion section. b) Opinion section. c) Introductory paragraph. d) Critical audit matters section.

b) Opinion section.

With respect to issuance of an audit report which is dual-dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the date of the audit report is: a) Limited to the specific event referred to. b) Limited to all events occurring through the date of issuance of the report. c) Extended to include all events occurring through the date of submission of the report to the client. d) Extended to include all events occurring until the date of the last subsequent event referred to.

a) Limited to the specific event referred to.

Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and Hall began the audit work on February 17, year 2. Hall completed the audit work on March 24, year 2, and completed the report on March 28, year 2. The client's representation letter normally would be dated: a) March 24, year 2. b) February 13, year 2. c) February 17, year 2. d) March 28, year 2.

a) March 24, year 2.

The review of audit working papers by the audit partner is normally completed: a) Near the completion of the audit. b) Immediately as each working paper is completed. c) After issuance of the audit report, but prior to required subsequent event review procedures. d) Prior to year-end.

a) Near the completion of the audit.

Which of the following summarizes the threshold at which auditors are required to request management to record any identified factual misstatements that are: a) Other than trivial. b) Significant deficiencies. c) Material. d) Material or immaterial.

a) Other than trivial.

The auditors have calculated the total uncorrected identified misstatements as $445,000; materiality for the audit is $450,000. The client has declined to record the related journal entries. In this situation it is most likely that the auditors will: a) Perform additional audit procedures to reduce audit risk to an appropriately low level. b) Conclude that the financial statements are not materially misstated. c) Resign from the audit. d) Issue a disclaimer of opinion.

a) Perform additional audit procedures to reduce audit risk to an appropriately low level.

The auditors used statistical sampling for the audit of inventory and calculated an estimated total audited value of $1,100,000; the client's book value for inventory is $1,200,000. This misstatement is properly classified as a: a) Projected misstatement. b) Factual misstatement. c) Judgmental misstatement. d) Relevance misstatement.

a) Projected misstatement.

Assume that $800,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 20%, while others are responsible for the other 80%. Assume the others have no financial resources. The CPA has been required to pay $160,000. The auditor's liability is most likely based upon which approach to assessing liability? a) Proportional liability. b) Absolute liability. c) Contributory negligence. d) Joint and several liability.

a) Proportional liability.

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in: a) Qualification of the audit report. b) An assessment that loss of the litigation is probable. c) An adverse opinion. d) Confirmation of related lawsuits with the claimants.

a) Qualification of the audit report.

The auditors' best course of action with respect to "other information (not including required supplemental information)" included in an annual report containing the auditors' report is to: a) Read and consider the manner of presentation of the "other financial information." b) Consider whether the "other financial information" is accurate by performing a limited review. c) Indicate in the auditors' report, that the "other financial information" is only compiled. d) Obtain written representations from managements as to the material accuracy of the "other financial information."

a) Read and consider the manner of presentation of the "other financial information."

The date the auditor grants the client permission to use the audit report in connection with the financial statements is the: a) Report release date. b) Report cutoff date. c) Representation date. d) Last day of significant field work.

a) Report release date.

Which of the following procedures would an auditor most likely perform prior to the balance sheet date? a) Review detail and test significant travel and entertainment expenses. b) Perform search for unrecorded liabilities. c) Review subsequent events. d) Send inquiry letter to client's legal counsel.

a) Review detail and test significant travel and entertainment expenses.

Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party? a) Rosenblum Approach. b) Restatement of Torts Approach. c) Ultramares Approach. d) Due Diligence Approach.

a) Rosenblum Approach.

Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence? a) Rosenblum v. Adler. b) Restatement of Torts. c) Rule 10b-5. d) Ultramares v. Touche.

a) Rosenblum v. Adler.

Of the following, a public company audit report is most likely to be addressed to the: a) Shareholders. b) Management. c) Company itself. d) Internal audit team.

a) Shareholders.

Which of the following modifications of the auditors' report does not include an additional paragraph? a) The audit report of a nonpublic company indicates a division of responsibility between two CPA firms. b) The report includes an emphasis of a matter. c) The report is qualified because the financial statements contain a material departure from generally accepted accounting principles. d) The report is qualified because the scope of the auditors' work was limited.

a) The audit report of a nonpublic company indicates a division of responsibility between two CPA firms.

Under which of the following set of circumstances might the auditors disclaim an opinion? a) The auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures. b) There has been a material change between periods in the method of application of accounting principles. c) The group auditors decide to make reference to the report of component auditor who audited a subsidiary. d) The financial statements contain a departure from generally accepted accounting principles, the effect of which is material.

a) The auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures.

Which of the following is correct concerning a public company audit report with a disclaimer of opinion? a) The paragraph describing the reason for the disclaimer will follow the opinion paragraph and will not include a title. b) The title of the Opinion section will be changed to Basis for Disclaimer of Opinion. c) It will ordinarily be issued in situations in which financial statements are materially and pervasively misstated. d) It must include in a section on critical audit matters the circumstances that led to the disclaimer.

a) The paragraph describing the reason for the disclaimer will follow the opinion paragraph and will not include a title.

In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate? a) The statements are not in conformity with generally accepted accounting principles regarding pension plans. b) The statements are not in conformity with generally accepted accounting principles due to a departure from GAAP with an immaterial effect on the financial statements. c) A client-imposed scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence. d) The auditor is not independent with respect to the enterprise being audited.

a) The statements are not in conformity with generally accepted accounting principles regarding pension plans.

If management refuses to furnish certain written representations that the auditor believes are essential, which of the following is appropriate? a) This may have an effect on the auditor's ability to rely on other representations of management. b) The auditor should issue an adverse opinion because of management's refusal. c) The client's refusal does not constitute a scope limitation that may lead to a modification of the opinion. d) The auditor can rely on oral evidence relating to the matter as a basis for an unmodified (unqualified) opinion.

a) This may have an effect on the auditor's ability to rely on other representations of management.

An independent auditor has concluded that substantial doubt remains about a nonpublic client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an): a) Unmodified opinion with an appropriate emphasis-of-matter paragraph. b) Standard unmodified opinion. c) "Except for" qualified opinion. d) Adverse opinion.

a) Unmodified opinion with an appropriate emphasis-of-matter paragraph.

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for: a) Updating the report on the previous financial statements regardless of the opinion previously issued. b) Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist. c) Updating the report on the previous financial statements only if there has not been a change in the opinion. d) Expressing dual dated opinions.

a) Updating the report on the previous financial statements regardless of the opinion previously issued.

Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors? a) Write-off of trade accounts receivable. b) New debt issuance. c) New bank accounts. d) Dividends.

a) Write-off of trade accounts receivable.

A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, both immaterial amounts. This year, the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit, $100,000 represents a material amount. Assuming that the entire understatement is to be recorded, the decrease in this year's income due to these understatements is: a) $110,000. b) $140,000. c) $60,000. d) $0.

b) $140,000.

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000, with all points in that interval equally likely. The judgmental misstatement in this situation is: a) $40,000. b) $30,000. c) $50,000. d) $0.

b) $30,000.

When an adverse opinion is expressed on the financial statements of a nonpublic company, the opinion paragraph should include a direct reference to: a) The consistency in the application of generally accepted accounting principles. b) A separate basis for modification paragraph (section). c) A note to the financial statements which discusses the basis for the opinion. d) The auditor's responsibility section of the audit report which discusses the basis for the opinion rendered.

b) A separate basis for modification paragraph (section).

For clients that distribute checks or cash payments and have significant payroll control weakness, which of the following audit procedures is aimed at determining whether every name on the company payroll is a bona fide employee actually on the job? a) Comparison of payee names on canceled payroll checks with the payroll register. b) A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment. c) A test of payroll extensions. d) Analytical comparisons of budgeted to actual payroll expense.

b) A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment.

An example of an internal control weakness is to assign the payroll department the responsibility for: a) Preparing the payroll expense distribution. b) Authorizing increases in pay. c) Preparing the payroll checks. d) Preparing journal entries for payroll expense.

b) Authorizing increases in pay.

For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected: a) Present information in the financial statements that is classified and summarized in a reasonable manner. b) Be applied on a basis consistent with those followed in the prior year. c) Be appropriate in the circumstances for the particular entity. d) Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.

b) Be applied on a basis consistent with those followed in the prior year.

In which type of court case is proving "due diligence" essential to the auditors' defense? a) Court cases brought by third parties under common law. b) Court cases brought under the Securities Act of 1933. c) Court cases brought by clients under common law. d) Court cases brought under the Securities Exchange Act of 1934.

b) Court cases brought under the Securities Act of 1933.

To minimize the opportunities for fraud, unclaimed cash payroll should be: a) Held by the payroll custodian. b) Deposited in a special bank account. c) Deposited in a safe deposit box. d) Held by the controller.

b) Deposited in a special bank account.

A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for: a) Hiring subordinate employees. b) Distributing payroll checks to employees. c) Reviewing and approving time reports for subordinate employees. d) Initiating requests for salary adjustments for subordinate employees.

b) Distributing payroll checks to employees.

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 foreseeable third party approach, the auditor is generally liable to the bank which subsequently grants the loan for: a) Lack of due diligence. b) Either ordinary or gross negligence. c) Lack of good faith. d) Gross negligence, but not ordinary negligence.

b) Either ordinary or gross negligence.

A limited liability partnership form of organization: a) Has similar liability requirements to that of a professional corporation. b) Eliminates personal liability for some, but not all, partners. c) Decreases liability of all partners of a CPA firm. d) Eliminates personal liability for all partners.

b) Eliminates personal liability for some, but not all, partners.

An auditor's decision concerning whether or not to "dual-date" the audit report is based upon the auditor's willingness to: a) Accept responsibility for year-end adjusting entries. b) Extend auditing procedures. c) Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the auditor's report. d) Assume responsibility for resolving all events subsequent to the issuance of the auditor's report.

b) Extend auditing procedures.

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) Strict liability. b) Gross negligence. c) Criminal deceit. d) Negligence.

b) Gross negligence.

Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general, Jones will have to prove that: a) The plaintiffs did not show him to be negligent. b) He performed the audit with due diligence. c) He performed the audit with good faith. d) He is not guilty of gross negligence.

b) He performed the audit with due diligence.

An auditor will ordinarily examine invoices from lawyers primarily in order to: a) Estimate the dollar amount of contingent liabilities. b) Identify possible unasserted litigation, claims, and assessments. c) Assess the legal ramifications of litigation in progress. d) Substantiate accruals.

b) Identify possible unasserted litigation, claims, and assessments.

Which of the following is a general purpose financial reporting framework? a) International Standards of Auditing. b) International Financial Reporting Standards. c) Auditing Standards of the Public Company Accounting Oversight Board. d) Generally accepted auditing standards.

b) International Financial Reporting Standards.

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: a) Issue an adverse opinion. b) Issue an unmodified opinion with no reference to this omission. c) Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure. d) Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables.

b) Issue an unmodified opinion with no reference to this omission.

An auditor should obtain written representations from the company's attorney concerning litigation claims and assessments, which may be limited to matters that are considered either individually or collectively material. An understanding on the limits of materiality for this purpose has been reached by: a) Management, the client's lawyer, and the auditor. b) Management and the auditor. c) The auditor and the client's lawyer. d) The auditor independently of management.

b) Management and the auditor.

An attorney responding to an auditor as a result of the client's letter of audit inquiry may appropriately limit the response to: a) Asserted claims and pending or threatened litigation. b) Matters to which the attorney has given substantive attention in the form of legal consultation or representation. c) Legal matters subject to unsettled points of law, uncorroborated information, or other complex judgments. d) Items which have high probability of being resolved to the client's detriment.

b) Matters to which the attorney has given substantive attention in the form of legal consultation or representation.

Under common law, when performing an audit, a CPA: a) Is strictly liable for failures to discover client fraud. b) Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. c) Must strictly adhere to generally accepted accounting principles. d) Is not liable unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards.

b) Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances.

Which of the following information need not be reported in the auditors' report of a nonpublic company if the information is considered to be properly stated after performing appropriate procedures? a) FASB-required supplementary information. b) Other information in documents containing audited financial statements. c) Supplementary information in relation to the financial statements as a whole. d) GASB-required supplementary information.

b) Other information in documents containing audited financial statements.

Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date? a) Review minutes of board of directors' meeting. b) Perform analytical procedures in the period subsequent to the balance sheet date. c) Review the latest available interim financial statements. d) Inquire about any unusual adjustments made subsequent to the balance sheet date.

b) Perform analytical procedures in the period subsequent to the balance sheet date.

It would be appropriate for the payroll accounting department to be responsible for which of the following functions? a) Distribution of paychecks to employees. b) Preparation of periodic governmental reports as to employees' earnings and withholding taxes. c) Approval of employee time records. d) Maintenance of records of employment, discharges, and pay increases.

b) Preparation of periodic governmental reports as to employees' earnings and withholding taxes.

Analytical procedures are required as a part of the: a) Detailed tests of balances. b) Procedures performed near the end of the audit. c) Internal control assessment. d) Substantive testing.

b) Procedures performed near the end of the audit.

If the predecessor auditors do not reissue their audit report on comparative financial statements, the successor auditors should: a) Express a qualified opinion on the comparative financial statements audited by the predecessor auditors. b) Refer to the report of the predecessor auditors. c) Reproduce the predecessor auditors' report and include it with the new set of financial statements. d) Have the client omit the comparative financial statements.

b) Refer to the report of the predecessor auditors.

An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to: a) Repurchase the entity's stock at a price below its book value. b) Refinance debt to lower loan payments. c) Accelerate the due date of an existing mortgage. d) Issue stock options to key executives.

b) Refinance debt to lower loan payments.

Which of the following is least likely to result in a qualification of the auditors' opinion due to a scope limitation? a) Scope limitations imposed by the client. b) Reliance placed upon the report of component auditors. c) Inability to obtain sufficient appropriate audit evidence. d) Inadequate accounting records.

b) Reliance placed upon the report of component auditors.

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable? a) Interest and Bad Debt Expense. b) Sales and Bad Debt Expense. c) Interest and Cost of Goods Sold. d) Sales and Cost of Goods Sold.

b) Sales and Bad Debt Expense.

The purpose of segregating the duties of distributing payroll checks and hiring personnel is to: a) Separate the custody of assets from the accounting for those assets. b) Separate the authorization of transactions from the custody of related assets. c) Separate duties within the accounting function. d) Establish clear lines of authority and responsibility.

b) Separate the authorization of transactions from the custody of related assets.

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? a) Loss of a plant as a result of a flood. b) Settlement of litigation in excess of the recorded liability. c) Major purchase of a business which is expected to double the sales volume. d) Sale of long-term debt or capital stock.

b) Settlement of litigation in excess of the recorded liability.

A client has changed the salvage values of a number of its fixed assets. The auditors of the public company believe that the revised salvage values are realistic. The appropriate report on the financial statements is: a) Disclaimer. b) Standard unqualified. c) Unqualified with explanatory language as to consistency. d) Qualified for consistency.

b) Standard unqualified.

Which of the following ledger accounts would be least likely to be analyzed in detail by auditors? a) Miscellaneous revenue. b) Supplies expense. c) Professional fees. d) Repairs and maintenance.

b) Supplies expense.

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. Waltons 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) The controller was Walton's agent and as such had designed the controls which facilitated the embezzlement. b) That the audit was performed in accordance with GAAS. c) The financial statements were presented in conformity with GAAP. d) Fleming had no knowledge of the embezzlement.

b) That the audit was performed in accordance with GAAS.

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 did not rely upon the financial statement. b) The audit work was adequate to support the CPA's opinion. c) The CPA detected the misstatement after the audit report date. d) The investor has not proven CPA negligence.

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

The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit is that: a) The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of field work. b) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period. c) The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date. d) The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred.

b) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: a) The auditors should disclaim an opinion on the overall financial statements. b) The auditors should issue a qualified report for the departure from generally accepted accounting principles. c) The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented. d) The auditors may still issue an unmodified opinion.

b) The auditors should issue a qualified report for the departure from generally accepted accounting principles.

PCAOB Form AP involves disclosure of: a) Audit firm's liability for accounts payable to the audit client. b) The engagement partner for the audit. c) Audit client executives. d) Names of all staff members on the audit.

b) The engagement partner for the audit.

Which of the following is not a difference between the audit report of a nonpublic and public company? a) The public company report is more likely to refer to a critical audit matter. b) The public company report has an additional paragraph referring to the client's fraud prevention procedures. c) The public company report refers to standards of the PCAOB. d) The public company report includes the word "Registered" in the title.

b) The public company report has an additional paragraph referring to the client's fraud prevention procedures.

In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion? a) Tests of controls show that the entity's internal control is so poor that it cannot be relied upon. b) The statements are not in conformity with FASB requirements regarding goodwill impairment. c) Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. d) The chief executive officer refuses the auditor access to minutes of board of directors' meetings.

b) The statements are not in conformity with FASB requirements regarding goodwill impairment.

Effective internal control over the payroll function would include which of the following? a) Total time recorded on time clock cards should be reconciled to job reports by employees responsible for those specific jobs. b) Total time spent on jobs should be compared with total time indicated on time clock punch cards. c) Payroll department employees should be responsible for maintaining employee personnel records. d) Payroll department employees should be supervised by the management of the personnel department.

b) Total time spent on jobs should be compared with total time indicated on time clock punch cards.

A basis for modification paragraph for a nonpublic company is least likely to relate to which of the following types of opinion? a) Disclaimer. b) Unmodified. c) Adverse. d) Qualified.

b) Unmodified.

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The factual misstatement in this situation is: a) $50,000. b) $40,000. c) $0. d) $30,000.

c) $0.

An auditor believes that a client's warranty liability is between $100,000 and $130,000, with each amount in that interval equally likely. The financial statements show a liability of $90,000. a) $10,000 projected misstatement. b) $20,000 projected misstatement. c) $10,000 judgmental misstatement. d) $20,000 judgmental misstatement.

c) $10,000 judgmental misstatement.

Which of the following is accurate with respect to litigation involving CPAs? a) A CPA is primarily responsible, while the client is secondarily responsible for the notes in an annual report filed with the SEC. b) A CPA will not be found liable for an audit unless the CPA has audited all affiliates of that company. c) A CPA may be exposed to criminal as well as civil liability. d) A CPA may not successfully assert as a defense that the CPA had no motive to be part of a fraud.

c) A CPA may be exposed to criminal as well as civil liability.

Which of the following will result in emphasis-of-matter as to consistency in a nonpublic company auditor's report, regardless of whether the item is fully disclosed in the financial statements? a) A change in classification. b) A change in accounting estimate. c) A change from an unacceptable accounting principle to a generally accepted one. d) Correction of an immaterial error not involving a change in accounting principle.

c) A change from an unacceptable accounting principle to a generally accepted one.

Which of the following accounting changes requires an emphasis-of-matter paragraph regarding consistency in a nonpublic company auditors' report? a) A change in the estimated useful lives of a class of fixed assets. b) A change in calculating bad debt expense from one percent to two percent of credit sales. c) A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets. d) A write-off of a patent because future benefits do not appear to exist.

c) A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets.

Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement. Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence? a) A loss sustained by a client in a suit brought under common law. b) A loss sustained by a bank named as a third-party beneficiary in the engagement letter in a suit brought under common law. c) A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent. d) A loss sustained by initial purchasers of stock in a suit brought under the Securities Act of 1933.

c) A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent.

Which of the following subsequent events might require an adjustment to the client's financial statements? a) Plant employees could possibly go on strike. b) A business combination with another company. c) A major customer declares bankruptcy causing a material receivable to be uncollectible. d) Loss of plant and equipment due to a fire. The loss in insured.

c) A major customer declares bankruptcy causing a material receivable to be uncollectible.

A scope restriction is least likely to result in a(an): a) Qualified opinion. b) Standard unmodified opinion. c) Adverse opinion. d) Disclaimer of opinion.

c) Adverse opinion.

Which of the following is least likely to be a critical audit matter in a public company audit report? a) A significant risk identified by the auditor. b) Matters relating to the company's accounting policies. c) An audit team member lacking experience in the client's industry. d) A related party transaction.

c) An audit team member lacking experience in the client's industry.

The primary objective of analytical procedures used near the end of an audit is to: a) Identify areas that represent specific risks relevant to the audit. b) Satisfy doubts when questions arise about a client's ability to continue in existence. c) Assist the auditor when forming overall conclusions about the financial statements. d) Obtain evidence from details tested to corroborate particular assertions.

c) Assist the auditor when forming overall conclusions about the financial statements.

If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first: a) Wait until the beginning of the next year's audit to determine whether misstatements have occurred. b) Notify legal counsel. c) Attempt to determine whether their report is still being relied upon by third parties. d) Notify regulatory agencies.

c) Attempt to determine whether their report is still being relied upon by third parties.

Which of the following is a correct statement related to CPA legal liability under common law? a) CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence. b) CPAs may escape all personal liability through incorporation as a limited liability corporation. c) CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed. d) CPAs are guilty until they prove that they performed the audit with "good faith."

c) CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed.

The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account? a) Intangible assets. b) Accounts receivable. c) Cash. d) Property, plant, and equipment.

c) Cash.

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies? a) Obtaining a lawyers' letter. b) Reviewing the minutes of board of directors' meetings. c) Confirming accounts payable. d) Review correspondence with banks.

c) Confirming accounts payable.

If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be: a) Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year. b) Treated as a subsequent event. c) Disclosed in the notes to the financial statements of the current year. d) Referred to in the auditor's report for the current year.

c) Disclosed in the notes to the financial statements of the current year.

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) Gross negligence, but not ordinary negligence. b) Lack of good faith. c) Either ordinary or gross negligence. d) Lack of due diligence.

c) Either ordinary or gross negligence.

A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that: a) Internal control relating to payroll disbursements are operating effectively. b) Jobs on which employees worked were charged with the appropriate labor cost. c) Employees worked the number of hours for which their pay was computed. d) Only bonafide employees worked and their pay was properly computed.

c) Employees worked the number of hours for which their pay was computed.

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n): a) Extrapolation difference. b) Redundancy effect misstatement. c) Factual misstatement. d) Projected misstatement.

c) Factual misstatement.

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public? a) Form 8-K. b) Form 10-Q. c) Form S-1. d) Form 10-K.

c) Form S-1.

Which of the following types of matters do not generally require disclosure in the financial statements? a) Commitments. b) Liabilities to related parties. c) General risk contingencies. d) Loss contingencies.

c) General risk contingencies.

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified or adverse opinion if: a) Negative trends and recurring operating losses appear to be irreversible. b) The effects of the adverse financial conditions are likely to be negative. c) Information about the entity's ability to continue as a going concern is not disclosed in the financial statements. d) Management has no plans to reduce or delay future expenditures.

c) Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? a) Evaluating the entity's procedures for identifying and recording related party transactions. b) Inspecting title documents to verify whether any real property is pledged as collateral. c) Inquiring of the entity's legal counsel about litigation, claims, and assessments. d) Performing cutoff tests of sales transactions with customers with long-standing receivable balances.

c) Inquiring of the entity's legal counsel about litigation, claims, and assessments.

To which of the following matters would materiality limits not apply when obtaining written client representations? a) Violations of state labor regulations. b) Information about related party transactions. c) Instances of fraud involving management. d) Disclosure of line-of-credit arrangements.

c) Instances of fraud involving management.

Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for: a) Auditors have no liability to security purchasers under this act. b) Ordinary negligence. c) Intent to deceive or defraud. d) Lack of due diligence.

c) Intent to deceive or defraud.

The auditors include an emphasis-of-matter paragraph in a nonpublic company audit report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this paragraph: a) Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements. b) Is considered a qualification of the opinion. c) Is appropriate and would not negate the unmodified opinion. d) Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

c) Is appropriate and would not negate the unmodified opinion.

A basis for modification paragraph in the audit of the financial statements of a nonpublic company: a) Must be included in all nonpublic company audit reports. b) Is presented only in audit reports with unmodified opinions. c) Is only included with qualified, adverse, or disclaimers of opinion. d) Has a section title: Emphasis-of-Matter.

c) Is only included with qualified, adverse, or disclaimers of opinion.

In a common law action against an accountant, lack of privity is a viable defense if the plaintiff: a) Bases the action upon fraud. b) Is the accountant's client. c) Is the client's creditor who sues the accountant for negligence. d) Can prove the presence of gross negligence that amounts to a reckless disregard for the truth.

c) Is the client's creditor who sues the accountant for negligence.

The auditors' primary means of obtaining corroboration of management's information concerning litigation is a: a) Letter of corroboration from the auditor's lawyer upon review of the legal documentation. b) Confirmation of claims and assessments from the other parties to the litigation. c) Letter of audit inquiry to the client's lawyer. d) Confirmation of claims and assessments from an officer of the court presiding over the litigation.

c) Letter of audit inquiry to the client's lawyer.

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor: a) Should refuse the engagement because there is a client-imposed scope limitation. b) May accept the engagement but must disclaim an opinion because of an inability to apply the procedures considered necessary. c) May accept the engagement. d) Should refuse the engagement because of a departure from generally accepted auditing standards.

c) May accept the engagement.

Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: a) Must refer to the audit of the component auditor. b) May refer to the audit of the component auditor, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the component auditor. c) May refer to the audit of the component auditor. d) Must not refer to the audit of the component auditor.

c) May refer to the audit of the component auditor.

Which of the following auditing procedures is ordinarily performed last? a) Confirming accounts payable. b) Testing of the purchasing function. c) Obtaining a management representation letter. d) Reading of the minutes of the directors' meetings.

c) Obtaining a management representation letter.

When a nonpublic audit client has omitted required supplementary information, the audit report should include a(n)? a) Disclaimer of opinion. b) Qualified opinion. c) Other-matter paragraph. d) Statement indicating that the financial statements should not be relied upon.

c) Other-matter paragraph.

An approach that quantifies the total of uncorrected misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the: a) Projected misstatement approach. b) Iron curtain approach. c) Rollover approach. d) Evaluation materiality approach.

c) Rollover approach.

In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law? a) 1136 Tenants Corporation v. Rothenberg. b) Continental Vending. c) Rosenblum v. Adler. d) Hochfelder v. Ernst.

c) Rosenblum v. Adler.

Which of the following circumstances generally results in the issuance of a report that includes an opinion that is modified? a) The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions. b) The financial statements are affected by a change in accounting principle due to a new FASB pronouncement. c) The auditor is unable to obtain the financial records of a foreign subsidiary which is material to the client. d) The group auditors for the engagement are relying on the work of component auditors.

c) The auditor is unable to obtain the financial records of a foreign subsidiary which is material to the client.

Which of the following would most likely be an appropriate addressee for an audit report? a) The president of the corporation whose financial statements were examined. b) The chief financial officer. c) The shareholders of the corporation whose financial statements were examined. d) A third party who requested that a copy of the audit report be sent to her.

c) The shareholders of the corporation whose financial statements were examined.

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report: a) Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion. b) The reasons why the predecessor auditor's report is not presented. c) The type of opinion expressed by the predecessor auditor. d) The identity of the predecessor auditor who examined the financial statements of the prior year.

c) The type of opinion expressed by the predecessor auditor.

The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who: a) Knowingly or unknowingly violates the 1934 Securities Exchange Act. b) Knowingly or unknowingly violates the 1933 Securities Act. c) Unknowingly violates the 1934 Securities Exchange Act. d) Unknowingly violates the 1933 Securities Act.

c) Unknowingly violates the 1934 Securities Exchange Act.

Hark, CPA, negligently failed to follow generally accepted auditing standards in auditing Long Corporation's financial statements. Long's president told Hark that the audited financial statements would be submitted to several, at this point undetermined, banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will: a) Lose because Hark was negligent in performing the audit. b) Win because Third was contributory negligent in granting the loan. c) Win because there was no privity of contract between Hark and Third. d) Lose because Hark knew that a bank would be relaying the financial statements.

c) Win because there was no privity of contract between Hark and Third.

A nonpublic client has provided required supplementary information with its audited financial statements. The auditor's proper reporting responsibility includes: a) A separate report should be issued on the required supplementary information. b) An adverse opinion on the required supplementary information. c) other-matter paragraph should be added to the audit report. d) The required supplementary information should not be referred to.

c) other-matter paragraph should be added to the audit report.

Bailey CPA, audited Lincoln Corporation. The shareholders sued both Lincoln and Bailey for securities fraud under the Federal Securities Exchange Act of 1934. The court determined that there was securities fraud and that Lincoln was 80% at fault and Bailey was 20% at fault due to her negligence in the audit. Both Lincoln and Bailey are solvent and the damages were determined to be $2 million. What is the maximum liability of Bailey? a) $1,000,000 b) $0 c) $2,000,000 d) $400,000

d) $400,000

If group auditors make no reference to component auditors whose work they have relied on as a part of the basis for their report, the group auditors: a) Are issuing an inappropriate report. b) Are not required to investigate the professional reputation of the component auditors. c) Are issuing a qualified opinion. d) Are assuming responsibility for the work of the component auditors.

d) Are assuming responsibility for the work of the component auditors.

On February 9, Brown, CPA, expressed an unmodified (unqualified) opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first: a) Take no additional action because subsequent events have no effect on the financial statements that were reported on. b) Request Web's permission to perform substantive procedures that would provide a satisfactory basis for the opinion. c) Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements. d) Assess the importance of the omitted procedures to Brown's present ability to support the opinion.

d) Assess the importance of the omitted procedures to Brown's present ability to support the opinion.

A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan. In a suit by the bank issuing the loan, the CPA's best defense would be that the: a) Bank was not the CPA's client. b) Bank's identity was known to the CPA prior to completion of the audit. c) Client was aware of the misstatements. d) Audit complied with generally accepted auditing standards.

d) Audit complied with generally accepted auditing standards.

A principle that may reduce or entirely eliminate auditor liability to a client is: a) Auditor gross negligence. b) Client constructive negligence. c) Auditor ordinary negligence. d) Client contributory negligence.

d) Client contributory negligence.

Which of the following is an analytical procedure that should be applied to the income statement? a) Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales. b) Select sales and expense items and trace amounts to related supporting documents. c) Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement. d) Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

d) Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

Assume that a client has encountered a $800,000 fraud and that the CPA's percentage of responsibility 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) Comparative negligence. b) Joint Negligence. c) Absolute negligence. d) Contributory negligence.

d) Contributory negligence.

Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with: a) An expert opinion as to whether a loss is possible, probable, or remote. b) An estimate of the dollar amount of the probable loss. c) Information concerning the progress of cases to date. d) Corroborative audit evidence.

d) Corroborative audit evidence.

Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements? a) A disclaimer contained in the engagement letter. b) Lack of due diligence. c) Contributory negligence on the part of the client. d) Due professional care.

d) Due professional care.

The Rotter Company, a nonpublic company, changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: a) Express an adverse opinion regarding the 20X4 financial statements, without a basis for modification paragraph since the reason will be included in the notes to the statements. b) Disclaim an opinion and explain all of the reasons therefore. c) Express an unmodified opinion with an emphasis-of-matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. d) Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

d) Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

Bugle Corp. approved a plan of merger with Stanley Corp. One of the determining factors in approving the merger was the strong financial statements of Stanley which were audited by Dennis & Co., CPAs. Bugle had engaged Dennis to audit Stanley's financial statements. While performing the audit, Dennis failed to discover certain instances of fraud which have subsequently caused Bugle to suffer substantial losses. In order for Dennis to be liable under common law, Bugle, at a minimum, must prove that Dennis: a) Knew of the instances of fraud. b) Acted recklessly or with lack of reasonable grounds for belief. c) Was grossly negligent. d) Failed to exercise due care.

d) Failed to exercise due care.

The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be: a) Less than the Securities Act of 1933. b) The same as the Securities Act of 1933. c) Indeterminate in relation to the Securities Act of 1933. d) Greater than the Securities Act of 1933.

d) Greater than the Securities Act of 1933.

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) Criminal deceit. b) Strict liability. c) Ordinary negligence. d) Gross negligence.

d) Gross negligence.

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. For a public company these considerations will affect the audit report as follows: a) If a loss meets these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report. b) If a loss meets these criteria and is disclosed in the financial statement notes, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report. c) If a loss meets these criteria and is disclosed in the financial statement notes, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure. d) If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.

d) If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? a) Such assumption of responsibility violates the profession's standards. b) In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. c) CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved. d) In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

d) In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to: a) Increase current dividend distributions. b) Reduce existing lines of credit. c) Purchase assets formerly leased. d) Increase ownership equity.

d) Increase ownership equity.

Which of the following forms of organization is most likely to protect the personal assets of any partner, or shareholder who has not been involved on an engagement resulting in litigation? a) Professional corporation. b) Partnership. c) Subchapter M Incorporation. d) Limited liability partnership.

d) Limited liability partnership.

An example of an internal control weakness is to assign the human resource department responsibility for: a) Hiring personnel. b) Authorizing deductions from pay. c) Interviewing employees for jobs. d) Maintaining time cards.

d) Maintaining time cards.

Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933? a) The unqualified opinion contained in the registration statement was relied upon by the party suing the CPA. b) The CPA knew of the misstatement. c) The CPA was negligent. d) Material misstatements were contained in the financial statements.

d) Material misstatements were contained in the financial statements.

Under the Securities Act of 1933, the burden of proof that the plaintiff sustained a loss must be proven by the: a) SEC. b) Defendant. c) Jury. d) Plaintiff.

d) Plaintiff.

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: a) Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. b) Issue an unmodified opinion, but inform the reader by including the omitted information in the audit report. c) Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. d) Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

d) Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

Which of the following procedures is not a procedure that is completed near the end of the engagement? a) Obtain the lawyer's letter. b) Obtain the letter of representations. c) Review to identify subsequent events. d) Review cash transactions.

d) Review cash transactions.

Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks? a) The auditors did not observe the distribution of the entire regular payroll during the audit in the prior year. b) Employee turnover is excessive. c) Total payroll costs are a significant part of total operating costs. d) Separation of payroll duties is less than adequate for effective internal control.

d) Separation of payroll duties is less than adequate for effective internal control.

The proper use of prenumbered termination forms by the payroll department should provide assurance that all: a) Employees who have not been terminated receive their payroll checks. b) Uncashed payroll checks were issued to employees who have not been terminated. c) Personnel files are kept up to date. d) Terminated employees are removed from payroll.

d) Terminated employees are removed from payroll.

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements? a) The CPA is liable only to known users of the financial statements. b) The CPA is liable only to third parties in privity of contract with the CPA. c) The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion. d) The CPA probably is liable to any person who suffered a loss as a result of the fraud.

d) The CPA probably is liable to any person who suffered a loss as a result of the fraud.

Auditors must communicate internal control "significant deficiencies" to: a) The SEC. b) The shareholders. c) The Federal Trade Commission. d) The audit committee.

d) The audit committee.

The unmodified standard audit report of a nonpublic company does not explicitly state that: a) The auditors believe that the audit provides a reasonable basis for their opinion. b) An audit includes evaluating the appropriateness of accounting policies used. c) The financial statements are the responsibility of the company's management. d) The audit was conducted in accordance with accounting principles generally accepted in the United States of America.

d) The audit was conducted in accordance with accounting principles generally accepted in the United States of America.

Wilson bought Zimmer Corp. common stock in an offering registered under the Securities Act of 1933. Baldridge & Co., CPAs, gave an unqualified opinion on Zimmer's financial statements that were included in the registration statement filed with the SEC. Wilson sued Baldridge under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Wilson must prove that: a) There was fraudulent activity by Baldridge. b) Wilson relied on Baldridge's opinion. c) Wilson was in privity with Baldridge. d) There was a material misstatement in the financial statements.

d) There was a material misstatement in the financial statements.

Which of the following is not correct relating to representation letters? a) They are ordinarily dated as of the date of the audit report. b) They are signed by members of top management. c) They must be obtained for audits. d) They often serve as a substitute for the application of other procedures.

d) They often serve as a substitute for the application of other procedures.

Auditors should perform audit procedures relating to subsequent events? a) Through issuance of the audit report. b) Through year-end. c) For a reasonable period after year-end. d) Through the date of the audit report.

d) Through the date of the audit report.

In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustments when they were identified. What is the primary purpose served by this schedule? a) To point out to the responsible client officials the errors made by various company personnel. b) To summarize the adjustments that must be made before the company can prepare and submit its federal tax return. c) To summarize the misstatements made by the company so that corrections can be made after the audited financial statements are released. d) To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.

d) To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.

One reason why the independent auditors perform analytical procedures on the client's operations is to identify: a) Noncompliance with prescribed control procedures. b) Improper separation of accounting and other financial duties. c) Weaknesses of a material nature in internal control. d) Unusual transactions.

d) Unusual transactions.

Which of the following is not a procedure normally performed while completing the audit of a public company? a) Obtain a representations letter. b) Obtain a lawyer's letter. c) Perform an overall review using analytical procedures. d) Update internal control questionnaire.

d) Update internal control questionnaire.

After performing all necessary procedures, the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should: a) Dual-date the report. b) Use the reissue date. c) Delete the date of the report. d) Use the date of the previous report.

d) Use the date of the previous report.

The term "except for" in an audit report is: a) No longer considered appropriate. b) Used in an adverse opinion. c) Used for an unmodified opinion when an emphasis-of-matter paragraph is added. d) Used in a qualified opinion.

d) Used in a qualified opinion.