Auditing - Test 1 Multiple Choice

Which of the following attributes is likely to be unique to the audit work of CPAs as compared to the work performed by practitioners of other professions? (1) Independence. (2) Competence. (3) Due professional care. (4) Complex body of knowledge.

(1) Independence.

The nature and extent of a CPA firm's quality control policies and procedures depend on The CPA Firm's Size; The Nature of the CPA Firm's Practice; Cost-benefit Considerations (1) Yes; Yes; Yes (2) Yes; Yes; No (3) Yes; No; Yes (4) No; Yes; Yes

(1) Yes; Yes; Yes

You have been engaged to audit the final statements of a U.S. public company. Which of the following statements is correct? (1) Your firm must be registered with the PCAOB. (2) Your firm will be subject to auditing and quality control standards issued by the Securities and Exchange Commission. (3) Your firm must be either a National or Big Four CPA firm. (4) You will be engaged to audit both the quarterly and annual financial statements of your client.

(1) Your firm must be registered with the PCAOB.

The auditor's report contains the following: "We did not audit the financial statement of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors." These sentences (1) indicate a division of responsibility. (2) assume responsibility for the other auditor. (3) require a departure from an unqualified opinion. (4) are an improper form of reporting.

(1) indicate a division of responsibility.

Which of the following professional services is an attestation engagement? (1) A consulting service engagement to provide computer-processing advice to a client. (2) An engagement to report on compliance with statutory requirements. (3) An income tax engagement to prepare federal and state tax returns. (4) The preparation of financial statements from a client's financial records.

(2) An engagement to report on compliance with statutory requirements.

Under which of the following circumstances would a disclaimer of opinion not be appropriate? (1) The auditor is unable to determine the amounts associated with an employee fraud scheme. (2) Management does not provide reasonable justification for a change in accounting principles. (3) The client refuses the auditor permission to confirm certain accounts receivable or apply alternative procedures to verify their balances. (4) The chief executive officer is unwilling to sign the management representation letter.

(2) Management does not provide reasonable justification for a change in accounting principles.

Which of the following best describes what is meant by U.S. auditing standards? (1) Acts to be performed by the auditor. (2) Measure of the quality of the auditor's performance. (3) Procedures to be used to gather evidence to support financial statements. (4) Audit objectives generally determined on audit engagements.

(2) Measures of the quality of the auditor's performance.

Which of the following statements accurately describes U.S. CPA firms that are not sole proprietorships? (1) Most derive the majority of their revenues from tax services. (2) The most common organizational structure is the limited liability partnership structure. (3) The firm will be subject to an annual peer review. (4) The number of other professionals within a firm generally equals the number of partners in the firm.

(2) The most common organizational structure is the limited liability partnership structure.

Which of the following is not a required element of a standard unqualified audit report issued in accordance with AICPA auditing standards? (1) A title that emphasized the report is from an independent auditor. (2) The signature of the engagement partner. (3) The city and state of the audit firm issuing the report. (4) A statement explaining management's responsibilities for the financial statements.

(2) The signature of the engagement partner.

Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures? Human Resources; Monitoring; Engagement Performances (1) Yes; Yes; No (2) Yes; Yes; Yes (3) No; Yes; Yes (4) Yes; No; Yes

(2) Yes; Yes; Yes

Independent auditing can best be described as (1) a branch of accounting. (2) a discipline that attests to the results of accounting and other functional operations and data. (3) a professional activity that measures and communicates financial and business data. (4) a regulatory function that prevents the issuance of improper financial information.

(2) a discipline that attests to the results of accounting and other functional operations and data.

Operational audits generally have been conducted by internal auditors and governmental audit agencies but may be performed by certified public accountants. A primary purpose of an operational audit is to provide (1) a means of assurance that internal accounting controls are functioning as planned. (2) a measure of management performance in meeting organizational goals. (3) the results of internal examinations of financial and accounting matters to a company's top-level management. (4) aid to the independent auditor, who is conducting the audit of the financial statement.

(2) a measure of management performance in meeting organizational goals.

Compliance auditing often extends beyond audits leading to the expression of opinions on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, as well as (1) accuracy. (2) adherence to specific rules or procedures. (3) evaluation. (4) internal control.

(2) adherence to specific rules or procedures.

If a principle auditor decides to refer in his or her report to the audit of another auditor, he or she is required to disclose the (1) name of the other auditor. (2) nature of the inquiry into the other auditor's professional standing and extent of the review of the other auditor's work. (3) portion of the financial statements audited by the other auditor. (4) reasons for being unwilling to assume responsibility for the other auditor's work.

(2) nature of the inquiry into the other auditor's professional standing and extent of the review of the other auditor's work.

What is the general character of the responsibilities characterized by the Performance principles? (1) The competence, independence, and professional care of persons performing the audit. (2) Criteria for the content of the auditor's report on financial statements and related footnote disclosures. (3) The criteria of audit planning and evidence gathering. (4) The need to maintain an independence in mental attitude in all matter pertaining to the audit.

(3) The criteria of audit planning and evidence gathering.

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? (1) It is difficult to prepare financial statements that fairly present a company's financial position, operations, and cash flows without the expertise of an independent auditor. (2) It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. (3) The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. (4) It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship of the affairs of the business.

(3) The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.

The annual audit of Midwestern Manufacturing revealed that sales were accidentally being recorded as revenue when the goods were ordered, instead of when they were shipped. Assuming the amount in question is material and the client is unwilling to correct the error, the CPA should issue: (1) an unqualified opinion or adverse opinion. (2) a qualified "except for" opinion or disclaimer of opinion. (3) a qualified "except for" opinion or adverse opinion. (4) an unqualified opinion with an explanatory paragraph.

(3) a qualified "except for" opinion or adverse opinion.

The date of the CPA's opinion on the financial statement should be the date of the (1) closing of the client's books. (2) finalization of the terms of the audit engagement. (3) completion of all important audit procedures. (4) submission of the report to the client.

(3) completion of all important audit procedures.

In comparison to the external auditor, an internal auditor is more likely to be concerned with (1) internal administrative control. (2) cost accounting procedures. (3) operational auditing. (4) internal control.

(3) operational auditing.

The Responsibilities principle underlying AICPA auditing standards includes a requirement that (1) field work be adequately planned and supervised. (2) the auditor's report state whether or not the financial statements conform to generally accepted accounting principles. (3) professional judgement be exercised by the auditor. (4) informative disclosures in the financial statements be reasonably adequate.

(3) professional judgement be exercised by the auditor.

One purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to (1) enable the CPA firm to attest to the reliability of the client. (2) satisfy the CPA firm's duty to the public concerning the acceptance of new clients. (3) provide reasonable assurance that the integrity of the client is considered. (4) anticipate before performing any field work whether an unqualified opinion can be issued.

(3) provide reasonable assurance that the integrity of the client is considered.

The opinion paragraph of a CPA's report states: "In our opinion, except for the effects of not capitalizing certain lease obligations, as discussed in the preceding paragraph, the financial statements present fairly, in all material respects...." This paragraph expresses a(n) (1) unqualified opinion. (2) unqualified opinion with explanatory paragraph. (3) qualified opinion. (4) adverse opinion.

(3) qualified opinion.

An entity changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n) (1) qualified opinion. (2) unqualified opinion with explanatory paragraph. (3) unqualified opinion. (4) qualified opinion with explanatory paragraph regarding consistency.

(3) unqualified opinion.

Which of the following best describes the operational audit? (1) It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company. (2) It concentrates on implementing financial and accounting control in a newly organized company. (3) It attempts and is designed to verify the fair presentation of a company's results of operations. (4) It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls.

(4) It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls.

When the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a(n) (1) adverse opinion. (2) qualified opinion only. (3) unqualified opinion. (4) unqualified opinion with explanatory paragraph.

(4) unqualified opinion with explanatory paragraph.

. In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining the audit​ fee? 1. A fee based on whether the​ CPA's report on the​ client's financial statements results in the approval of a bank loan. 2. A fee based on the outcome of a bankruptcy proceeding. 3. A fee based on the nature of the service rendered and the​ CPA's expertise instead of the actual time spent on the engagement. 4. A fee based on the fee charged by the prior auditor.

1. A fee based on whether the​ CPA's report on the​ client's financial statements results in the approval of a bank loan.

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential client information obtained in the course of a professional engagement except with the consent of the client. In which one of the following situations would disclosure by a CPA be in violation of the Code​? 1. Disclosing confidential information to another accountant interested in purchasing the​ CPA's practice. 2. Disclosing confidential information in compliance with a subpoena issued by a court. 3. Disclosing confidential information in order to properly discharge the​ CPA's responsibilities in accordance with the​ profession's standards. 4. Disclosing confidential information during an​ AICPA-authorized peer review.

1. Disclosing confidential information to another accountant interested in purchasing the​ CPA's practice.

Which of the following is not a provision of the Sarbanes-Oxley Act of​ 2002? 1. The auditor of an issuer may not provide internal audit outsourcing services for the issuer. 2. Audit documentation must be maintained for five years. 3. The lead and reviewing partners must rotate off the audit after five years. 4. Tax services must be preapproved by the audit committee.

2. Audit documentation must be maintained for five years.

According to the​ profession's ethical​ standards, which of the following events may justify a departure from​ GAAP? I. New legislation. II. Conflicting industry practices. III. Evolution of a new form of business transaction. 1. I and II 2. II and III 3. I and III 4. ​I, II, and III

3. I and III

The concept of materiality would be least important to an auditor when considering the 1. adequacy of disclosure of a​ client's illegal act. 2. discovery of weaknesses in a​ client's internal control structure. 3. effects of a direct financial interest in the client on the​ CPA's independence. 4. types of evidence to use in testing accounts receivable.

3. effects of a direct financial interest in the client on the​ CPA's independence.

An auditor strives to achieve independence in appearance to 1. comply with the auditing standards related to audit performance. 2. become independent in fact. 3. maintain public confidence in the profession. 4. maintain an unbiased mental attitude.

3. maintain public confidence in the profession.

A​ CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is 1. not addressed by the AICPA Code of Professional Conduct. 2. acceptable if sanctioned by the state laws. 3. prohibited under the AICPA rules of conduct. 4. a violation of generally accepted auditing standards.

3. prohibited under the AICPA rules of conduct.

. Which of the following services can be offered to public company audit clients under SEC requirements and the SarbanesdashOxley ​Act? 1. Tax services for executives involved in financial reporting 2. Internal audit outsourcing 3. Tax planning not involving tax shelters 4. Bookkeeping and other accounting services

3. Tax planning not involving tax shelters

What is the meaning of the rule that requires the auditor be independent? 1. The auditor must adopt a critical attitude during the audit. 2. The auditor's sole obligation is to third parties. 3.The auditor may have a direct ownership interest in the client's business if it is not material. 4. The auditor must be without bias with respect to the client under audit.

4The auditor must be without bias with respect to the client under audit.