Audit MCQs that were wrong

In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate $10,000 $15,000 $20,000 $30,000

$10,000 Materiality should be considered in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements. As $10,000 is material to the income statement and that amount is smaller than the $20,000 material to the balance sheet, the smaller amount would be used

Each of the following types of controls is considered to be an entity-level control, except those Relating to the control environment. Pertaining to the company's risk assessment process. Regarding the company's annual stockholder meeting. Addressing policies over significant risk management practices

Regarding the company's annual stockholder meeting

Testing the design effectiveness of internal control is considered a ___________ ___________ ______________ test vs the test of operating effectiveness that is an ____________ _________ ___________ _______ _________ test

point in time test over a period of time test (normally 12 months)

What is a tolerable misstatement

the amount that a line item on the F/S can be off from its actual balance and not cause issues to the fair presentation of the F/S

To prepare for a CPE course you will soon be taking, you are brushing up on your independence rules 2. Larry bought into a condominium complex. His firm audits the homeowners' association. This absolutely creates an independence problem 5. Larry's firm's client, ABC Co., had to withdraw and restate its financial statements. For a brief period, there was some bitter litigation between ABC, who sued claiming that Larry's firm had botched the audit, and Larry's firm which counterclaimed arguing that ABC's employees had misled the audit team. The case was soon settled out of court. But Larry's firm would violate independence rules if it just went back to the next audit of ABC

False An independence problem can be averted if four safeguards are met. All four of the safeguards, as outlined under the Member of a Common Interest Realty Association (CIRA) guidelines, are required to avoid a problem False Once the litigation is settled, any independence threat is reduced to an acceptable level

The ABC Accounting Firm wishes to hire you for its audit staff, so it is checking on your investments to ensure that no independence problems exist ABC wants to put you on the audit team for the Miniscule National Bank. You have a savings account there. The balance is mostly insured under federal law, but the balance exceeds the insurance limit by $3,157. This account would impair independence

False It is unlikely that $3,157 is material to you. Only if the amount were material would there be an independence problem

An individual audit engagement is governed by A CPA firm's collective portfolio of accounting and auditing services (sometimes called the A&A practice, which involves entities' financial statements and, thereby, involves the public interest) is governed by

GAAS AICPA's SQCS (Statements on Quality Control Standards)

According to the U.S. Department of Labor, an auditor of an employee benefit plan would be considered independent if The auditor is committed to acquire a material indirect financial interest in the plan sponsor. An actuary associated with the auditor's firm renders services to the plan. A member of the auditor's firm is an investment advisor to the plan. The auditor's firm maintains financial records for the plan

An actuary associated with the auditor's firm renders services to the plan

According to PCAOB standards, each of the following items of information should be included in the documentation of an engagement quality review except Identification of the engagement quality reviewer and others who assisted the reviewer. Identification of the documents reviewed by the engagement quality reviewer and others who assisted the reviewer. The date on which the engagement quality reviewer provided concurring approval of issuance. An assessment by the engagement quality reviewer of the instances of fraud identified by the audit team

An assessment by the engagement quality reviewer of the instances of fraud identified by the audit team

A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by Adhering to generally accepted auditing standards. Having an appropriate system of quality control. Joining professional societies that enforce ethical conduct. Maintaining an attitude of independence in its engagements

Having an appropriate system of quality control

Brown, CPA, has been engaged to audit and report on Crow Company's written assessment about the effectiveness of Crow's internal control over financial reporting in an integrated audit under AICPA standards. In what form may Crow appropriately present its written assessment? I. In a separate report that will accompany Brown's report. II. In a representation letter to Brown. neither both

I only

Julie would violate the Code of Professional Responsibility if, during an audit, she I. Expressed an opinion or stated affirmatively that the financial statements were presented in conformity with GAAP when they contained material departures from GAAP. II. Expressed an opinion or stated affirmatively that the financial statements were presented in conformity with GAAP when they contained immaterial departures from GAAP both neither

I only

A CPA is permitted to disclose confidential client information without the consent of the client to I. Another CPA firm if the information concerns suspected tax return irregularities. II. A state CPA society voluntary quality control review board both neither

II only

A CPA is permitted to disclose confidential client information without the consent of the client to I. Another CPA who has purchased the CPA's tax practice. II. Another CPA firm if the information concerns suspected tax return irregularities. III. A state CPA society voluntary quality control review board some none

III only

Which of the following conditions is necessary for an auditor to accept an engagement to audit and report on an entity's internal control over financial reporting in an integrated audit for a nonissuer? The auditor anticipates relying on the entity's internal control in a financial statement audit. Management presents its written assessment about the effectiveness of the entity's internal control over financial reporting. The auditor is the continuing auditor who previously has audited the entity's financial statements. Management agrees to restrict the distributor of the auditor's report on internal control over financial reporting to specified users

Management presents its written assessment about the effectiveness of the entity's internal control over financial reporting.

What is the complete and accurate list of walkthrough procedures usually performed in an issuer's integrated audit

Inquiry, observation, inspection of relevant documentation, reperformance of controls

Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC's internal controls placed in operation as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit. Cook's report should Contain a disclaimer of opinion on the operating effectiveness of PDC's controls. State whether PDC's controls were suitably designed to achieve the retailer's objectives. Identify PDC's controls relevant to specific financial statement assertions. Disclose Cook's assessed level of control risk for PDC

Contain a disclaimer of opinion on the operating effectiveness of PDC's controls

To exercise due professional care, an auditor should Critically review the judgment exercised by those assisting in the audit. Examine all available corroborating evidence supporting management's assertions. Design the audit to detect all instances of illegal acts. Attain the proper balance of professional experience and formal education

Critically review the judgment exercised by those assisting in the audit

Your Uncle Al and your Aunt Peg were CPAs for many years. Indeed, their careers inspired you to study accounting. Al recently retired. Peg, who is some years younger, was recently laid off and is currently looking for a job. Their son, Teddy, is also a CPA and has kept his license current, taking CPE classes and the like, even though for the past three years he has worked at a pet store, a job that he finds very satisfying. Al, Peg, and Teddy come to you asking what "OM" means 1. Al is an "Other Member. 2. Peg is an "Other Member. 3. Teddy is an "Other Member. 4. The major professional obligation of Al, Peg, and Teddy is to not act discreditably. 5. If Teddy sexually harassed a co-worker at the pet store, he would violate the Code of Professional Conduct

1. True. Retired CPAs are "other members." 2. True. Unemployed CPAs are "other members." 3. True. CPAs who are "otherwise not working in the profession" are "other members." 4. True. Because they are not working in public practice or in business, most of the Code provisions do not apply to them. But Al, Peg, and Teddy should not bring discredit to the CPA profession by acting discreditably. 5. True. Harassment in employment practices is an example of a discreditable act

The Big Friendly Accounting (BFA) firm audits ABC Co. Tim is a manager on BFA's engagement team for ABC. The partner in charge of the audit, Marianne, answers to Fred, one of BFA's regional managers. Bill is a tax partner in the same office that Marianne works in. He does no work for ABC. Torrey is a manager who does no audit work at all but performs around 50 hours of tax work for ABC every year. Torrey is also located in the BFA office that Marianne works out of Who are considered covered members (yes or no)? Tim Fred Bill Torrey BFA

1. Yes. All audit team members are covered members. 2. Yes. Fred is in a "position to influence" the audit team and therefore is a covered member. 3. Yes. Bill is an "other partner in the office" and is therefore a covered member. 4. Yes. Torrey is a Manager who provides more than 10 hours of nonattest services for an attest client and therefore is a covered member. This would be the case even if she didn't work out of the same office as Marianne. 5. Yes. The firm is always a covered member

The Sarbanes-Oxley Act of 2002 imposes a mandatory rotation applicable to both the audit engagement partner and the quality control (also called review) partner. How long in total is the partner allowed to serve as the engagement partner or review partner before someone else must serve in that capacity 3 years. 5 years. 7 years. 10 years

5 years

Network firms are firms that cooperate to enhance their capabilities to provide professional services and share one or more of the following except A common brand. A common bathroom. Common control. Professional resources

A common bathroom

One of a CPA's firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through A system of quality control. A system of peer review. Continuing professional education. Compliance with generally accepted reporting standards

A system of quality control

Accountant Alto decided to maximize his income in the new community to which he had moved, by engaging in multiple forms of advertising and promotion. Which of the following forms of promotion is likely to violate the AICPA Code of Professional Conduct Alto's accurate newspaper ad describing his services. Alto's accurate billboard ad (containing a picture of his smiling face) listing his prices. Alto's entering the hospital room of a stranger (Ed), who had been injured in a car wreck, to suggest that Ed hire Alto as an accountant and investment adviser to help him with all the money he was going to receive from the lawsuit he should file against the driver of the other car. Alto's knocking on the doors of small businesses in his community to see if any of them were interested in his services

Alto's entering the hospital room of a stranger (Ed), who had been injured in a car wreck, to suggest that Ed hire Alto as an accountant and investment adviser to help him with all the money he was going to receive from the lawsuit he should file against the driver of the other car

Which of the following statements is not correct about materiality? The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements

An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements

Which of the following statements is correct regarding characteristics required of an engagement quality reviewer under PCAOB auditing standards Only a partner of the registered public accounting firm conducting the audit can serve as an engagement quality reviewer. An individual outside of the registered public accounting firm becomes an "associated person" of the registered public accounting firm when receiving compensation from the firm for performing the engagement quality review. There is no requirement that the engagement quality reviewer must be independent from the client involved, since the engagement quality reviewer cannot make engagement team decisions or otherwise assume any responsibilities of the engagement team. The engagement quality reviewer is required to be a partner in a public accounting firm, regardless of whether the reviewer is from within the firm or outside the firm responsible for the audit engagement subject to the engagement quality review

An individual outside of the registered public accounting firm becomes an "associated person" of the registered public accounting firm when receiving compensation from the firm for performing the engagement quality review The PCAOB (specifically, AS Section 1220) requires the engagement quality reviewer to be a partner (or have an equivalent position) only if the engagement quality reviewer is from the within the registered public accounting firm. If the engagement quality reviewer is from outside the registered public accounting firm, there is no such requirement

An audit of a nonissuer's internal control over financial reporting in an integrated audit will generally Require procedures that duplicate those already applied in assessing control risk during a financial statement audit. Increase the reliability of the financial statements that have already been audited. Be more extensive in scope than the assessment of control risk made during the financial statement audit. Be more limited in scope than the assessment of control risk made during a financial statement audit

Be more extensive in scope than the assessment of control risk made during the financial statement audit.

Snow, CPA, was engaged by Master Co., a nonpublic company, to audit and report on the effectiveness of Master's internal control over financial reporting in an integrated audit. Snow's report should state that

Because of the inherent limitations of internal control over financial reporting, misstatements may occur and not be detected

If an auditor performing an integrated audit identifies one or more material weaknesses in a nonissuer's internal control, the auditor should Expand the examination of internal control to identify deficiencies less severe than material weaknesses. Conclude that the financial statements are materially misstated because of the material weakness in internal control. Disclaim an opinion on internal control. Express an adverse opinion on the entity's internal control

Express an adverse opinion on the entity's internal control

Which of the following statements correctly describes the "top-down approach" used during an audit of internal control over financial reporting Begin reviewing balance sheet accounts and then review income statement accounts. Begin reviewing income statement accounts and then review balance sheet accounts. Begin by understanding the overall risks to internal control over financial reporting at the financial statement level. Begin by understanding the overall risks to internal control over financial reporting at the general ledger level

Begin by understanding the overall risks to internal control over financial reporting at the financial statement level

When an auditor increases the assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the Extent of tests of controls. Level of detection risk. Extent of tests of details. Level of inherent risk

Extent of tests of details

How should differences of opinion between the engagement partner and the quality control reviewer be resolved By adhering to industry best practices. By following the firm's policies and procedures. By accepting the recommendations of the client's audit committee. By issuing a disclaimer of opinion and reporting the issue to those charged with the entity's governance

By following the firm's policies and procedures

The acceptable level of detection risk is inversely related to the Assurance provided by substantive tests. Risk of misapplying auditing procedures. Preliminary judgment about materiality levels. Risk of failing to discover material misstatements

Assurance provided by substantive tests

Which of the following is not true regarding "threats" to independence in the Conceptual Framework The Abacar Accounting Firm has long audited Dippelo Corporation. As Dippelo has grown (and Abacar has not), Abacar has had to drop almost all of its clients other than Dippelo, which now accounts for 93% of Abacar's annual revenues. This situation creates a self-interest threat. Smersh has long been a senior auditor for the Malcolm Accounting Firm, leading the audit of ABC Corporation. His connection to ABC is so long-standing and so complete that ABC has asked Smersh to join its board of directors. This relationship creates a management participation threat. Audit client Bigno Corporation pays Aberdeen Accounting a large amount each year to do its audit. However, Ralph, a billionaire and Bigno's largest shareholder, pays Aberdeen even more to audit his many private companies. This fact alone creates an undue influence threat. Berwick Accounting audits Borbon Corporation. It also provides investment advice to Borbon. This relationship creates an advocacy threat

Audit client Bigno Corporation pays Aberdeen Accounting a large amount each year to do its audit. However, Ralph, a billionaire and Bigno's largest shareholder, pays Aberdeen even more to audit his many private companies. This fact alone creates an undue influence threat

According to the requirements of the public accounting profession, which of the following activities may be required in exercising due care Consulting with experts obtaining specialty accreditation both neither

Consulting with experts

Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC's policies and procedures placed in operation as of a specific date. These policies and procedures are relevant to the schools' internal control structure, so Drake's report will be useful in providing the schools' independent auditors with information necessary to plan their audits. Drake's report expressing an opinion on CSC's policies and procedures placed in operation as of a specific date should contain a(an) Description of the scope and nature of Drake's procedures. Statement that CSC's management has disclosed to Drake all design deficiencies of which it is aware. Opinion on the operating effectiveness of CSC's policies and procedures. Paragraph indicating the basis for Drake's assessment of control risk

Description of the scope and nature of Drake's procedures

To evaluate the significant judgments and conclusions of the engagement team under PCAOB auditing standards, the engagement quality reviewer should Make inquiries of client personnel and perform analytical procedures. Perform tests of details and analytical procedures to corroborate client account balances. Make inquiries of client personnel and selected members of the engagement team. Discuss matters with members of the engagement team, including the engagement partner, and review engagement documentation

Discuss matters with members of the engagement team, including the engagement partner, and review engagement documentation

At least how often should the PCAOB inspect a registered public accounting firm that regularly issues audit reports to 50 issuers Annually. Every two years. Every three years. As requested by the firm

Every three years

Inherent risk and control risk differ from detection risk in that they Arise from the misapplication of auditing procedures. May be assessed in either quantitative or nonquantitative terms. Exist independently of the financial statement audit. Can be changed at the auditor's discretion

Exist independently of the financial statement audit

Inherent risk and control risk differ from detection risk in which of the following ways? Inherent risk and control risk are calculated by the client. Inherent risk and control risk exist independently of the audit. Inherent risk and control risk are controlled by the auditor. Inherent risk and control risk exist as a result of the auditor's judgment about materiality

Inherent risk and control risk exist independently of the audit

Tisha is a partner at a local accounting firm, which provides audit services for the United Way. She is not on the engagement team, but is, obviously (as partner in the firm), in a position to influence the audit team's findings and decisions. Tisha also serves as an honorary trustee on the United Way Board of Trustees. As an honorary trustee, she does not take any management role nor make any decisions, and all information brochures and pamphlets circulated by the United Way indicate her honorary position. Which of the following is true regarding whether there is an independence problem here? I. Yes—As partner in the firm where the lead audit partner performs the audit of the United Way, Tisha is considered a "covered member" and is required to follow independence rules. II. Yes—Because Tisha is a partner in the accounting firm that provides attestation services to the United Way, she cannot serve as a trustee of that organization. III. No—Tisha serves as an honorary trustee of the United Way and exerts no influence over management and its decisions related to the organization

III only

Sampson is an audit partner at the QRS Accounting Firm. There is a lot of tax work to be done in her city, so she wishes to invest in R&H Square, a local accounting firm that specializes in tax preparation. Its other owners and employees are not CPAs. Which of the following is not true regarding this investment opportunity If Sampson is a minority owner of R&H, she must follow Code provisions on collection of commissions and referral fees through R&H. If Sampson is a majority owner of R&H, she must follow Code provisions on collection of commissions and referral fees through R&H. If Sampson is a minority owner of R&H, other employees of R&H must follow Code provisions on collection of commissions and referral fees through R&H. If Sampson is a majority owner of R&H, other employees of R&H must follow Code provisions on collection of commissions and referral fees through R&H

If Sampson is a minority owner of R&H, other employees of R&H must follow Code provisions on collection of commissions and referral fees through R&H

Under the Sarbanes-Oxley Act of 2002, which of the following is not a stated responsibility of the Public Company Accounting Oversight Board Conducting inspections of registered public accounting firms. Overseeing the registration of public accounting firms. Issuing accounting standards that must be followed by issuers in financial reporting. Issuing auditing standards that must be followed by registered public accounting firms in auditing the financial statements of issuers

Issuing accounting standards that must be followed by issuers in financial reporting

Kwoc is a covered member as regards ABC Corporation. Kwoc has been asked to be the co-trustee of a trust for young Tony Macaroni. In which of the following scenarios would Kwoc not have an independence problem Kwoc has the ability to make investment decisions on behalf of the trust and purchases ABC shares for it. Kwoc has the ability to make investment decisions on behalf of the trust and does not object when the co-trustee purchases ABC shares for it. Kwoc has no authority to make investment decisions on behalf of the trust, but 5% of the trust's assets are in ABC shares. Kwoc has no authority to make investment decisions on behalf of the trust, but the trust owns more than 10% of outstanding ABC shares

Kwoc has no authority to make investment decisions on behalf of the trust, but 5% of the trust's assets are in ABC shares

Wang is an auditor helping to audit an employee benefit plan. Which of the following services would create independence problems for Wang if performed by members of his office for the plan Maintaining financial records. Performing actuarial services. Advising on tax issues. All of the above

Maintaining financial records

Before an auditor can accept an engagement to audit internal control over financial reporting in an integrated audit of a nonissuer, all of the following conditions must be met, except for Management must state in the engagement letter that any identified significant deficiencies will be corrected on a timely basis, not to exceed 60 days from the report release date. Management must accept responsibility for the effectiveness of the entity's internal control over financial reporting. Management must evaluate the effectiveness of the entity's internal control using suitable and available criteria, and must support its assessment about the effectiveness of internal control with sufficient documentation. Management must provide its written assessment about the effectiveness of the entity's internal control over financial reporting in a report that accompanies the auditor's report

Management must state in the engagement letter that any identified significant deficiencies will be corrected on a timely basis, not to exceed 60 days from the report release date.

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to Enable the CPA firm to attest to the reliability of the client. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients. Minimize the likelihood of association with clients whose management lacks integrity. Anticipate before performing any field work whether an unqualified opinion can be expressed

Minimize the likelihood of association with clients whose management lacks integrity

Your firm is struggling financially. It wishes to revisit its engagement letters and its billing practices in an attempt to maximize revenues 1. The firm wishes to audit ABC Co., a private company, on a contingent fee basis. Is this permitted

No Attest work can never be done on a contingent fee basis

Your accounting firm is on double secret probation with the AICPA and wants to ensure that it doesn't violate any ethics rules. Therefore, it is reviewing all the financial relationships that its employees have with audit clients Simonds just joined the firm and has been assigned to the DEF audit team. Simonds owns some DEF stock and it is one of his favorite investments. If he placed the stock in a blind trust would impairment of independence be avoided

No Both a blind trust and its underlying investments are deemed to be direct financial interests of the grantor (Simonds) and even an immaterial amount impairs independence

Your firm just hired a talented auditor, Margo, away from a competing firm. You are excited to put her to work, but you just learned that she has a very large family You would like to make Margo a partner in the office housing your firm's audit team for Cheyenne Co., a small private company. Fern is Margo's sister, and her story is interesting, Fern's first husband died, leaving Fern $100 million in real estate holdings. Fern's second husband also died early, leaving Fern a majority of the shares of Cheyenne Co. Does this information create an independence problem

No Fern is not an immediate family member because it does not appear that she is dependent upon Margo given her own wealth, but she is a close relative. As a close relative of an OPIO, independence is impaired if Fern has a financial interest that (a) Margo knows or has reason to know was material to the close relative (which is not the case given Fern's $100 million in real estate holdings), and (b) enabled the close relative to exercise significant influence over the attest client (which is the case because Fern is the majority shareholder). Although (b) is the case, (a) is not and both are required for a mere close relative of an OPIO to create an independence problem

Entropy Corporation (EC) approaches GA about providing litigation support services. The potential contract would be extremely lucrative, but GA does not currently have any employees who have ever provided litigation support services. Should GA take this engagement?

No GA might want to rationalize that it can do some research and figure out how to provide litigation support services, or perhaps partner with another firm that actually has a litigation support group. But, all in all, these would sound like desperate measures by a firm really stretching to pad its income

Your firm is struggling financially. It wishes to revisit its engagement letters and its billing practices in an attempt to maximize revenues 3. The firm wishes to do XYZ Company's original tax return on a contingent fee basis. XYZ is not an audit client. Is this permitted

No Members may not prepare original or amended tax returns on a contingent fee basis, even for nonattest clients

Your firm is struggling financially. It wishes to revisit its engagement letters and its billing practices in an attempt to maximize revenues 2. The firm wishes to do ABC Company's original tax return on a contingent fee basis. ABC is an audit client. Is this permitted

No Members shall not receive contingent fees for any service performed for an attest client, even nonattest services

Your accounting firm wants to hire Burt to join your audit group. Burt has a big family and you don't want to create any independence issues. Therefore, you examine Burt's situation carefully You want to put Burt on the audit team for the ABC Co. audit. Burt's sister is an officer of ABC. For AICPA Code purposes, is she an immediate family member (IFM)

No Only if she were a dependent of Burt would she be an IFM. That seems unlikely, since she is a corporate officer. That makes her a close relative

Your friends Nan, Pam, and Consuela wish to form an accounting firm to do both audit and tax work. They have never formed a firm before and come to you for advice because you have some experience in that area Would the name "NPC LLP" be appropriate if Nan, Pam, and Consuela wish to operate as a professional corporation

No This would be misleading. They should be "NPC PC" if they wish to operate as a professional corporation

Your firm is trying to plump up revenues by providing more non-audit services (NAS) to audit clients. But, of course, your firm does not wish to run afoul of AICPA Code provisions or Sarbanes-Oxley (SOX) rules 2. Making large amounts of money performing permitted NAS 5. Legal services

Not permitted Really large amounts of permitted NAS might end up being not permitted. The firm must always look at the overall impression that is made. Too much NAS, even if individually the services are all permitted, could add up to an impermissibly suspicious amount Not Permitted Under either the Code or SOX

Piddles Corporation, an audit client, wishes to depart from GAAP in its financial reporting due to a new law which allows a new form of transaction that GAAP has not been updated to reflect. Should GA approve this departure

Yes Departures from GAAP are appropriate if there is new legislation, or evolution of a new form of business transaction. So, this is fine, but only if GA discloses the departure from GAAP and describes the departure, its approximate effects, and the reasons why compliance with GAAP would mislead

Which of the following is not a correct statement regarding differences between PCAOB auditing standards on engagement quality review and AICPA Statements on Quality Control Standards (SQCS) PCAOB auditing standards require a concurring approval of issuance before the engagement report is released, whereas the SQCS have no such requirement. PCAOB auditing standards require a cooling-off period of at least two years before an engagement partner can serve as an engagement quality reviewer, whereas the SQCS have no such requirement. PCAOB auditing standards require engagement quality review documentation to be retained separately from the related engagement documentation for 10 years, whereas SQCS only require that the engagement quality review documentation be retained for 5 years with the other related engagement documentation. PCAOB auditing standards require an engagement quality review before an audit report is released, whereas SQCS do not require an engagement quality review

PCAOB auditing standards require engagement quality review documentation to be retained separately from the related engagement documentation for 10 years, whereas SQCS only require that the engagement quality review documentation be retained for 5 years with the other related engagement documentation

Holding other planning considerations equal, a decrease in the number of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to Apply the planned substantive tests prior to the balance sheet date. Perform the planned auditing procedures closer to the balance sheet date. Increase the assessed level of control risk for relevant financial statement assertions. Decrease the extent of auditing procedures to be applied to the class of transactions

Perform the planned auditing procedures closer to the balance sheet date

An auditing procedure that is applicable to "testing operating effectiveness" that is not associated with "testing design effectiveness" is Inquiry. Observation. Inspection of relevant documentation. Reperformance of the control procedure

Reperformance of the control procedure

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the Auditor's system of quality control has been maintained at a high level. Results are consistent with the conclusions to be presented in the auditor's report. Audit procedures performed are approved in the professional standards. Audit has been performed by persons having adequate technical training and proficiency as auditors

Results are consistent with the conclusions to be presented in the auditor's report

An entity engaged a CPA to determine whether the client's web sites meet defined criteria for standard business practices and controls over transaction integrity and information protection. In performing this engagement, the CPA should comply with the provisions of Statements on Assurance Standards. Statements on Standards for Attestation Engagements. Statements on Standards for Management Consulting Services. Statements on Auditing Standards

Statements on Standards for Attestation Engagements

In which of the following situations did all covered members act properly? Sam was on AAA Accounting's audit team for the ZZZ Corporation audit. ZZZ's CFO offered Sam a job at ZZZ. While considering the offer, Sam did not tell anyone at AAA because she worried they would think her disloyal. Sim was on AAA Accounting's audit team for the ZZZ Corporation audit. ZZZ's CFO offered Sim a job at ZZZ. Sim told her firm of the offer but stayed on the audit team as she considered it because AAA was very short-handed. Som worked for AAA Accounting and supervised its audit team for the ZZZ Corporation audit. ZZZ's CFO offered Som a job at ZZZ. While Som was considering the offer, he did not tell AAA about it. However, Bunny, an audit team member at AAA, learned of the offer and alerted the firm. Sum worked for AAA Accounting in a tax position and performed 25 hours of tax work for ZZZ Corporation, an AAA audit client. Sum did a good job, and ZZZ offered Sum a job as its director of tax compliance. Sum did not tell AAA about the offer as he considered it

Sum worked for AAA Accounting in a tax position and performed 25 hours of tax work for ZZZ Corporation, an AAA audit client. Sum did a good job, and ZZZ offered Sum a job as its director of tax compliance. Sum did not tell AAA about the offer as he considered it

Which of the following is an example of an inherent risk that an auditor should consider Technological developments that may render inventory obsolete. Posting of unauthorized journal entries. An incorrect formula in a worksheet used to calculate a LIFO inventory reserve. Inaccurate physical inventory count

Technological developments that may render inventory obsolete

In an integrated audit of a nonissuer, which of the following is the responsibility of an auditor with regard to testing controls at a company with multiple business units

Testing controls over specific risks at business units that are material to the company's consolidated financial statements

What is a requirement for an audit of both an issuer's and a nonissuer's financial statements by an auditor.

The auditor is required to assess the risk of fraud

During an audit, 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 fully investigate other transactions related to this manager to determine if fraud exists. The auditor should bring the transaction to the attention of an appropriate level of management. The auditor should report this finding to those charged with governance. The auditor's responsibility is satisfied by documenting that the single transaction is inconsequential

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

Your firm is struggling financially. It wishes to revisit its engagement letters and its billing practices in an attempt to maximize revenues 5. The firm is preparing the tax return for DEF Corporation when it realizes that DEF's records are a mess, which makes it much more expensive for the firm to prepare the taxes. DEF could save some money if it had a better record keeping software package. The firm has such a package (produced by Winstorm Co.) which it often sells to its tax clients. The firm wants to sell this package to DEF at a 20% profit without disclosing the markup. Is this permitted

Yes If the firm takes title to a product and assumes risk of ownership, which it appears happened here, it may resell a product to a client at a profit without disclosure

The Jade & Jake Accounting firm audits HIJ Corporation. HIJ owns an office building that Jade & Jake wished to lease for its firm headquarters. The parties carefully structured the lease to be an operating lease rather than a finance lease (also known as a capital lease). To avoid independence issues on this operating lease, the parties must additionally take all of the following safeguards except The lease must meet the GAAP criteria for an operating lease. The lease must be notarized. The terms and conditions of the lease must be comparable to those of similar leases. Jade & Jake pays all amounts in accordance with the terms of the lease

The lease must be notarized

Which of the following best describes the earliest date for an auditor's report

The date the auditor has obtained sufficient appropriate audit evidence to support the opinion

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality? The anticipated sample size of the planned substantive tests. The entity's annualized interim financial statements. The results of the internal control questionnaire. The contents of the management representation letter

The entity's annualized interim financial statements

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality The results of the initial assessment of control risk. The anticipated sample size for planned substantive tests. The entity's financial statements of the prior year. The assertions that are embodied in the financial statements

The entity's financial statements of the prior year

A service organization provides processing services for a client's sales orders. Which of the following information is relevant when gathering data for the report on the service organization's internal controls The client's sales manager reviews accounts receivable balances. The client's data entry clerk used the sales manager's password to make unauthorized changes to customer prices. Credit limits are established and updated by the client's credit department. The service organization's system calculates accounts receivable balances

The service organization's system calculates accounts receivable balances

When attempting to eliminate threats to integrity and objectivity, MIBs may turn to safeguards created by all of the following except The profession. Their accounting firm. Regulators. Their employer

Their accounting firm

As the acceptable level of detection risk increases, an auditor may change the Assessed level of control risk from below the maximum to the maximum level. Assurance provided by tests of controls by using a larger sample size than planned. Timing of substantive tests from year end to an interim date. Nature of substantive tests from a less effective to a more effective procedure

Timing of substantive tests from year end to an interim date

Which of the following factors affecting the risk associated with a control is not a consideration when designing the current-year audit procedures in an audit of internal control over financial reporting for an issuer Whether there have been changes in the operation of a key control since the previous audit The results of the previous year's testing of the control The nature, timing, and extent of procedures performed in previous audits Whether the control has been documented in flowchart or narrative form

Whether the control has been documented in flowchart or narrative form

The Totally Blissful Sisters (TBS) accounting firm audits XYZ Co. To ensure that it does not have any independence problems, TBS is reviewing all of its employees' financial relationships with XYZ. XYZ Co. is a major corporation with 1,000,000 outstanding common shares Ferdinand is a covered member who owns 7% of a diversified mutual fund. The mutual fund holds XYZ stock in its portfolio. The fund's total portfolio is $100,000,000. XYZ shares make up 2% of the portfolio's value. This relationship impairs independence

True At least probably so. Materiality must be determined. Ferdinand owns 7% of $100,000,000 of stock. XYZ stock is 2% of that amount, so he effectively owns (.07 ×$2,000,000 = ) $140,000 shares of XYZ stock. It is unlikely that this amount is not material to him. A material, indirect interest impairs independence

The Totally Blissful Sisters (TBS) accounting firm audits XYZ Co. To ensure that it does not have any independence problems, TBS is reviewing all of its employees' financial relationships with XYZ. XYZ Co. is a major corporation with 1,000,000 outstanding common shares LaRee is a covered member who owns 4% of a nondiversified mutual fund that holds XYZ stock in its portfolio. The total portfolio is worth $10,000,000 and 14% of the portfolio is in XYZ shares. This relationship impairs independence

True At least probably so. Materiality must be determined. LaRee owns 4% of $10,000,000 worth of stock. Because XYZ stock is 14% of that amount, she effectively owns (.04 × $1,400,000 = ) $56,000 worth of XYZ stock. It is possible that LaRee is so wealthy from other assets that this amount is immaterial to her, but it is unlikely. A material, indirect interest impairs independence

Your firm is struggling financially. It wishes to revisit its engagement letters and its billing practices in an attempt to maximize revenues 4. The firm has been approached by LMN Co. to represent LMN before a revenue agent examining LMN's income tax return. LMN is not a client of the firm for any other purpose. Can the firm perform this service on a contingent fee basis

Yes Contingent fees are permitted for this purpose (and a few others) for nonattest clients

Your accounting firm, Sebony Accounting LLC (SAL), audited ABC Co. in 2XX7 and issued a clean opinion. Then ABC switched to another audit firm. When that happened, ABC approached two members of your firm's audit engagement team and hired them into the CFO's office. Nine months later, ABC was in negotiations with a potential purchaser and asked SAL for permission to provide the audit report to the purchaser. SAL gave permission, in part because of a provision in its original engagement letter with ABC that required ABC and any user of the certified financial statements to hold SAL harmless for any errors they might have made in performing the audit. And should any disputes arise between the auditor and audit client, ABC agreed to arbitration rather than litigation. It was true that ABC had not yet paid SAL's audit fees from the 2XX7 audit Is there a problem with the indemnity agreement? Is there a problem with the arbitration clause? Is the reissuance a problem in light of the failure to pay the audit fees?

Yes Independence is impaired if an audit firm is indemnified from the effects of its own carelessness No Arbitration clauses may be used to resolve disputes with clients. On the other hand, arbitration can put the client and the auditor in positions of material adverse interests and thereby impair independence. But since the audit engagement and audit relationship are already over, independence is no longer important here No First, the audit relationship is over, so independence is no longer relevant. Even if that were not the case, independence is imperiled by unpaid fees only if a firm is asked to issue an audit report more than one year after payment was due

Your accounting firm wants to hire Burt to join your audit group. Burt has a big family and you don't want to create any independence issues. Therefore, you examine Burt's situation carefully You want to put Burt on the audit team for the GHI Co. audit. Burt's mother owns 3% of GHI's stock and his wife owns 3%. Is this an independence problem

Yes Independence would be impaired because Burt's wife is an immediate family member (IFM) and owns stock in the audit client. An immediate family member cannot own any stock directly in Burt's audit client. Burt's mother is only a close relative and so her ownership would not impair independence

The accounting industry is very competitive in your area. To compete, some firms have joined together in networks. Others have merged with one another. It's been a hectic and confusing time that has raised lots of independence issues 5. The ABC audit firm is merging with the XYZ audit firm. Millie, who is an audit partner at ABC, is excited to be a part of the new firm. However, she knows that XYZ audits the Linnkle Corporation, and Millie has long owned shares of Linnkle that she inherited from her grandfather. Does this create an independence issue

Yes Millie is almost certain to be a covered member relating to Linnkle once the merger is complete, so she should promptly divest herself of the Linnkle stock

Your friends Nan, Pam, and Consuela wish to form an accounting firm to do both audit and tax work. They have never formed a firm before and come to you for advice because you have some experience in that area Some of Nan, Pam, and Consuela's relatives have indicated an interest in investing financially in the new firm. Could that be a problem

Yes This firm is going to do attest work, the facts indicate, so CPAs must own a majority of its financial interests (and must remain responsible financially and otherwise for the firm's attest work)

Which of the following would likely create a violation of the Code of Professional Conduct? Answer by selecting "yes" or "no" as appropriate GAF was approached by the AAA Airline to see if it would be interested in auditing AAA. GAF was open to the notion, but disclosed to AAA that it had long audited several other airline companies. AAA's audit committee said: "We know. Your expertise in the industry is exactly why we want to hire you." Is this a conflict of interest

Yes but a manageable one. With disclosure and with firm-imposed safeguards involving separate engagement teams and policies and procedures to ensure that confidential information belonging to one airline client does not make its way to another airline client, the threat of a violation should be reduced to an acceptable level

Your friends Nan, Pam, and Consuela wish to form an accounting firm to do both audit and tax work. They have never formed a firm before and come to you for advice because you have some experience in that area Nan, Pam, and Consuela are all CPAs. They are the only three owners of the firm. May they represent the firm as being a member of the AICPA

Yes so long as all the firm's owners are CPAs